The bank of England’s latest monetary policy report is a classic example of bad news and good news. The bad news is that the British economy will shrink by 14 percent this year.
Apparently, this will be the worst recession since the Great Frost of 1709. This is however a rather meaningless comparison since Britain was a predominantly agricultural country then, not one economically dependent on finance and industry.
The good news is that there will be a rapid economic recovery in 2021 so that the recession will be V-shaped—sharply down, then sharply up. Moreover, there will be “only limited scarring to the economy”.
The case for this scenario has a lot to do with the City of London. Britain is the base of the biggest international financial centre. The emergency measures taken by the Bank and the Treasury have poured money into financial markets to keep them afloat.
A study by University College London of regional economic activity during the lockdown suggests that “those working in financial services, in particular, are in a better position to work remotely”.
If we have to go through a prolonged period of social distancing, then the City may bounce back comparatively easily, pulling up sectors dependent on it.
But the Bank’s forecast attracted widespread scepticism from mainstream economists. As a Financial Times newspaper headline put it, “Economists question BoE’s overly rosy view of V-shaped recovery.”
One reason for scepticism arises from the many things we don’t know about the future of the pandemic.
We don’t know whether the moves around the world to relax restrictions will provoke a second wave of infections, forcing retreats back into lockdown. We don’t know whether infection will lead to lasting immunity to the virus.
And we don’t how long it will take to produce a Covid-19 vaccine—or indeed whether one will be possible at all.
All these uncertainties suggest that we will be living with social distancing for some time to come.
But the Bank’s projection is that the lockdowns will be “gradually unwound” here and abroad by the end of September. Meanwhile, its “scenario” assumes that “if an additional two weeks of current social distancing and policy support measures were announced, activity in that quarter would fall by around 1¼ percent of annual GDP.”
Then there are the more straightforward economic doubts. The world economy was not in a good place before the pandemic. It was being kept going largely by financial markets bloated with cheap central bank money.
The right-wing economists who last week succeeded in getting the German Constitutional Court to challenge the European Central Bank are right at least that flooding the markets with more money in response to the pandemic isn’t a long-term solution.
This takes us to the question of “scarring”. Free-marketeers assume that recessions are periods of “creative destruction” in which unprofitable firms are replaced by new dynamic “disrupters”. But the Marxist blogger Michael Roberts pointed out recently that there is growing evidence that slumps can create long-lasting damage.
Investment falls, reducing productive capacity. Workers who suffer prolonged unemployment lose skills and motivation. Irreplaceable firms disappear.
The British economy is indeed a victim of this kind of scarring.
One reason why Boris Johnson’s government has made such a mess of securing Personal Protective Equipment for health and care workers is that so much manufacturing capacity was wiped out in the 1980s. It has been left scrambling for imports in a sellers’ market. A shrunken manufacturing base has left Britain over-dependent on the City.
The real historical comparison is not with 1709 but with the Great Depression of the 1930s.
What the American Marxist Doug Henwood tweeted about the United States is true of Britain as well, “It took almost two years after the 1929 stock market crash to reach 15 percent unemployment. We’ve done it in two months.”
In other words, we’re facing as severe an economic collapse much more quickly. There will be plenty of scarring.