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Critics of the UK’s Covid pandemic response tend to miss the big picture. Poor pre-pandemic planning, and unfavourable demographic and economic profiles made the UK particularly vulnerable. Serious mistakes have been made, but the UK has since hugely increased PPE availability and testing capacity. Infection and death rates have fallen to very low levels. The overall strategy is clear and having success – steadily opening up the economy while mitigating the possibility of a second wave. Economic policy has been well judged – in contrast to the EU and USA – and economic recovery is well underway. Renewed national lockdown is very unlikely, and the crisis can pave the way for radical measures to boost the economy’s long term potential growth rate.
Recent Developments
This is an update of the “In Defence of the UK’s Response to the Covid-19 Pandemic” piece published on this website on May 11th. It is even clearer now than then that the UK was destined to take a relatively big hit from the Covid pandemic, both in terms of deaths and economic output. In addition to the demographic negatives noted then – a very high population density (especially in England), and by far the largest, and most globally connected city – the UK is also the most obese country in Europe (after Malta) and has a relatively high number of BAME citizens and residents. Both of these latter groups have since proved to be particularly vulnerable to Covid.
The UK service sector is the largest of any major nation as a percentage of GDP (80%), with most of the sector components – notably hospitality, retail, tourism and the creative industries – highly dependent on inter-personal contacts. Looked at another way, household consumption spending comprises 65% of UK GDP compared to an EU average of 55%. The economy was thus highly susceptible to economic damage from a national lockdown policy. Hence the dramatic 20% fall in UK GDP in Q2 – the largest decline in Europe, with Spain closely behind with a fall of 18.5%. The UK looks particularly bad on this Q2 measure because our lockdown occurred just before the quarter began, whereas most of Europe locked down earlier in Q1. For the first half of 2020 the UK’s decline of 22% was exceeded by that of Spain at 23.7%.
Given the UK’s particular vulnerability to the pandemic, the question then becomes to what extent have policy failures made the high death toll and collapse in GDP even worse? And to what extent has the UK done better or worse than other comparable countries? Although the critics would have it otherwise, the honest answer is that it is still far too early to say. These will be matters for the promised Inquiry. My original article pointed out the pitfalls of international death toll comparisons and these remain. The valid long term comparison is “excess mortality” – that is the extent to which deaths from all causes are higher than would normally be expected over the whole pandemic. The UK publishes timely data on excess deaths but many countries are much slower. UK “excess deaths” were the highest in the world at the peak of the crisis, but have since been below normally expected levels for seven weeks in a row. The number of UK Covid cases has fallen by 80% from the crisis peak, and at 16 cases per day per million people is now well below the EU average of 27. This fall has occurred in spite of a huge increase in testing. A number of countries that were praised for their initial response to the crisis–including Australia, Israel, Singapore and some US states –have since seen a major rise in cases. Similar policy mistakes to the UK have been replicated across the globe. The glib early verdict that the UK was doing uniquely badly is just not valid.
The UK has made major strides in getting its act together. Weeks after the PM put Lord Deighton in charge of sorting out PPE shortages the problem disappeared from the headlines. The UK now has ample supply and large stocks of PPE. In a few weeks the UK has gone from having a tiny testing programme to having the largest number of daily tests (currently averaging 173,000 per day) and much the largest testing capacity in Europe (currently 337,000 per day). Only the USA, Russia and India now conduct more tests. There has been a persistent pattern in this crisis of public sector health officials resisting cooperation with the private sector and insisting on highly centralised arrangements. Only after the PM imposed private sector involvement has dramatic progress been made. The testing programme is only now beginning to reach its potential after acceptance that local health officials are more effective in reaching contacts than a remote call centre.
These failures have now been recognised by the government. Public Health England is to be merged with NHS Test and Trace to form a new National Institute for Public Health Protection, based on the German and Korean models. Important templates are being set here for future improved delivery of public services. The decades-long failure to level up the regions has been partly down to excessive centralisation of government power and resistance to public/private sector cooperation. The government’s ability to achieve its “levelling up” agenda could be hugely boosted by following these templates. What could be more appropriate to happen in the context of Brexit, the very essence of which is decentralisation of power?
The critics complain that the government has no clear or coherent Covid strategy. This is a baffling accusation. It is true that detailed implementation of the strategy sometimes appears arbitrary, and replete with anomalies and inconsistencies. I put to the critics that this is inevitable in any phased transition from total lockdown to relative normality. Indeed the whole experience is a classic illustration of why centralised control by the state of the economy and its citizens is generally a very bad idea. Nevertheless the overall strategy itself is clear and coherent, and is already having significant success. The strategy is two-pronged – open up the economy as rapidly as possible while taking mitigating measures to prevent a damaging second wave of infections. These mitigating measures include the increased use of face masks, shielding of the vulnerable, local restrictions where outbreaks occur (which can be increasingly precise as testing improves), better treatments and possibly an effective vaccine. The UK is a world leader in the latter two fields.
The economy has been gradually opening up for nearly three months now and yet cases of infection remain very low. The number of Covid patients in UK hospitals is less than 1,000 and continues to fall, as do hospital admissions. The lockdown-induced recession was very sharp but it was also very short. The economy began recovering slowly in May and then more sharply in June and July. There has been a minor uptick in cases recently, but it is not clear that this reflects anything other than more effective testing. Furthermore, the new cases that are being found are predominantly in those under 65. Infections in the more vulnerable 65+ group continue to fall. It can fairly be argued that the government is overreacting by imposing travel quarantines and local (albeit partial) lockdowns in response to statistically inconclusive data. Conversely, though, opinion polls show that the majority of the public are very anxious about a second wave. Government has to show a lead, but jumping too far ahead of public opinion might be counter-productive.
The Chancellor’s “Eat out to Help Out” scheme is providing just such a lead. It is proving to be a roaring success, not only in boosting the depressed hospitality sector, but more importantly in giving people confidence to go out in public places. It will be much harder for parents to keep their children from school, or workers to refuse to go back to the office, when they have paid several visits to busy restaurants and cafes. Criticisms of the scheme for being a gimmick, or inconsistent with the government’s anti-obesity campaign, therefore entirely miss the point.
Future Prospects
There is every reason now to be confident that the second wave mitigation strategy will be robust enough to see the UK through the winter without major damage to the economy or the NHS. It is perhaps fortunate that the Test and Trace programme has had the summer months to bed in. It is now clearly a world leader in scale, and with the switch to greater use of local council teams, may soon approach world class effectiveness too. It is now very unlikely that there will be another national lockdown. Availability of an effective vaccine within the next few months would make that a certainty.
With that background I stick to the view that pre-Covid levels of economic output will be regained by the middle of next year. There are two threats to the economy that are more worrying than a second wave. The first would be if the Chancellor was to listen to the siren voices in the Treasury calling for tax rises and spending cuts in the next Budget. This would be policy madness, but I cannot see the PM/Chancellor combination of Boris Johnson and Rishi Sunak committing such folly. (See my previous article “Treasury Austerity Plans Must Be Ditched: We Need Tax Reform Not Tax Rises). The Chancellor is however right to resist extending the job furlough scheme beyond October (at most temporary further relief for the most vulnerable sectors might be considered). There will be a consequent significant rise in unemployment, although consensus forecasts are probably too pessimistic. Recruitment agencies are reporting a notable rise in vacancies in recent weeks, albeit from very low levels. The household savings rate has risen sharply, indicating pent up future demand. Sterling has been rising. Current economic models of the UK economy underestimate the remarkable adaptability of the UK labour market, and it is crucial that the state does not try to preserve the jobs market in aspic. Future productivity growth and thus prosperity depends on allowing zombie companies to go under and unsustainable jobs to be lost. New jobs, new companies and new industries will appear. The market rather than the state must determine these outcomes. The government’s plan to increase spending on job training, further education and expanded apprenticeship programmes is the correct role for the state in this context.
The second major threat to UK recovery lies in the poor medium term prospects for the EU and the US. Both seem to be struggling with an incipient second wave, and in both, the economic policy response has been far less sure footed than in the UK. The EU’s main challenge is the inability of the highly indebted PIGS – Portugal, Italy, Greece, Spain, – to protect their economies. The richer EU nations, most notably Germany, have enacted very large fiscal stimulus programmes. This was the time for the EU to step up and provide major help to those member states most weakened by the crisis, using the EU’s borrowing power (for the first time)to raise funds and provide outright grants to devastated economies. After much haggling and delay the EU has eventually come up with an E750bn package – the EU Recovery Fund – which has more holes in it than a Swiss cheese. Firstly, the package has not yet been fully ratified. Secondly, it only begins to take effect in June next year and is spread over four years. Third, a substantial proportion of the package consists of loans not grants – the PIGS need more debt like a hole in the head – and both come attached with onerous conditions. Fourth, large amounts of the money go to countries little affected by Covid such as Poland and Hungary, and –incredibly – Germany. The net transfer of grant money to Italy, the epicentre of the EU crisis, is just 0.7% of GDP per annum for four years. This is the equivalent of blowing a pea shooter into a howling gale. The bottom line is that the EU remains in existential crisis and is unlikely to achieve more than very modest growth at best for the foreseeable future. As our largest trading partner this is a negative for the UK. Mercifully, we are not still a member!
The US economic policy response has been very different from that of the EU but equally disturbing. US fiscal and monetary stimulus has been gargantuan, with a current fiscal deficit approaching 25% of GDP and broad M3 money supply growth of 26.7% in the year to June, and 71% annualised in the three months to June. {By contrast, the UK fiscal deficit for 20/21 looks to be of the order of 15% of GDP, and broad money growth is 11.3% in the year to May}. Both of these measures are much higher than anything seen in US history outside of war time, and even more fiscal stimulus measures are expected in response to the stuttering US recovery. Both Presidential candidates are committed to further fiscal expansion. It is therefore very likely that the US will see a marked rise in inflation during the course of 2021, probably terminating what would then be a short-lived recovery. As our second largest trading partner this would also be a negative for the UK.
However, it is not appropriate to end on a negative note, because a strong case can be made that the UK might be the best performing major western economy in the next five years. Next year the UK will be released from the stranglehold of the EU and the “can do” attitudes opened up by the Covid crisis provide huge opportunities to raise the UK’s growth potential.
The “mood music” in the UK/EU trade talks has improved markedly. EU leaders are aware of the acute economic and political threats facing them. In this context the basic trade deal that is on offer from the UK is likely to be accepted. The UK is simultaneously conducting trade talks with the US, Japan, Australia, New Zealand and now Canada, as well as a financial services agreement with Switzerland. These are very ambitious undertakings which receive remarkably little media attention. Good progress is being made, and an agreement with Japan may be announced soon. The first UK trade deals as a newly independent nation are likely in the first half of 2021. In the longer term the UK seeks to join the Asian trade bloc CPTTP. If the UK were to become a member this would be a larger trading bloc than the EU, and one growing much faster. As President, Joe Biden would be likely to apply for US membership. With the US and UK as members the CPTTP would dwarf the EU. Downing Street will be silently hoping for a President Biden, which would also see the US again take a constructive attitude to a rules based international order and respect for institutions like the WTO.
The Covid emergency response has seen greatly increased public/private cooperation in key fields, highly effective and rapid de-regulation, and changes to the NHS that might have taken many years have happened in weeks. Similar rapid innovation has been seen in the private sector. The development of home working has been similarly telescoped, with significant positive implications for productivity. The Treasury has enacted huge and effective programmes with unprecedented rapidity. These are all templates for future improved public sector delivery and better economic performance.
In a world of increasing trade tensions the UK’s major drive for new trade deals provides a competitive advantage, as well as demonstrating Global Britain in action. The government now has the opportunity to carry out new policies – free ports, tax reform, and deregulation (notably of restrictive planning laws), – to boost the supply side of the economy. A very large programme of investment in technology and public sector infrastructure is underway. It seems likely that significant numbers of emigrants will arrive from Hong Kong – Global Britain again – bringing much needed skills, capital, and entrepreneurship with them. Policy will not get everything right, but there is so much potential here for me to wager that the UK WILL be the fastest growing western economy in the five years 2021-2025.
Robert Lee is an economic consultant and private investor who writes regularly for BfB.
