The coronavirus pandemic has prompted a mixed bag of responses from economic policymakers around the world. Indeed, I’d sort these responses into three very different groups: the ‘good’, the ‘bad’, and the ‘ugly’. The UK belongs in first category. Much of the rest of Europe is still in the second. And some traditional global leaders are languishing in the third.
To set the scene, the economic fallout from Covid-19 can also be split into three parts. The first is the blow to confidence, even before any major loss of life or economic disruption. This has been reflected in much weaker consumer and business sentiment, collapsing stock markets, and panic buying of essentials.
The second channel is the impact on the supply-side of the economy. International supply chains and travel have already been disrupted, or cut altogether, but the biggest shock will come if, or when, large parts of the UK labour force are unable to work as normal.
The third channel is the impact on the demand-side of the economy, as businesses and especially consumers reduce their spending, either because their incomes have fallen, or because they are unwilling or unable to access the goods and services that they would normally buy.
The economic policy responses need to address all three of these problems. To be clear, the aim is no longer to prevent a recession: a collapse in normal economic activity is inevitable and even desirable, to minimise the loss of life. Instead, the aim should be to protect the most vulnerable households and businesses, and to prevent a temporary shock from becoming a prolonged depression.
This is where I think the UK has done a relatively good job, especially in the strong coordination of fiscal and monetary policy between the Treasury and the three policy committees (yes, three!) at the Bank of England. The Budget earlier this month made an excellent start, with a targeted £12 billion package, including measures which made it easier for people, whatever their type of employment, to access means-tested benefits. The Chancellor has already followed this up with another well-judged programme of emergency support for businesses.
In purely monetary terms, the highlight of the latest package was the £330 billion of new loan guarantees. This is money that companies themselves are going to have to borrow and repay, rather than an injection of cash into the economy. But if cheap finance helps some firms to survive, as it surely will, this is still very useful. Some of the smaller measures are actually likely to have a bigger immediate impact, notably a further £20 billion of direct support for businesses in tax breaks and cash grants.
Inevitably, there are still some gaps in the safety net. There will have to more financial support for specific sectors, notably airlines, and for those renting rather than paying a mortgage. But this is expected to follow soon. The Chancellor has also indicated that he intends to do more to protect jobs with various types of employment support, which is likely to include cuts in payroll taxes and some new form of wage subsidies.
Other countries have also been ahead of the curve.Hong Kong was one of the first to announce a bold fiscal package, which included a HK$10,000 cash grant (about £1,000) to all permanent residents over the age of 18. New Zealand has introduced a package of wage subsidies to encourage business to retain staff. These may be good templates for the UK to follow.
In contrast, the policy responses in the euro-zone mostly belong in the ‘bad’ category. In part this is because of the constraints of the single currency itself, which prevent individual members from running their own coherent fiscal and monetary policies. The European Central Bank’s own actions have also appeared to be half-hearted. ECB President Christine Lagarde has actually had to apologise for poorly-judged comments on the limits of monetary policy, which seemed to hung the southern European members out to dry.
The closing of the Schengen borders has also underlined the value of being an independent, sovereign nation state. Of course, the UK was outside both the euro and Schengen even while a full member of the EU. But this is another reminder of the risks of the ever-closer political and economic union that lies at the heart of the European project.
The US economic response has also been disjointed, with the US central bank running well ahead of the Federal government, which has been slow to act.
This leads to the third category: the ‘ugly’ are those responses which have actually made things worse. With awful timing, Russia and Saudi Arabia have started an oil price war. Normally, a fall in the oil price is good for the world economy, because it transfers spending power from relatively-rich producers to businesses and households who are net consumers of energy. But on this occasion, it has simply added to the financial pressures on the oil industry, particularly the shale producers who dominate the US high-yield bond market.
Unfortunately, I also have to include President Trump in this category. As it happens, the emergency measures adopted by the US have not been unreasonable. The ban on travel between the US and Europe now looks eminently sensible, given that almost every other major country has gone at least as far. The problem is presentation, rather than substance.
In particular, the President’s national prime-time TV address announcing the travel ban managed to undermine confidence worldwide. Even the ban itself was badly explained – implying it would apply to goods as well as people, and to US as well as foreign citizens. There were misleading statements about the likely timescale for the development of a vaccine, the availability of virus testing, and medical insurance.
When confidence is fragile, this stuff matters even more than usual. But here again, I’d like to argue that the UK is doing relatively well. Contrast President Trump’s performance with the regular press briefings we are now getting from the own Prime Minister and senior health advisors. Credit as well to Matt Hancock and Rishi Sunak for their relatively clear communications.
Of course, the UK hasn’t got everything right and we may have more to learn from other countries. But on the economics at least, the UK is a global leader again.