Recession: Why has UK been so badly hit and what must government do now to restore confidence?

Analysis: Country is in deeper downturn than any other G7 nation and ministers have vital decisions to make to get us out of it, writes Ben Chapman

Rishi Sunak has a tough job to instil the confidence needed to help the UK out of an unprecedented economic slump (AP)

The UK has gone through a significantly worse recession than any of the other wealthy nations that make up the G7, new data confirmed on Wednesday.

While there were clear signs of a rebound in June as workers returned to factories, construction sites and high streets, the UK finds itself attempting to drag itself up from a worse position than other comparable countries.

We must ask ourselves why.

It would be foolish to ascribe certainty to theories at this point. Even the hard data that we have is being revised by the week.

The UK’s reliance on consumer services, which often require face-to-face contact, is one factor in the deeper than expected contraction.

Yet, that is not a sufficient explanation. Deep declines were experienced across the board, in services, construction and manufacturing.

Another answer to this important question is given weight by the GDP numbers: that the UK entered lockdown too late and when it did so the government was too timid in its measures to control the virus.

In so doing, it allowed Covid-19 to spread much more widely than it otherwise would have done, necessitating a longer shutdown.

The consensus among economists is that Britain’s economic slump – the deepest on record – was in part due to the length of time that the country’s businesses were forced to close.

In seeking to err on the side of personal freedom, the government likely achieved precisely the opposite: a longer than necessary curtailment of our liberties and a deeper than necessary hit to our livelihoods.

In those crucial weeks in early March, as other countries quickly enacted draconian but necessary policies, Boris Johnson was taking selfies with Philip Schofield and Holly Willoughby on television while saying that perhaps the country could take the virus “on the chin” and let it spread through the population. But he added that he wasn’t sure just yet.

Of course, all of the big decisions made at that time were difficult ones. However, with one of the worst death rates in the world and now the deepest economic slump (bar Spain), a central premise of much of the government’s thinking on lockdown appears shakier than ever: the idea that there is a trade-off between the economy and public health. In fact, the former cannot thrive unless the latter is prioritised.

Anti-lockdown purists will again point to Sweden which took a more laissez faire approach and is now seeing deaths come down dramatically. But there too, economic activity has slumped only slightly less than its Nordic neighbours, despite many times more deaths.

China, by contrast, has avoided a recession altogether. After being far too slow to publicly acknowledge the severity of the coronavirus crisis which began in its midst, the country introduced perhaps the most comprehensive lockdown anywhere in the world. Now its economy is growing again.

So what next for the UK? Many in government will be hoping that the memory of previous missteps, flip-flops, dithering and delay will be erased as life, for most people at least, gets back to something like normal.

But the key thing holding back the economy from getting back to growth is, as ever, uncertainty; people worried they might die from the virus won’t go out; workers worried they won’t have a job will hold back on spending; businesses worried they won’t have any customers won’t invest or hire new staff.

It is up to the government to instil confidence on these issues but ministers seem, yet again, to be losing their bottle.

Just as the public health messaging has been marked by confusion, contradiction and U-turns, there are reports that the government is set to waver on the economy.

The certainty of Rishi Sunak’s “whatever it takes” message was exactly what the country needed during lockdown, but it has been slowly watered down as the moment of real pain approaches.

The chancellor is reportedly preparing a public spending squeeze this autumn.

That will be at exactly the moment that furlough support is withdrawn and hundreds of thousands, perhaps millions, of workers are likely to lose their jobs, taking demand (spending) out of the economy.

This demand crunch will be exacerbated by the fact that the UK has one of the least generous benefits systems in the developed world.

At this point the government should be seeking to invest, to help stimulate demand and pick up the slack. It should be reassuring viable businesses that they will be supported and considering further targeted help to sectors most in danger. It should also be laying out a credible longer-term plan for real, large-scale investment to spur the recovery rather than reheating its old infrastructure spending plans and pretending that they’re new.

To take an alternative approach and focus on short-term budgetary discipline would be to compound previous errors and condemn the UK to a slow recovery from an unnecessarily deep recession. Sound familiar?