The economic downturn, while very deep, could be mercifully short

The latest data is historically bad but the bounce back could be swift if the policy response is the right one, writes James Moore

With the mother of all recessions on the way, we need our scientists and politicians to make the right decisions (iStock)

I was left wondering where on earth Stenn, a trade finance provider, found so many wide-eyed optimists when its press release landed telling me that less than half the UK (46 per cent) and US (45 per cent) firms it polled predicted their countries would go into recession in 2020.

I’d be interested to see how the results would look after the latest set of Purchasing Managers Index data came out.

It showed that Covid-19 is hitting the UK economy with the force of a Mike Tyson haymaker, one of the ones he was capable of unleashing in his prime when he was arguably the most feared boxer the heavyweight division has ever seen.

The latest flash composite UK PMI – it includes about 85 per cent of firms in the closely watched dataset – nose dived to 37.1 from 53.0, the lowest level recorded since the survey began. Anything below 50 indicates a contraction is coming.

Reuters surveys economists’ forecasts before the official data is released. Not one of them had it that low. The figure is worse than anything seen during the depths of the financial crisis.

The UK’s dominant services sector (manufacturing and construction are the other two parts of the economy feeding into the composite) fared even worse, slumping to 35.7. Services includes everything from city banks to corner shops to pubs and bars. It should be noted that the data was collected before the government’s shutdown began.

With information like that coming in daily, forecasters are now predicting the mother of all recessions. It sometimes seems as if they’re engaged in a competition for who can come up with the worst number. While writing this, Goldman Sachs came out with minus 7.4 per cent for the UK economy in 2020. It could be worse. Italy was expected to contract by 11.6 per cent and Spain by 9.7 per cent.

The silver lining to this dark cloud is that it may only be temporary

Similar tales of economic woe can be found wherever the pestilential microbe stalks.

The silver lining to this dark cloud is that it may only be temporary. Goldman predicts that the UK will turn in growth of 7.3 per cent in 2021, a figure more normally associated with emerging market powerhouses and China, Italy 7.9 per cent, Spain 8.5 per cent.

That’s not getting back what they’ve lost but the downturn being modelled, while very deep, is mercifully also short.

That is, if it is consistent with the experience of episodes such as the SARS outbreak of 2003 and the swine ‘flu that emerged in 2009. Economists are using these episodes as templates.

But before we wipe our fevered brows, a note of caution is warranted. Oxford Economics notes that the period of disruption could be longer than anticipated, “depending on the potential spread and seasonality of Covid-19 and policy actions to mitigate the fallout”.

A double dip outbreak could easily lead to a double dip recession, if, say, the restrictions, such as those we are now experiencing in the UK, are lifted too soon.

Oxford also points to opinion polls, which suggest that there may be large and more persistent effects for some countries.

The balance sheets of companies in the worst hit sectors will be flaky, and for some time. Caution may make some businesses reluctant to invest. It may cause some consumers to become wary of spending, especially when it comes to big ticket items

Then there are the trade relations, frayed before this started, which could also put a break on recovery, especially if policymakers succumb to nationalistic stupidity of the type that’s been on display in Britain and the US.

While a lot depends on the behaviour of a vicious little package of proteins and RNA, a viral dire wolf that makes the ‘flu look like a toothless lap dog, and what science can produce to combat it, just as much depends on politicians.

Their diseased minds could still make a bad situation worse.

That’s true both in terms of economics and public health.