Daily Coronavirus Webinar: In Discussion with Andy Haldane, Chief Economist of the Bank of England

Overview:

The topic for today’s webinar was the economic impact of Covid-19 and what we can expect the economy to look like as it begins to reopen. For this discussion, we were joined by Andy Haldane, Chief Economist of the Bank of England and Rain Newton Smith, Chief Economist at the CBI.

Here’s what they spoke about:

• News on the restart
• Travel and quarantine measures
• The economic impact of the crisis
• What shape will the recovery take?
• Valuing different measures of success.

News on the restart 

Last night’s press conference brought updates on the reopening of businesses. Rain Newton Smith guided us through some of the key dates for the restart. Some businesses have been operating throughout the lockdown, essential shops, pharmacies and food stores for example. As restrictions began to ease up, property viewings and sales were permitted. More loosening is on the horizon: nurseries and schools are opening next week, while businesses are looking forward to the reopening of non-essential retail. From June 1st, outdoor markets and car showrooms will be allowed to operate. Two weeks later, from June 15th all non-essential retail from small local shops to department stores will be allowed to open their doors as long as they can make their premises “Covid secure,” said Rain. She noted that the government had released additional guidance about how to operate a Covid safe retail environment. Crowded changing rooms will not be part of the retail landscaper, for example. Other services such as hairdressers and beauty salons will not not be permitted to resume until July, however.

Travel and quarantine measures

Rain also gave an update on the plans for the introduction of a 14-day quarantine for travellers from outside the UK. This will come into force from 8th June onwards with exceptions for freight workers, road haulage, medical professionals and seasonal agricultural workers. The idea of “air bridges” between countries with lower levels of Covid risk is “something we might see evolve in the coming weeks,” she said, news which will be welcomed by manufacturing and services businesses.

The economic impact of the crisis

“The crisis started as a health crisis but then it has just rippled throughout our entire economy,” said Rain. The impacts have been widespread but uneven. Some businesses felt the impact earlier as supply chains were interrupted as the virus took hold in Asia several months ago. Others only began to feel the effects keenly when lockdown measures were imposed in March, forcing them to close their doors. How badly businesses have been affected depends on three factors, says Rain:

1. How easy it is for them to operate remotely
2. For those that cannot work remotely, how easy it is to implement social distancing.
3. How demand for what you’re producing has been impacted.

Andy Haldane noted that a contraction in the economy of about 2% in the first quarter of 2020 had “hit pretty much every sector, plainly some much more severely than others.” However, he also stressed that he has seen improvement in some indicators, giving “cause for a little bit of cautious optimism.” Business sentiment has improved modestly, while there has been some stabilisation and recovery in spending although we are still looking at a “very ugly” first half of the year.

What shape will the recovery take?

“No one is expecting a bounce back as sharp as the fall,” said Andy. There will likely be a “prolonged period” of caution in spending by consumers and businesses alike, he said, predicting a “lopsided V” shape for the recovery.

Questions about negative interest rates and debt levels were raised during this portion of the conversation. Andy noted that the Bank of England’s approach to reviewing rates is “not to rule anything out” but noted that they would have to think hard about how a negative interest rate would impact financial services and how it would “affect confidence in the economy.”

On debt, Rain said that “generally the idea has been to use the financial system almost to create a bridge to the other side,” particularly with regard to the raft of business support loans that have been introduced. However, concerns are being raised about the sustainability of this debt. Rain suggested that other options might emerge for the recapitalistion of debt or the conversion of debt into equity, but noted that we need options other than loans, for example a greater variety of grant funding.

Reducing unemployment and increasing productivity will likewise be critical questions as we move into the recovery phase. Andy remarked that reducing the number of inactive workers will be “one of the key aspects in securing the recovery” and that the Bank of England will endeavour to create financial conditions that are as supportive as possible for that.

Both Rain and Andy stressed that increasing productivity and reducing unemployment going forward will require a focus on digital infrastructure and skills. This crisis could provide a “prompt” for businesses to update their “digital estates” and to invest in the “digital skills” of staff, said Andy. “There are innovations that are coming out of all the adversity that businesses are facing,” said Rain, citing advances in the capacity of businesses to work remotely or operate digitally. “It is allowing us to leapfrog some of the digital adoption we wanted to see.”

Valuing different measures of success

We rounded off the conversation thinking about how businesses might learn from the lessons of the previous financial crisis. Rain mentioned that the most resilient business then were those that had the greatest diversity on their boards in terms of gender and ethnicity. Diversity of background and diversity of opinion leads to better decision making and more resilient organisations she said. As we move forward from this crisis, “that lesson will hold true.”

Andy spoke about the opportunity we have to think about different ways of “keeping score” of success in our society. Traditionally we have valued financial metrics of success and physical capital rather than as human capital, natural capital, intellectual capital and so on. One element that we have neglected is “social capital” which Andy described as the “sets for relationships” and “bonds of trust” that exist across society within businesses, towns and cities, and communities. “Without social capital you struggle as a society to grow,” he said. As we think about “building back better” we could think more about how to value a “wider conception of capitals” in business and the economy.

Key questions we answered:

1. Rain, could you give us an update on the government’s support schemes?

• This is a big week ahead for the Job Retention Scheme (JRS), with the Chancellor due to outline the crucial next steps for the scheme.
• Possible changes to be announced could be around partial furloughing, and the size of the employer contribution from August. Obviously, we need to wait for the official statement this week. But, so far, furloughing has protected millions of jobs and livelihoods. As firms slowly reopen, a part-time element to furloughing will help bring employees back to work in stages.
• Access to finance is critical. We’ve already seen the success of the Bounce Back Loans, and the government has taken steps to get funds to businesses quicker, via CBILS and CLBILS.
• Over £22bn has been lent across the schemes so far, helping hundreds of thousands of UK firms keep people in work and businesses going.
• We know there are still hurdles around eligibility for loans, and the role of non-bank lenders.

2. How is this crisis affecting different sectors and what might happen going forward?

• One of biggest challenges for policymakers in this crisis is lack of precedents to draw on. Past recessions tended to be caused by either a demand-shock, a supply-shock or a financial-shock. This crisis is a perfect storm of all three, and it’s hitting different sectors differently:
• The impact on different sectors depends on:
  • The potential for remote working
  • How easy it is to implement social distancing in the workplace
  • How suppliers and customers have been affected.
• Data from the Office for National Statistics (ONS) suggests that as of mid-April, close to one quarter of enterprises had temporarily ceased trading or paused operations. But this figure varies enormously from sector to sector:
  • Over 80% in entertainment & leisure, restaurants, hotels, etc.
  • 20% in manufacturing, 26% in construction
  • Under 5% in business and professional services, or information and communications.
• The least affected sectors are those that have shifted to remote working.
• Supply chain disruption also continues to be significant. According to the CBI’s April manufacturing surveys, almost half (49%) of manufacturers are experiencing shipping delays. A similar share (44%) reported shortages of raw materials/components/finished goods.
• As the economy reopens, businesses also need to ensure that staff who can work from home continue to do so, to help relieve the pressures on transport systems.

3. How does the Bank of England expect this crisis to impact the UK economy?

• We had around 2% contraction in the economy and GDP in the first quarter of 2020. This is relatively modest in the grand scheme of things.
• However, in Q2 we’re expecting a very sharp contraction, which could be as high as 20%.
• To add a bit of optimism however, our data has shown some stabilisation and a very modest recovery in some measures of spending. We have also seen very modest improvement in business sentiment.
• The data is coming in slightly better than we expected, at least when it comes to household spending.
• However, we are seeing fewer signs so far of stabilisation in jobs and employment. So, it’ll still be a very ugly first half of the year.
• After the lockdown has been lifted, there will be understandably a period of prolonged caution in spending by both households and businesses.
• So, this is a still a V-shaped recovery, but a lopsided V.

4. How likely is the prospect of negative interest rates?

• We are not ruling anything out.
• The key factor will be the consequences for the financial sector of a further lowering of rates into negative territory.
• We would expect it to cause some squeeze on the margins between lending and deposit rates. What are the implications of that? More generally, how would such a move affect confidence in the economy?
• We have not yet reached a conclusion on this issue.

5. What level of debt is sustainable within our economy as we head through this crisis?

• It looks like we're going to come out of this with a level of unemployment that we haven't seen for a considerable amount of time. It's possible that that will be focused mainly on young people. What should we be doing now to try to avoid a severe bout of youth unemployment?
• Currently, we have between a quarter and a third of the workforce inactive, either unemployed or furloughed. And it's hard to think of a point in history where so many workers have been sitting on the side-lines. One of the key aspects in the recovery will be to ensure that as many as possible of those inactive workers find their way back to work.
• Part of the solution could come from the Bank of England providing supportive conditions to keep the economy growing, to keep jobs being created, and to keep credit flowing.

6. Andy, how do we make sure that we drive productivity up as part of the recovery?

• There are plenty of countries around the world that have pulled achieved both high productivity and high employment.
• This could form part of the process of building back better.
• If we had an investment in the digital skills of staff, that would mean we could have not just productivity-rich growth, but jobs-rich growth as well.
• So, this isn't a trade-off. Both are possible, and the crisis might provide a useful opportunity.

7. How should we think about business resilience and efficiency in light of what has happened to the economy?

• There's no point in having an efficient financial system if it's in the gutter.
• As we did with the banking system twelve years ago, we should think about the critical functions of the economy, which we simply cannot do without?
• The key point is not that you turn your back on international markets and look inward. But you need to think carefully about how best to secure domestic resilience for those functions, for those goods and services that matter most.
• You also need to have domestic supply chains operating alongside the international supply chains that we hope get rebuilt.