Covid-19 Recession Looks Mild Compared to 1980s – So Far | Larry Elliott | Business


TThose of us with long enough memories can vividly recall the recession of the early 1980s. Unemployment rose inexorably as many big names in British industry collapsed or restructured. The economic pain was palpable and bleed directly into popular culture, music and television drama in particular. Even now, the mere mention of Boys from the Blackstuff evokes the desperation of unemployment and torn communities.Compared to the blow to the economy this year, the slump of the early 1980s was a moderate affair. The 25% drop in output from peak to trough observed in two months – March and April – was four times larger than the drop experienced in 1980 and 1981. Yet, so far at least, one cannot really say. that the recession was four times worse.

There are several possible explanations for this. The first is that the recession of the early 1980s had profound structural consequences: it helped to break up the labor movement; it marked the moment when Britain ceased to be a manufacturing economy and became a country specializing in financial services; and it shifted the economic geography of the country to London and the original counties.

Second, the crisis was due in part to deliberate political choices on the part of Margaret Thatcher’s government. To be sure, much of British industry was already hampered in the early 1980s by the strength of the pound, pushed higher in world currency markets by Britain’s new status as a major oil producer. . But a further twist was brought in by the use of extremely high interest rates deemed necessary by the government to bring inflation under control. For his supporters, Thatcher did the right thing. To her detractors, she was brutal and callous.

The comparison between the macroeconomic policy stance of the early 1980s and that of today could hardly be more striking. Interest rates are not 15% but 0.1%, with the Bank of England considering the prospect of lowering them below zero. The pound is competitively against the dollar and the euro. Rather than raise taxes and cut spending, the treasury plans to borrow more this year than any peacetime government.

Militant politics have meant, so far, that the 2020 recession has been a bit like the period between September 1939 and May 1940: a kind of bogus war. Figures from the Office for National Statistics show national income fell by £ 85 billion between the first and second quarters of 2020, but by far the largest drop in income – £ 50.1 billion – has been suffered by the government because of its subsidies and taxes. vacation and income support plans. Corporate profits fell by £ 26.5 billion. Household income fell by £ 8.6 billion – a slight drop under the circumstances.

As Paul Dales, chief economist at UK consultancy Capital Economics, rightly notes: “Most of the pain from the huge 20.4% quarter-over-quarter decline Real gross domestic product in the second quarter (which hides the biggest spike of (25.6% drop between February and April) has so far been borne by government and businesses rather than households.

So far, households have not suffered much from the recession. But that, Dales adds, is about to change because the end of the leave program is when Rishi Sunak began to unload the pain on households and businesses.

Layoffs are inevitable as struggling companies see the cost of employing workers rising. So while monthly ONS data shows economic activity begins to pick up in May, the employment recession is only just beginning. For most people, it’s hard to tell whether the economy is growing or not. Getting laid off is another matter. It brings out the reality of the recession.

Sunak appears to be aware of the risks of rapidly rising unemployment, although he has so far resisted calls to tailor holidays to the needs of specific sectors. Instead, he started urging employees to return to their normal workplace.

London – which accounts for over a fifth of UK domestic production is a particular puzzle for the government. The latest research from Morgan Stanley shows that only 31% of office workers in London are back at their desks, while in Paris, Madrid and Berlin the comparable figures are 74%, 66% and 76% respectively.

This matters, as a sophisticated supporting economy – ranging from sandwich shops to taxi drivers and wine bars to clothing stores – has grown to meet the needs of office workers in London (and, indeed, in the rest of the world. large metropolitan cities). It’s easy to see why the branches of Yo! Sushi and Jigsaw are reserved for closing.

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It remains to be seen whether the trend towards working from home continues. Employers seem genuinely reluctant to try to force their worried workers to contract Covid-19 in the office, but may also decide that if their staff are working in Essex or Bedfordshire there is no need to pay them a wage premium to London. A threat of a pay cut could make the office attractive again.

If maintained, the trend towards working from home would have profound ripple effects: on commuting, on the importance of London, on the retail and hospitality sectors, on work teamwork, on-the-job learning with more experienced colleagues and on transition. to a net zero carbon Britain.

The economy will eventually adjust to these structural changes, as it did after the recession of the early 1980s. But only over time and only after much pain.


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