This recession could be long and deep

If, like me, you have spent some of your lockdown time catching up with stuff you recorded earlier in the year, you will have experienced that strange sense of watching something from a bygone age. The adverts, in particular, feel like they belong in a different world. Was it really only February when we were still going to pubs and restaurants and getting excited about major football, rugby and racing events?

The official employment statistics issued earlier this week had a similar feel. Because of the time lag in collating survey data, the most recent figures are from the January to March period, only the last 2-3 weeks of which were affected by the coronavirus lockdown. They showed a joint record level of employment, at 76.6 percent, in line with the previous trend of rising employment rates. What would have been worthy of comment only three months ago was barely mentioned. It was a snapshot of the olden days. We know things aren’t like that any more.

Fortunately the ONS also started reporting on HMRC data a few months ago and this gives us some more up-to-date information. The rising employment of the last half decade has come to an abrupt halt and the beginning of a collapse in employment is already visible.

Chart by ONS

The claimant count data gave a similar picture, showing a sharp spike at the beginning of April, taking the numbers above those we saw during the last recession.

Chart by Resolution Foundation

Next months data, showing the position in April and early May will be even worse as the full impact of the lockdown becomes visible.

It was a similar story for the GDP data published last week. The ONS release has a series of charts showing the economy contracting sharply in March.  This, too, is likely to look even worse in next month’s figures. 
Chart by ONS

The revised data for the previous quarter show that the economy had already stopped growing in the final months of 2019. The coronavirus lockdown poured cold water on a fire that was already going out. This doesn’t bode well for a bounceback once the lockdown ends. Last month’s optimism about a V-shaped recession, with a sharp downturn and a rapid rebound, was short-lived. Even the chancellor is now saying that it is “not obvious there will be an immediate bounceback”.

It is likely that pent-up demand will lead to a short-term economic bounce once the lockdown ends. Maintenance tasks that have been on hold will finally get done. People will get their hair cut, fix the car and call in the plumber. Companies will carry out a backlog of routine but necessary activities. Beyond that, though, the extent of the recovery depends on how confident people are about the future. Will people commit to major purchases like houses and cars? Will companies risk major investments? The fact that things were staring to slow down in the months before the coronavirus outbreak suggests that they might not. If they decide to wait and see the recovery is likely to be slow.

The big problem forecasters face is the unpredictable impact the coronavirus and the lockdown will have on human behaviour. Recessions and recoveries are, for the most part, caused by shifts in human behaviour. Confidence plays a big part. The last recession started when people lost confidence in certain financial instruments. This one has started because we have lost confidence in our ability to move around without catching a life-threatening infection.

It was Edgar Schein who explained to us, 35 years ago, that culture is a pattern of shared basic assumptions and beliefs. Because these are unspoken, those who share them don’t realise they are doing so. They just carry on assuming. They only stop assuming when the beliefs they have taken for granted are challenged. Even then, they will cling to these beliefs even in the face of powerful evidence. These assumptions and beliefs underpin the behaviour that produces the unwritten rules, the rituals and the visible artefacts that define the society. This is why changing culture is so difficult. Long-term behavioural change only happens when the assumptions and beliefs behind that behaviour change.

What we are seeing now could become a major cultural shift. Apart from those in particularly exposed occupations, most of us in the developed world, with clean water, clean living space and good sanitation, went about or daily business on the assumption that we were not likely to be infected with anything. Like all deep rooted assumptions, it was so deep rooted that infection barely crossed our minds. If we worked in city centre offices, we would get off filthy trains, go to work at our keyboards, pop out and buy a sandwich, sometimes (but not always) wash our hands and then eat the sandwich while bashing away at the keys we had been touching all day. We would then go to meetings where we would shake hands with, or even kiss, colleagues who had been doing the same thing. We knew, intellectually, that we would probably get a cold at some point during the winter yet it still came as something of an irritation when it happened. If we were unlucky enough to get flu or a stomach bug, we would respond with indignation. ‘How the hell did I get this? I bet it was that restaurant we went to at the weekend.’

That assumption has now been turned on its head. We leave the house now under the assumption that there is a good chance we will catch something and that, if we do, it is likely to be extremely unpleasant or fatal. This risk may be lower than a lot of people think, especially for younger age groups but, for the moment, that is beside the point. People fear this disease and that fear has changed our assumptions. When we leave the house, we react to people in a different way. We get a taste of what it is like to live in a dangerous neighbourhood. We look upon strangers with suspicion and are wary even of people we know. Suddenly, we see other people are a risk in a way they weren’t a few weeks ago. We applaud the bravery of essential workers because, in the course of their jobs, they are going out and mixing with people in a way that would scare the hell out of a lot of us. As we clap, many of us are thinking, ‘Thank God I don’t have to do that.’

Though this shift in assumptions has been rapid, the reversion to previous assumptions, where we once again do not see other most other people as a risk, is likely to be very gradual. Even if we find a vaccine for the coronavirus, which may not happen, or if it becomes less potent over time, there will always be the question, ‘What if there is another one out there?’ After all, this one seemed to come from nowhere. How long will it be before people are prepared to get on crowded trains or aeroplanes? Will people shake hands again? Will they happily sit together in offices and meetings? I’d be willing to bet that the (relatively recent in the UK) practice of kissing one greeting will cease. Even if people do relax their guard and decide that the risk has passed, they will do so gradually and one-by-one. Some people may never do so.

The return to normal, then, is likely to be a slow process even if scientists tell us that the serious risk has passed. One of the details that seems to have got lost in the discussion of the lockdown that people began to change their behaviour before the government told them to. A study by the Centre for Cities showed that the proportion of people travelling into city centres for work and leisure fell significantly during the week before the lockdown.

Studies from the US have produced similar findings. To an extent, then, people started locking themselves down before they were told to. Many will be reluctant to return to normal until they are sure the coast is clear. That is not likely to happen for some time.

The trouble with a modern economy, though, is that it only works if a lot of things work together at the same time. Supply chains and public transport are obvious examples but schools are a crucial part of the dependency map too. People are showing some reluctance to go back to work or to send their children back to school. The planned opening of schools on 1 June now looks doubtful. And if the schools aren’t open a lot of people simply won’t go back to work.

The longer this goes on, the more difficult it will become for many organisations to restart operations. Skills will atrophy and the team cohesion needed in the workplace will start to dissipate. The threads that hold an organisation together are difficult to maintain remotely and the task becomes harder over time. Video conferencing and remote contact can only go so far. We are facing a gradual loss of organisational capital.

The return of the economy to anything like its pre-crisis level looks like it will take a long time. It was already showing signs of weakness before the coronavirus pandemic and the shift in our cultural assumptions, even if it is temporary, will make the revival a slow and piecemeal process. We didn’t get a bounceback after the last recession and it is unlikely that we will see one this time. If I had to predict the shape of the downturn I would go for a bath-shaped recession, a similar shape to the last one, with a sharp fall, a bump along the bottom and then a very gradual recovery. Only this time the bath will be a lot deeper.

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6 Responses to This recession could be long and deep

  1. Dipper says:

    This is getting discussed in a lot of places, and in my group there is absolutely no unanimity on what will happen. On the one hand this recession is unique in that it does not have an economic cause, so it is possible to predict a sharp bounce back. On the other, the money spent in furloughing people and the debts run up will cast an enormous shadow over government finances. It may mean we are in for higher taxes and lower growth, or it may be that the only way to deal with the debt is to inflate it away.

    It is always easier to predict loss than gain, to predict decline rather than growth. My view is we have no idea how this is going to pan out, but once the actual path becomes clear it will be agreed by all that the outcome was unavoidable and inevitable.

  2. markhalladay says:

    Hi Rick. Thanks for this. Clear and incisive as ever.

  3. nobody says:

    My gut feeling is that the global economy will be very lucky to get out of the crisis phase of the pandemic without losing the last several decades worth of improvements in living standards.

    Government, corporate, and household debt overhangs due to reduced employment (and reduced general economic activity) will trigger a debt-deleveraging recession in the near term. in the medium term, recovery will not be possible because pandemic countermeasures (social distancing, less travel, telework) will permanently reshape the GDP growth curve downwards. There’s no money for economic stimulus if tomorrow’s economy will be smaller than today’s/

    Deepening political dysfunction in the US (and, to an extent, the EU) will not help.

    Regional social collapse as large swaths of local populations lose employment, housing, and secure access to food is entirely likely.

  4. David Timoney says:

    Re: “The longer this goes on, the more difficult it will become for many organisations to restart operations. Skills will atrophy and the team cohesion needed in the workplace will start to dissipate. The threads that hold an organisation together are difficult to maintain remotely and the task becomes harder over time. Video conferencing and remote contact can only go so far. We are facing a gradual loss of organisational capital.”

    One thing that has become apparent over recent weeks is that many firms are finding it easier to maintain operations with a dispersed workforce than received wisdom would have suggested. I’m also sceptical that we will see skills atrophy over a period as short as a few months, or even a whole year, particularly when you consider that much of what we consider “skill” is dependent on the corporate IT that has remained running in most cases.

    Organisational capital is today largely embedded in processes and systems, rather than people, and I see little reason to believe that it will be damaged by an extended outage or eroded by remote working, at least in the case of well-run businesses. Those firms most likely to struggle to recover after the pandemic has passed are those that entered it with poor organisational capital.

    There are obviously informal dynamics (such as “team cohesion”) that will suffer, however a significant portion of that is actually the makework that pads out higher-level whitecollar jobs: the office tax. I suspect one cultural change that is happening among professionals is that many have realised (perhaps guiltily) just how little actual work their job requires.

    None of this means we will avoid a long recession, but it does suggest that the forecasts of hysteresis and scarring may be too pessimistic.

  5. I completely agree that returning the economy to something like its pre-crisis level will take a long time. Some industries suffered such serious losses that their restoration is not possible, and this is very sad. I wish you all good luck and prosperity!

  6. Pingback: How do you look at life? – MJCarty

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