Amid the daily cascade of numbers, projections, doom-mongering and wishful thinking, two questions have emerged of key importance.
The first is near term: how strong might our recovery be as the peak of the pandemic passes and lockdown restrictions are gradually lifted?
The second is longer-term, but no less worrying: how are we going to pay for all the mind-boggling government rescue programmes and soaring debt?
Ponder these, and little wonder many now query whether we will ever see a recovery to ‘normal’ in the foreseeable future.
Up until lockdown restrictions were extended, there was a widespread view that we could see a ‘V-shaped’ recovery once they were lifted.
That camp is now shrinking. Joining the list of V-shaped recovery sceptics this week is Scotland’s chief economic adviser Dr Gary Gillespie. His latest State of the Economy update warns that current restrictions are cutting Scotland’s economic output by a third and that sustained action to squash the spread of infection will have long-lasting “scarring” effects. The risk of a re-imposition of social distancing should infection numbers break upwards would turn the hoped-for ‘V’ into a ‘W’.
It is a bleak assessment of what could lie in store, echoing other grim assessments in recent days from the IMF and others of the devastation being wreaked by Covid-19.
Tourism in despair, retail pulverised
Particularly disturbing is the spotlight Dr Gillespie turns on the worst affected sectors – retail, hospitality and tourism.
His analysis reflects a recent report by the OECD warning that international tourism, globally, will be down by between 45 and 70 per cent this year, and that it may take years to recover. Domestic tourism cannot be expected to make up for it.
Locked-down pubs and hospitality venues are in despair. Tourism is especially vulnerable to sustained curbs on social contact. The most recent survey by Visit Scotland reveals that 99 per cent of businesses have suffered cancellations, a decline in bookings and fewer visitors. More than half said they have had to reduce staff numbers, with the likelihood of further losses to come.
The retail sector has also been pulverised. The Scottish Retail Consortium reported yesterday that total sales in Scotland slumped by 13 per cent in March compared with March 2019, the lowest figure since January 1999. In the last two weeks of this period – ie, post lockdown – sales have plunged by 44 per cent. Many retail outlets will go under while for others it may take a long time before household finances and consumer confidence recover.
Meanwhile, the Office for Budget Responsibility estimated a budget deficit this year of 14 per cent of GDP (financial crash level: 11 per cent). Other estimates project the deficit at 15 per cent of GDP or £300 billion. Any return to ‘normal’ would suggest massive hikes in tax and a radical scaling down of the Government’s infrastructure spending plans.
There is a tempting escape hatch – monetisation. The central bank simply becomes the biggest buyer of the extra debt, creating new money by electronic means to buy Government bonds. Under this scenario, there was really no need for the UK Government to embark on austerity. We could have been spared all that!
But monetisation would come with a risk: sterling would slump, sending the price of imports surging and sparking an inflation crisis – though this, say apologists, would work to reduce the real burden of that debt – surely a plus?
A milder form of monetisation was quantitative easing, supposedly temporary. But it has not been unwound. Most of the money central banks created since the global financial crisis (£645 billion in the UK alone) is still out there in the economy. And the Bank of England owns a third of the UK’s national debt.
Adopting monetisation would release an explosion in demand for finite resources such as raw materials, machinery, goods and services. This would be to risk not just rocketing inflation, which would hit all voters, but transfer unprecedented power to the Government.
When it is no longer dependent on voters for money, it will enjoy untrammelled discretionary power and no longer be required either to seek sanction from voters or make hard choices on resource allocation. And when the consent of voters is not required for spending, democracy would be the ultimate casualty.
An inflationary escape to the post-pandemic ‘new normal’? Let’s hope we can avoid that.