Daily Coronavirus Webinar: economic impact of COVID-19

This was a very CBI affair, as we were joined by our Director-General, Dame Carolyn Fairbairn, as by our former Director-General (from 1995 to 2000) Lord Adair Turner. Adair also, of course, led the UK Financial Services Authority through the financial crisis, and is now a Senior Fellow at the Institute for New Economic Thinking.

The main subject of the conversation was the economic impact of the coronavirus crisis, although we touched on many points, including:

• Crunch time for the Job Retention Scheme (JRS)…
• …and for the Coronavirus Business Interruption Loan Scheme (CBILS)
• What more can be done?
• The meaning of the Office for Budget Responsibility (OBR)’s macroeconomic scenario
• Securing the recovery.

Crunch time for the JRS…

The CBI is receiving hundreds of emails from businesses with cash-flow concerns – particularly now that the month-end is approaching. In this regard, the JRS is, as Carolyn, put it “an absolute lifeline”.

But the JRS also needs to work properly. Carolyn highlighted three particular dates, across the next couple of weeks, that are crucial for the scheme and its beneficiaries. The first is 20th April, next Monday, when HMRC will open the online portal through which businesses can claim money. The second is a few days later, 25th April, when the payments should start being made.

The third and most important is before either of those – and it’s one that the CBI has mentioned many times before now. 18^th April is when firms may have to start issuing redundancy notices, to comply with the 45-day consultation period, if they do not know whether the JRS will be extended beyond the end of May.

The CBI has communicated the urgency of this situation to the government (as well as, yesterday, to Sir Keir Starmer and his opposition team). We believe they understand and will act. They have to, as Carolyn explained: “If the government is not clear, we will see a wave of redundancies by the end of this week.”

…and for the CBILS

The government’s loan scheme for businesses has had what Carolyn called “a creaky start”. But there are signs that it’s starting to work. The latest data, received this morning, shows that around £1.1 billion of funding has been made available to about 6,000 firms. The CBI is also hearing more and more stories from businesses who have had their loans come through – and are able to function as a result.

There has also been progress on the government’s new CBILS+, which was technically launched last week and is designed for businesses that are too big to benefit from the normal CBILS but too small to benefit from the Bank of England’s separate corporate debt scheme. There’s still a lot of work to be done on CBILS+, but Carolyn said that the current proposal is “looking good”.

What more can be done?

Although CBILS is improving, it remains the case that only a small proportion – around 20% – of applicants have received funding so far. As a result, the CBI is focusing on finding more ways to get cash to businesses, quicker.

It’s worth saying that some alternative measures are in place already – for example, grants are now working their way through local authorities and getting into the hands of businesses.

But the CBI believes that a lot more is needed – some of it within CBILS, some of it outside CBILS. Within CBILS, Carolyn suggested, the government guarantee could be increased from 80% to 100% for certain, smaller loans. This would mean that banks wouldn’t need to risk-assess every loan, which would help to speed the process up. Similar measures have already been introduced, with success, in countries such as Germany.  

Outside CBILS, Carolyn highlighted three further possibilities. First, loosening the Business Rates system. Second, looking at the tax system to deliver more liquidity. And, third, getting loans to business through the insurance system.

The last of these, in particular, is an example of the imaginative thinking that will be necessary to support businesses through this crisis. As Carolyn said, “We have a number of networks in this country; one of these is the insurance network. Companies are used to paying into their insurance. Could the flows go in the other direction? It would require some working up, but we are talking to the Treasury.”

The OBR’s scenario

When it came to the macroeconomic picture, it was hard to look beyond the OBR’s scenario from yesterday – which showed a 35% decline in GDP in the second quarter of this year.

But, as Adair pointed out, “if the OBR scenario turned out to be right, it wouldn’t be a total disaster”. Although the 35% figure is alarming and unprecedented, the OBR’s scenario then allows for a rapid recovery in the later months of this year, then 18% growth next year, before GDP growth returns to more normal levels in the years after. “We’d look at that as a V-shaped recovery.”

Adair did sound a few notes of caution, though. The main one was that the OBR’s scenario is only possible if there aren’t significant “scarring effects” on the British economy – such as companies going bankrupt, and people being made permanently unemployed. A V-shaped recovery will require businesses to be ready to motor once the immediate crisis is over.

Securing the recovery

How can we make sure that businesses are ready for the recovery phase? A lot can be done now, as both Adair and Carolyn explained. The proper functioning of the JRS will mean that people can keep their jobs, rather than losing them and having to turn to Universal Credit.

But Adair and Carolyn also agreed that policymakers should be looking to the future – and particularly to the issue of ending the current lockdown. The actual date, as Adair said, will have to be “determined by health experts”. But the government, businesses, unions and other stakeholders can certainly come together over the questions that follow. For example, which sectors can reopen earlier than others? What precautions should be taken?

Beyond that, once the economy moves from the recovery phase to the revival phase and perhaps even to the renewal phase, the government will have to turn to other questions – including, Adair said, “how to make [the new economy] as good as possible”.

He gave an example of the thinking that may need to be employed. To stimulate demand for new cars, the government may choose to introduce grants – but make sure that those grants are targeted at energy efficient, or perhaps even electric, vehicles.

Key questions we answered:

1. Can you give us a sense of some of the initial reports of what the impact of Covid-19 is expected to be on the UK economy?

• While we’re starting to see initial analysis emerge – such as scenario set out by the Office of Budget Responsibility yesterday - the near-term economic effects are still very unclear.
• At the CBI, we believe we’re likely to see a far more rapid, deeper decline that during financial crisis. Coupled, hopefully, with a much faster recovery too – with activity rebounding in the second half of the year.
• Business surveys are giving us an early steer on the extent of disruption so far. Unsurprisingly, expectations for activity in the CBI’s March surveys were at their worst since the financial crisis. And, the most recent Purchasing Manager’s Indices also fell to a record low - largely driven by a sharp fall in services activity.
• Looking at the OBR’s scenario, which works on the assumption of a three-month lockdown period followed by a three-month period where measures are partially lifted.
• It estimates a 35% fall in real GDP in Q2 of 2020 (compared to Q2 2019), and a rise in unemployment by over 2 million – hitting 10% in Q2 also.
• But the OBR also expects the economy to bounce back quickly to its pre-virus levels by the end of the year, so that overall 2020 is expect to see a 13% decline in GDP relative to last year.
• While, more widely, other economists expect UK GDP growth to be anything between -1% to -8% in 2020, also with the bulk of the hit occurring in Q2. Followed by a rebound in growth of +2% to +7% is then expected in 2021.
• The extent to which we see long-running impacts on the economy depends on a number of factors. These include:
  • The length of the disruption to people’s lives and the UK economy.
  • How far spending and output during shutdown is permanently lost or simply deferred. For example, a family might put off a car purchase until later in the year. But, the damage to the travel and restaurant industries may represent a permanent loss.
  • The scale of any lasting damage to the supply-side of the economy. For example, with the increased uncertainty hitting investment, and possible redundancies putting people out of their jobs for prolonged periods and eroding their skills.
  • The extent to which the outbreak causes lasting weakness in demand – with businesses reluctant to invest, people saving more, or whether a further period of government austerity is needed to deal with the costs of the crisis.

2. What are the CBI’s top priorities this week for business?

• Businesses are increasingly looking for forward-guidance from government on the duration of public health measures:
  • Length of the lockdown
  • Duration of economic support measures
  • Information about how the government’s response will evolve as the UK moves through the Covid-19 crisis.  
• This is particularly pertinent where firms are currently topping up furloughed employees’ wages and considering how possible this will be to maintain if lockdown is extended substantially. 
• More clarity testing availability to the private sector would also be incredibly helpful.  
• Revival plan – need to get thinking going. CBI has established UK revival team, meeting in Cabinet office this week.
• Three phases: Restart, recovery, Renewal.
• Final thought from me – mentioned before how the CBI are helping businesses and government with the PPE shortage.
• CBI can play a critical role coordinating the business effort – not just manufacturers but also the suppliers, lawyers and logistics firms needed to make this happen.

3. Carolyn has spoken about the impact of CV-19 on the UK’s economy. How do you see the impact on a global perspective, and how will this impact the UK?

• If the OBR scenario turned out to right, it would not be a catastrophic result. The forecast shows a V-shaped recovery.
• The OBR’s scenario projection for the UK next year is that we will grow at a considerable 18%.
• At the end of next year, the OBR projects we will have the same GDP and GDP per capita as we had before the crisis.
• This is only possible if there isn’t what the OBR stresses the need to avoid: scarring effects. Permanent effects of this temporary lockdown. This includes companies going bankrupt and people becoming permanently unemployed
• The crucial need is to ensure the result looks like the OBR scenario rather than something worse.
• To achieve this, we need to focus on two policy outcomes:
  • All about cashflow, loans guarantee and the JRS to ensure we don’t have unnecessary company bankruptcies which could have emerged after the crisis
  • A clear plan of how we will come out of lockdown in a rapid but controlled fashion.
• Pubs and restaurants will probably be not open for many months. But we need to consider, sector by sector, which elements of the economy could re-open.

4. People are very concerned about the projections on unemployment as we emerge from this crisis. In particular, that the unemployment rate will increase from 3.9% to above 10%, a further two million people becoming unemployed. What is your assessment of this problem?

• The OBR scenario shows a temporary sharp increase in unemployment, up to 10%, followed by a reduction to around 5% by the end of next year.
• We need to ensure that this projection comes true.
• Even the temporary spike of up to 10% will be a major problem as it is a hit to people’s income, which will naturally have a significant impact on consumer demand.
• We need to make sure the JRS is as effective as possible. As many people are on furlough absence schemes rather than moving onto unemployment.
• To reiterate, the most important step the government must take to ensure this projection comes true, is to ensure it holistically plans for the phased re-opening of the economy, and that it communicates it clearly.
• In the United States of America, you are seeing a fundamental increase in unemployment precisely because they have not enacted the pay retention schemes that we, and other countries in Europe, have.
• It is also important to note that some may criticise us for focusing on, and prioritising the economic recovery, particularly when this is a public health crisis. However, governments can do two things at once. Indeed, during World War 2, the government was putting a lot of effort into planning the welfare state for after the end of the war.

5. How would you approach the UK’s exit plan with respect to three things – 1. Timing, 2. Staggering (which sectors return to work and when), and 3. New thinking (using this as an opportunity to consider how the economy and businesses work)

• It has to be determined by the health experts. Not the economic and business experts. They will have to make a judgement on how soon we can come out of the extreme lockdown we are in. They will need to consider how much have the daily infection cases have reduced? How much have the daily serious cases reduced? And how much the daily death toll has reduced.
• In many countries around the world re-opening their economies, it looks like the process takes around 8 weeks or so. We will not be removing this lockdown maybe mid-May. The challenge then will be whether there are there some sectors of the economy we cannot re-open. I fear that will be leisure and food sectors. We will have to have, for many months thereafter, limits on large gatherings of people.
• We will then have to think about re-opening construction and factories, perhaps those that offer an online service.
• We could also consider bits of physical retailing. E.g. Austria is re-opening DIY stores and garden nurseries. Austria believes you can put in place protocols that makes it safe to re-open those.
• That is the sort of gradual re-opening we are likely to see.
• On re-thinking the economy, and how it works, after this crisis, I think a lot of people rushed to make grand statements about making the economy more equitable and greener after this.
• We should be beginning to think about this as we re-open the economy. So, can we make sure the recovery is not happening at the expense of, but is serving good outcomes such as making it environmentally sustainable. How do you get consumption going again?
• We should also try to ensure that the recovery also matches the government’s previous agenda of levelling-up the economy by addressing regional disparities.

6. For businesses, what will be the price and consequence of taking government money over time? This relates to the extent to which companies may have to change their pay structures, dividend policies, the freedom of they have to act etc.

• After the 2008 global financial crisis, we put in place very tight controls, which lasted for a significant amount of time after, on banks paying out dividends.
• When you are trying to revive the economy, it is crucial that banks are able to lend, and banks can only lend if they have large capital bases. You build up those capital bases if you stop them paying out dividends.
• There is a very particular aspect of dividend policy which relates to the banking system rather than anywhere else.
• Across the rest of the economy, people have to be sensitive about dividend payments at the time of taking public money.
• Let’s not forget, the vast majority of British pensioners rely on defined benefit pension schemes, which are paid out of investments, which are paid out of dividends. We have encouraged them to do that through auto-enrolment. We have to accept there is a balance and cannot immediately switch to an economy where we don’t allow companies to pay dividends out of their profits.