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Will the economy recover from Covid-19?

This article is over 2 years, 7 months old
As we begin to emerge from lockdown restrictions with companies reopening, Rob Hoveman examines what’s behind the turmoil and if the economy will now bounce back.
Issue 2768
Investors will be applauding as workers will be made to pay for the pandemics devastating effect on the economy.
Investors will be applauding as workers will be made to pay for the pandemics devastating effect on the economy. (Pic: Ministry of Housing, Communities and Local Govt)

Why is the government optimistic that the economy will bounce back?

The huge contraction of the British economy from March of last year was based on a deliberate if belated decision to lock down in the face of the Covid crisis.

This is different from previous crises which ultimately resulted from falls in the rate of profit leading to bankruptcies, unemployment and so on.

However the contraction was also far larger than previous contractions—the biggest for 300 years the experts claim. The British economy was particularly badly hit because of its dependence on so-called service industries ever since Thatcher presided over the destruction of much of manufacturing in the 1980s.

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Once Covid restrictions were eased or abolished, there was bound to be some recovery as people used restaurants, pubs and other service industries again.

The more optimistic forecasts are based on the assumption that companies and consumers have been forced to save during the lockdown. They expect that saving to be unleashed in a spending and investing bonanza.

The limited recovery we have seen so far is undoubtedly due to a rise in spending on services.

Optimism about the international environment has also increased as a result of the decision by US president Joe Biden to boost government spending by trillions of dollars.

The issue is not whether the economy will experience a recovery but rather how big and how sustained that recovery will be and how vulnerable it is to future crises.


What about the growth of debt as well as saving?

Some companies and individuals may have saved during the lockdown, but for many workers saving is impossible.

Moreover debt has grown enormously during lockdown, going from 300 percent of total annual world production to over 350 percent.

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Much of this has been the growth of government debt as governments have sought to limit the long-term effects of lockdown. But companies and some workers have also had to go into debt.

The levels of debt are bound to break on recovery.

For example, the bond markets on which much borrowing depends want to be reassured—now the Covid crisis seems to be over or at least abating—that government debt is going to be reduced.

Otherwise, they may be unwilling to lend unless interest rates rise. Any rise in interest rates are likely to inhibit growth and could even trigger a financial crisis.

That is why orthodox economists are urging Rishi Sunak to plan to reduce government spending. And it’s why he’s cutting teachers pay, giving NHS staff a derisory pay rise and threatening to cut the triple lock on the state pension.

Cutting government spending will however reduce economic growth. On top of that, the number of companies that can only just cover their debt repayments has increased during lockdown. They will not be leading any investment recovery.

The limited spending power of people returning to work will be further cut by unemployment which threatens following the end of the furlough scheme.


Is a high inflation rate a real threat?

The Bank of England has also been pumping money into the economy since lockdown to keep interest rates low and try and prevent further damage to the economy.

This is on top of the easy money policy they have been pursuing since the great financial crisis of 2008. This increase in the supply of money has not so far fed into rampant inflation of prices in general.

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Instead, it has encouraged banks to improve their solvency against further shocks and to fuel financial speculation which has seen stock markets and at least some property prices rise.

However, there are all sorts of supply problems that have developed during lockdown which have been pushing up prices which are now forecast to rise quite significantly.

It is unclear whether these inflationary pressures are going to continue to build.

The Bank of England has relaxed its inflation targets and is extremely cautious about raising interest rates because of the fragility of the economy.

If serious inflation does set in, interest rates will rise. This will have possibly disastrous consequences for many companies in debt and of course for many indebted workers and the real possibility of a financial crash.


What about the continued threat of Covid?

Covid has not gone away. The government has spent £37 billion on a track and trace system and now it’s finally working, they are urging some workers to ignore it.

The surge in infections among younger people who are at work is causing serious shortages of workers in key areas which is increasing the supply problems mentioned above.

On top of that, there are many countries now suffering a second, third and even fourth wave of Covid.

This is making the situation in the international economy more precarious and has led the OECD to cut its predictions of world economic growth.


Are there broader international threats to the British economy?

On top of the threat from Covid, there are growing trade tensions between the United States and China with sanctions being imposed.

There are also the problems posed by the hard Brexit negotiated by Johnson.

The British economy now faces many of the tariff barriers that the government was previously very happy to impose on countries outside the European Union.

The difficulties and the threat of a serious breakdown in relations with principal trading partners is clear in the absurd situation which has arisen with the North of Ireland.

The EU is prepared to accept a soft border between the North and the Irish Republic so long as there is a hard border down the Irish Sea.

And we shouldn’t ignore the growing disruption to the world economy from the climate crisis.

Floods in Belgium and Germany have caused billions worth of damage and the raging fires in the North West of the United States have also cost billions.

All the forecasts are for these economically disruptive and sometimes disastrous events to increase in number.


Is the world economy over the “Great Recession”?

The world economy was already faltering when the major economies locked down.

From a weak recovery from the 2008 financial crisis, the financial system was again showing signs of stress in late 2019 and growth in the EU was heading downwards.

This is all part of a pattern of weak growth and financial instability over the last fifty years.

Back in the late 1970s and 1980s this led to the abandonment of Keynesian state intervention for a much more market-orientated neoliberalism.

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But financial instability, lacklustre growth and austerity and growing inequality have become central features of the new economic order bringing with it more political instability.

Now we see a change of thinking in the US away from that consensus and particularly with the perceived rising threat from state capitalist China.

But there is no reason to think that the underlying problems of the capitalist system have been in any way resolved.

Rather they seem to have become worse.

And those underlying problems are the generalised fall in rates of profit as a result of the displacement of workers from whom profit is derived through exploitation by ever more sophisticated technology.

The excess capital in the system which is depressing profit rates might have been eliminated in the financial crisis of 2008. But it came with an enormous economic cost, with unknown political consequences.

That is why central banks and governments have sought to prop up the system. But that means the world economy and with it, the British economy remains trapped in relatively low rates of profit and the repeated economic instability and crises that inevitably follow.

Only by replacing the system of capitalist exploitation and profit—with workers controlling and planning production—will we finally be rid of the suffering and destruction that are endemic to capitalism.

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