The recovery won’t be V-shaped

Last week’s GDP figures showed the depth of the economic contraction during the lockdown and the extent of the bounceback afterwards. The decline was unprecedented but so was the subsequent growth. This is what happens when you switch the economy off then switch it back on again.

By most accounts, the recent figures were disappointing. Much of the bounceback was due to the partial recovery of the hospitality industry, aided by government subsidy and fine weather. The resurgence of the Covid virus and renewed restrictions in some parts of the country don’t bode well for the prospects of a continuing recovery.

Aside from Lockdown 2, though, there are other reasons to suspect that talk of a V-shaped recovery might be over-optimistic. The big scary slump on the ONS chart draws attention away from what was happening before the pandemic. Zoom in on the two years before the lockdown and it is clear from the most recent data that GDP growth hit the buffers well before March 2020. The economy had already shrunk on Boris Johnson’s watch and it was smaller on the eve of the lockdown than it had been a year earlier.

Source: ONS GDP Monthly Estimate

The Institute for Fiscal Studies and the Resolution Foundation published reports over the summer showing the state of pay and employment just before the pandemic. For living standards, the picture was dismal. Average pay, having just hit its pre-crisis level, was on the slide again and household incomes had fallen slightly in 2018-19. The only bright spot was continuing high employment without which, as the IFS remarked, the picture would have been even worse.

The only thing good about the UK’s economic performance after the recession was record high employment rates and even that now looks likely to fall victim to the pandemic. Today’s release by the ONS shows the impact of the crisis feeding through into the headline employment numbers. All the indications suggest that, even with continued government support, unemployment is set to rise sharply, with the lower paid suffering the biggest hit.

The government is making much of re-skilling. There’s a set of parallel narratives going on at national, organisational and individual level which depicts the pandemic as just what we need to shock the country, its companies and its people into new ways of working. The post-Covid economy will look very different but companies will pivot to take advantage of new opportunities. (Everybody’s pivoting now and if you’re not you really need to get with the programme.) This will shock the economy into renewed high productivity as zombie companies go under and the workforce reskills to take advantage of the new jobs available. That’s why the government is so keen on reskilling – hence its new advertising campaign showing shop-workers and ballet dancers retraining as cyber experts. Company failures and redundancies are re-framed as opportunities. This is just the kick up the backside you/the company/the country needed to move on to something bigger and better.

It’s a great story. No doubt older readers will remember something similar from previous recessions. Governments always pledge to help those people displaced by economic restructuring to re-skill and take on new jobs. I have long suspected, though, that the main beneficiaries from such initiatives are the companies awarded the contracts to run the schemes. 

The cold reality is that workers don’t tend to re-skill when they lose their jobs. As recent Resolution Foundation research showed, very few people change occupation and even changes in the same occupation between sectors are unusual. For the most part, when people lose their jobs, they move down the occupational hierarchy rather than up it, accepting lower paid and lower skilled jobs.  Even before the pandemic the IMF cast doubt on the ability of workforces around the world to re-skill quickly in the face of automation. Assuming that rapid re-skilling is possible, it is likely to require massive government investment. The recent record of employers on training provision is pretty poor. A few might put resources into retraining but, if previous behaviour is anything to go by, most won’t. Beware of government skills-washing. A great re-skilling is unlikely.

What we are likely to see, then, is significant displacement of people, similar to that which occurred in all previous recessions apart from the 2008 one. This will reduce demand, increase feelings of insecurity and slow down the recovery.

As Philip Inman said last week, the underlying problems with the UK economy are still with us. It is still beset by dismal productivity and a lot of its high performers of the past are in decline. Chris Giles noted two years ago that the UK’s leading edge companies and sectors are no longer as leading edge as they were. 

To make matters worse, hard on the heels of Lockdown 2 we will be switching parts of our economy off again as those firms dependent on exports and cross border supply chains will be hit with new trade barriers. Various estimates have been made as to the economic impact of Brexit but, whatever happens in the negotiations, trade will get more difficult and that is bound to impact on economic growth. The UK is the only country in modern times that has pursued a policy of making trade more difficult. A questionable policy at the best of times but bordering on the insane during an economy-wrecking pandemic. 

Add all this to the continuing fear of the virus which, as the IFS noted in its Green Budget today, is still significantly suppressing demand, and the V-shaped recovery is looking very unlikely.

I particularly liked this quote from Ruth Gregory at Capital Economics:

We expect the new Covid-19 restrictions to mean that the economy does little more than move sideways in the final three months of the year, leaving economic activity marooned 7.5% short of its pre-crisis level.

Moving sideways is a succinct description of what is going on. Some sectors are booming, while others are collapsing. A few workers may transfer from the collapsing ones to the booming ones but most won’t. Some firms will do very well but the overall aggregate is an economy which will remain smaller than it was for some time.

All of which suggests that the recovery, such as it is, will be more tick-shaped than V-shaped. Even the IFS’s most optimistic scenario doesn’t anticipate the economy recovering to its pre-pandemic level until the beginning of 2022. 

Chart from IFS Green Budget

An already weak economy has been flattened by a pandemic and then hit while on the ground by a self-launched missile from three years ago. There are serious doubts about the UK’s ability to recover from this and it is unlikely that we will see much improvement soon. It looks like we could be in for a long and grim haul.  

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7 Responses to The recovery won’t be V-shaped

  1. Kieran Garland says:

    What sectors are set to do well, if any? Great article cheers.

  2. Pingback: The recovery won’t be V-shaped | sdbast

  3. P Hearn says:

    Much to agree with here. We’re all screwed. The Resolution Foundation must have a side-gig going, drumming up work for The Samaritans. This needs investigating.

  4. Patricia Leighton says:

    Another ‘realistic’ piece. I could not agree more with your comments on pre-existing weaknesses, not least in productivity. skills development(Or lack of), horrendous waste, weak governance etc etc. The big question is-Can anything be done? There is a very real sense of ‘chickens coming home to roost;an unwillingness to challenge he future and to prefer looking backwords to ‘glory days’..
    Hey Ho

  5. says:

    Hi Rick. Another thoughtful piece and one hard to disagree with.  I wondered if you might be interested in a book we have recently published that picks up some of your themes. I wrote it over the last two years-well-finished in December 2019 and, of course, we(My co-author is from Monash Uni in Australia) had no idea regarding the virus. Our book is published by Routledge and entitled Work in Challenging and Uncertain Times (2020) Patricia Leighton and Tui Mckeown and is a hard hitting look at key aspects of employment. I am an employment lawyer by trade(Tui is a psychologist/HR bod). We explore many fault lines-not least the fragmentation of work, the abdication of its role by the state, the poor state of especially vocational skills training (I have been writing about the Augar Report 2019 recently) , , issues around inequalities and lack of well being, low productivity etc etc. We question, if it is thought desirable to improve work conditions(You tightly highlight the low paid and precarious workers) the long held strategy of giving people legally enforceable rights. As a lawyer, I know this simply does not work-‘naming and shaming’ might be better, it seems.Anyway-I thought you might be interested. We are planning and working with others on the general idea of ‘What next’? We also have a sentimental sttreak to our work-the book is dedicated to Robert Owen!Patricia Leighton.

  6. Alex SL says:

    The idea of simply retraining people falls apart once one considers individual cases. Just speaking for myself, but after school I was at university for c. five years and then did a three year PhD. Since then I have learned more about my field of research every year. If I were to change fields there would be two consequences, although really they are two sides of the same coin:

    (1) The massive investment of eight years of formal training plus fifteen years of work experience flushed down the drain. Not just my time, but also taxpayer money and scholarship funds.

    (2) I would start completely untrained somewhere else, much less efficient and useful to that sector.

    Everybody else can probably do the same calculation for themselves or some of their friends and colleagues, be it university, vocational training, apprenticeship, work experience, or any combination of these.

    Of course people sometimes need to change careers, and sometimes they embrace and enjoy it; that’s not the point. The point is that you can’t just take a health counsellor and switch her to programming as if you move your stuff from one house to the other. It is more like building a house for a million bucks and then, after having lived in it for only six weeks, deciding you don’t like the floor plan, burning it to the ground, and spending another four hundred thousand bucks in haste to build another house that is much smaller than the first.

  7. jayarava says:

    Once we fall off the Brexit cliff I cannot see GDP growing. The Govt are saying to business “prepare for Brexit” but have not provided any details – typical of the Govt to have a slogan but no manifesto. UK businesses are not prepared because they don’t know what “prepared” looks like. Nor do Govt. I’d say, forget about a V shaped recovery. We’re about to head into a prolonged recession.

    Of course, the economic models *always* predict growth, even the most pessimistic forecast is for a very short term contract followed by rapid growth. Always. Go back and look at all modern economic forecasts. They all look the same. Look at the forecasts 3 months before Boris took office. Forecast: growth. Reality, contraction. At what point do we just call bullshit on economic modelling? Because when a model is *never* right it has quite limited usefulness.

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