We need to think about the overhang of debt created by the pandemic. Not government debt, of course, but corporate borrowing. Bank of England data show that small- and medium-sized firms (those with turnover of less than £25m) have increased their debt by 28 per cent since the pandemic began as they tried to tide themselves over during collapsing revenues.
Granted, many of these loans are through government-guaranteed schemes. But such guarantees only protect banks. Borrowers are still liable for them. Which poses a danger that if they are unable to do so we’ll see a wave of business closures and job losses, especially as the furlough scheme ends and the interest on the loans falls due. And many of those firms that stay in business will be less able to expand.
This, however, is not the only way in which the pandemic might leave permanent scars on the economy. A second deep recession in just 11 years could dampen entrepreneurs’ animal spirits. High unemployment means young people are missing out on experience and training, which has long-lasting effects on their future productivity, employability and earnings. What’s more, the pandemic might have made us more frugal in the long-term. Many of us are still drinking with our friends in our gardens rather than in pubs. Working from home means no longer buying coffees and pastries during the commute to work. And the shift to online shopping will intensify the decline of high streets: latest data show that while online sales have fallen recently they are far above pre-pandemic levels.
All this spells trouble because despite the strong upturn the economy is a long way from being fully healed. The ONS reports that GDP in May was 3.2 per cent below its pre-pandemic level. Which doesn’t seem disastrous. But it is 5.8 per cent down on what it would be if the economy had grown since 2019 at the same average rate it had in the previous 20 years. And to get output back onto that trend by the end of 2020 requires growth of over 9 per cent by then.
Fortunately, though, we have some reasons for hope. One is that entrepreneurs tend to be over-optimistic which means new ones will start businesses even if older, debt-encumbered firms close. Stanford University’s Nick Bloom and colleagues show that people working from home report that their productivity has risen slightly. MPC member Jonathan Haskel adds that working from home might increase potential output in another way – by enabling some of those outside the labour force because they are carers or disabled to take up work. And, he adds, investment in intellectual property has held up well during the pandemic. Given that it has big spillovers – one companies’ knowledge benefits others – this too augurs well for future growth.
You’ll object that all this is speculative. You’re right. Last year’s recession is unprecedented, so we cannot be confident about its long-term impact on potential growth. For investors, this means we must apply large error bands around any forecasts for corporate growth. And for policy-makers – both monetary and fiscal – it means they should for now err on the side of looseness lest they further damage output. As Professor Haskel says, “tight policy isn’t the right policy.”