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  • David A. Smith

Coronanomics: Scenarios for the UK economy in 2020-21

Global Futures & Foresight published a new report on 25th May: Coronanomics: Scenarios for the UK economy in 2020-21. This report will be followed by a further study on the enduring long-term impact of Covid-19 on the economy.

Commenting on the new report, Global Futures & Foresight director of economics, Graeme Leach stated:

“We think this is the most comprehensive study on the economic impact of Covid-19 yet produced. The range of epidemiological uncertainty at present is huge, by the 5 scenarios in our report will enable clients to understand how alternative epidemiological outcomes will impact the economy. This is the time to move beyond today and think about what the world of tomorrow could look like”.

Among the key findings are:

The scale of economic uncertainty at present is perhaps greater than at any time in our economic history. In response the report presents a comprehensive set of 5 epidemiological and economic scenarios, in order to help readers understand the economic consequences of the Covid-19 threat to lives and livelihoods.

In the second half of the year the economy could bounce back and regain all the lost output in the first half. Alternatively, if there is a second wave to the pandemic - over the Autumn-Winter period - the economy could implode and not regain its pre-pandemic output level until 2025-30. Amazingly, all these scenarios are a possibility - from the roaring twenties to a 1930s style depression.

The 5 economic scenarios are: Super V (miraculous recovery), V (full recovery), U (hospitalisation), W (intensive care) and L (near death experience).

The range of possibilities is that wide, because the epidemiological uncertainty is so great. The 5 economic scenarios are based on epidemiological outcomes ranging from a very quick lifting of the lockdown and social distancing over the Summer, through to a second or third wave to the pandemic over the Autumn-Winter of 2020-21.

The great hope for the Super V and V scenarios is very large numbers of unrecorded asymptomatic cases and therefore much higher levels of herd immunity.

If the Super V, V or U scenarios don’t occur, the negative economic consequences of the crisis could be dangerously non-linear, increasing over time. The longer and deeper the crisis, the lower the probability of a quick bounce-back when it’s over.

It is difficult to be at all clear, as yet, as to which scenario will come to pass. Our very hesitant judgement is that the U or V scenarios are the most likely.

The immediate impact of Covid-19 will be weaker inflation or even deflation, but thereafter there is huge uncertainty as to whether or not it will lead to sustained zero inflation/deflation or in fact result in the ‘resurrection of inflation’ via monetisation and ‘helicopter money’.

Accelerating money supply growth at present - particularly in the US, but also in the UK and Eurozone - suggests that an acceleration in inflation is possible in 2021.

In sharp contrast to the aftermath from the great financial crisis, both commercial banks (over 2008-09 onwards they were being encouraged to re-build capital) and central banks are now being encouraged to expand their balance sheets, thereby accelerating monetary growth.

After the great financial crisis HM Government introduced a policy of fiscal austerity. Whilst it is possible that strategy could be repeated after the pandemic is over, it seems unlikely. The political mood music seems very different, despite the current surge in public debt from an already very high base. Politicians seem to lack the willpower, although this might be simply that they expect the crisis to be over very quickly, with a bounce back in the economy, and higher debt to be then easily financed at record low interest rates.

Financial markets remain unperturbed by the issuance of debt. The UK government borrowed at a negative interest rate for the first time ever in May.

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