UK economic activity is bouncing back, official figures suggest. The Office for National Statistics reported last week that retail sales volumes in July hit a record high. As a result, economists expect to see a record rise in real GDP in the third quarter.
This, however, is misleading. Sales have been boosted by pent-up demand; we’ve bought lots of stuff in the last few weeks that we couldn’t during the lockdown: spending on clothing, carpets, jewellery and even books and magazines doubled between April and July.
In fact, there are big reasons to doubt that growth can return to normal. To see them, remember what economic growth is. It is not like inflating a balloon where the thing just gets bigger while otherwise staying the same. It is a process of change, of creative destruction. Before the pandemic the economy lost around 800,000 jobs every three months and gained around one million. That’s a job destruction rate of around 2.5 per cent per quarter and a creation rate of around 3 per cent.
Which brings us to our problem. Job destruction is continuing, as daily reports of redundancies in shops and restaurants confirm. Job creation, on the other hand, has slowed greatly. Latest official figures show that there were 370,000 vacancies in the UK in the May-July period. That’s only half the pre-pandemic level.
It’s not hard to see why job creation should have slowed. Employers and potential employers face colossal uncertainties. Will there be a second wave of Covid-19 and if so how long and serious will it be? To what extent will this year’s economic dislocations lead to permanent changes in our habits and patterns of demand? What impact will Brexit have upon activity and particular sectors? Will the government do enough to support demand or will debt-fetishism trigger a tightening of fiscal policy? And so on. And this is not to mention a scarring effect. This year’s economic shock reminds us that we know less about the future than we thought we did – a fact that might have a long-lasting depressing effect upon animal spirits.
We don’t need to be especially pessimistic about redundancies to be cautious about our growth prospects. Even an average rate of job destruction combined with lower job creation will lead to weak (if any) growth and rising joblessness. And the latter can have multiplier effects. Lower incomes for the unemployed themselves, plus the fear of redundancy among those in work can depress demand and more than offset the tendency for unemployment to cut wages and thus incentivize hiring. The surge in retail sales we are now seeing might not, therefore, carry through into coming months.
So, the economy might well not return to normal – at least not quickly. Which is an especial problem because normal wasn’t so great in the first place. Interest rates and bond yields were low before the pandemic because western economies were in what Larry Summers called secular stagnation. And the causes of that – a lack of monetisable innovations, low profit rates and so on – are still in place.
All this is troubling, because a world of growth of around 1 per cent isn’t the same as one of plus 2 per cent growth but slightly worse. It is different in kind, not just degree. For one thing, such stagnation brings into question the economic regime that has benefited investors since the 1980s: it raises the possibility that we might need more state intervention in the economy. And for another, subsequent events have corroborated what Harvard economist Ben Friedman showed in 2006 – that economic stagnation causes increased intolerance, insularity and populism. That threatens further political uncertainty.
Weak growth might be tolerable, but its effects are less so.
