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Prior to the COVID-19 global pandemic, one of the biggest challenges facing the UK economy was undoubtedly sluggish productivity growth.
The story of progress in productivity, or the amount of output produced per worker or each hour worked, is the story of human progress. Advances in technology, the organisation of production and accumulation of capital mean a worker today produces in two weeks what a worker of the past would have produced in a year.
These gains in output per hour worked are what enable societies to enjoy better standards of living or spend less time at work. We have tended to focus on the former – predictions by economist John Maynard Keynes in 1930 that we would only be working 15 hours a week have not come to pass.
The big data event for economists in the UK last week was the release of May GDP numbers. After a record 27% contraction in March and April, the easing of the lockdown from May was expected to generate a strong bounce in activity. The outcome, a disappointing 1.8% increase in GDP, has dented hopes of a swift, ‘V-shaped’ recovery.
The government response to COVID-19 has involved vast, debt-financed increases in public expenditure. The spending has been on a far greater scale than during the financial crisis. With interest rates close to zero fiscal policy is firmly in the driving seat.
The COVID-19 crisis has collapsed global economic activity, and with it, greenhouse gas emissions. The pandemic has brought cleaner air and skies across the world’s cities, but it also offers a glimpse of the scale of changes needed to mitigate the worst impacts of climate change.
COVID-19 has monopolised the business headlines for the last three months. But now, with the negotiations stepping up a gear and the transition set to end by December, Brexit is moving back into the limelight.
Data released on Friday showed that the UK economy contracted by more than 26% in March and April as the lockdown collapsed activity. The governor of the Bank of England (BoE), Andrew Bailey, responded by saying that the Bank stood “ready to take action” to help the economy as it emerges from the lockdown. This week we consider whether the time has come for the Bank to deploy the big gun in its arsenal, negative interest rates.
As the lockdown eases the global economy is starting to come back to life. Last week’s better than expected US jobs numbers, and a surge in private sector activity in China, reinforced the view in equity markets that the worst is past. On Friday the US S&P500 equity index closed up almost 40% on its March lows.
The impact of the lockdown on the UK job market has been dramatic. Last month about a third of the UK’s 33m workforce were being supported by the government, through the furlough scheme, self-employment income support or Universal Credit. A further third were working from home and a final third were at work.
Last week’s UK GDP data underscored the scale of the economic damage wrought by the COVID-19 lockdown. The economy contracted by 2% in the first quarter of 2020, the sharpest quarterly contraction since the 2008 financial crisis.
Many European countries have started easing the lockdowns they imposed in March to contain the spread of COVID-19. Last night UK prime minister Boris Johnson laid out what he described as a “conditional plan” for the gradual easing of the UK’s lockdown.