n a way, Britain should have been the country best prepared for the devastating impact of Covid-19 on the economy, because throughout 2019 barely a day went past without someone popping up to warn of the dangers of a cliff-edge Brexit.
But there are cliff edges and then there’s falling off the cliff, and not even the most pessimistic remainer would have been willing to predict what has happened since the UK went into lockdown at the end of March. While most of the attention has been focused – quite rightly – on the medical emergency, the economy has collapsed.
This week, figures released by HM Revenue and Customs showed that more than six million jobs had been furloughed under the government’s wage subsidy scheme, getting on for a quarter of all British employees. In April 2019, there were 67,873 sales of cars to private buyers; last month there were 871, a drop of 99% to a level last seen in 1946. Some economists think the UK is operating at around one third of its pre-crisis levels of activity.
That’s because almost every part of the economy – outside food and drink and the public sector – has been affected. Factories have been mothballed; estate agents have stopped selling houses; bars, restaurants and hotels have closed; footfall in high streets has dwindled to a trickle; schools and universities have been emptied.
The quarantining of the population has also affected every region of the UK. Parts of the country with relatively few cases of Covid-19 tend to be among the prettiest and attract the highest numbers of tourists. It is going to be an anxious summer for the hoteliers and restaurateurs of Cornwall, the Lake District and the Scottish Highlands.
In the past, recessions have tended to be concentrated in one part of the economy. In the early 1980s it was manufacturing; in the early 1990s it was housing; and in 2008 it was the financial sector. This time it is everything at once, which is why the current slump is, by some distance, the most severe in recent history.
If a full lockdown is kept in place until the end of June, national output is likely to fall by a third between the first and second quarters of 2020. If, as expected, there is a modest relaxation of the rules later this month, the reduction in activity may be limited to a quarter. By comparison, the peak to trough contraction in the economy in 2008-09 – until now the most serious recession since the second world war – was around 6%.
To the extent that there is any good news, it is that the worst is now over. The tentative evidence from traffic congestion and job listings suggests that the economy hit the foot of the cliff in the middle of last month. April truly was the cruellest month.
That said, there is little sign that the economy is going to bounce back rapidly. Most people can notice that there is a bit more going on: a few more cars on the streets; a construction site that has reopened; a bar doing off sales. But there is going to be no snapback of the sort that some were predicting back in March.
There are a number of reasons for that. The risk of a second wave of infection means that the lockdown restrictions will only be lifted gradually, and that process will prove too slow for hundreds of thousands of businesses that are burning through their cash and will go bust within a few months.
Some of the biggest sectors of the economy – hospitality, retail, transport and travel among them – are going to be affected for a long time to come. It is hard to see how social distancing is going to be compatible with a visit to one of the tightly packed theatres in London’s West End or attendance at a Premier League football match.
What’s more, consumer behaviour is bound to be affected by the lockdown. The government has spent the past couple of months warning people of the dangers of leaving their homes and it is going to be a while before they can be persuaded it is safe to have a meal in a restaurant, even if the tables are kept two metres apart. A snapback in the economy would require consumers to blow all the cash they have been unable to spend for the past two months, and that seems improbable.
Since late March, the government has been injecting vast amounts of stimulus into the economy. Interest rates have been cut, money has been created, spending on the NHS has been increased, wages have been subsidised, incomes of the self-employed have been topped up, loans to businesses have been underwritten. The speed at which the package was put together has meant that it is far from perfect, but two things are absolutely certain: without action by the state, Britain would be on course for an unemployment rate of 15% or so; and the cost would have to be met one way or another.
Rishi Sunak is already worried about how much he is having to borrow to subsidise 80% of wages up to a maximum of £2,500 a month, which the Office for Budget Responsibility estimates costs £14bn for every month it is in operation. The chancellor says the UK is currently spending as much on wage subsidies as it is on the NHS and that this cannot go on indefinitely.
Yet these are strong drugs the Treasury has been administering – and weaning businesses off them is not going to be easy. Imagine for a second that Sunak says that from July the government will only pay 60% of the pay for furloughed workers and that the cap is being reduced from £2,500 to £2,000 a month. Some businesses will benefit from a sugar rush of spending as the public celebrates being released from lockdown, but many will not and will start to lay off workers who have previously been furloughed. Those that remain on the top-up scheme at the reduced rate will experience a cut in their pay, reducing their spending power.
As the dole queues inevitably start to lengthen, even those fortunate enough to have escaped a cut in wages will get anxious. They will save more and spend less for fear that they could soon lose their jobs as well.
All of which means that the government needs to act with extreme care. One of the lessons of the last recession was that austerity measures were imposed too quickly and recovery was choked off, and the stakes are much higher this time. Whether or not there is a second wave of infections there is certainly the risk of a second wave of acute economic distress starting in the autumn. The psychological impact of Covid-19 on consumer behaviour meant it was never realistic for the UK to have a V-shaped recession. The aim now is to avoid a great depression.
• Larry Elliott is the Guardian’s economics editor