23 September 2020

Why Covid-19 means there will never be a return to economic normality

We are in a new world of low growth, high costs and permanent state intervention.

LONDON, ENGLAND - SEPTEMBER 17: Tower Bridge is seen in the distance on September 17, 2020 in London, England. A number of London's bridges have recently either needed emergency repairs, or have been closed to the public entirely due to fears that they are structurally unsafe. In late August, Tower Bridge was closed for 48 hours after it suffered "technical issues" resulting in the iconic bridge remaining in the upright position, and Hammersmith Bridge has been closed to the public since April 2019 as it undergoes major structural repair. Elsewhere along the river, Vauxhall Bridge and London Bridge are closed to car traffic as urgent repair work takes place. Campaign groups have called for the repairs to be carried out in full and at speed, as roads and commutes become harder as people return to work after the COVID-19 lockdown. (Photo by Leon Neal/Getty Images)

Covid-19 is continuing its grim advance: second waves of infections are clearly underway across Europe, including the UK. Whatever early hopes there may have been that this pandemic would pass quickly have been dispelled. Even if a safe and effective vaccine is eventually developed, there is unlikely to be any swift return to pre-Covid “normality”. The scale of production and distribution for any vaccine will be enormous and disruptive, while it is also possible that (in common with other coronaviruses), we have no natural long-term immunity to Covid-19.

But while we may only be in the early months of our “new normal”, we are starting to get a better sense of how Covid-19 will reshape our economies. As the UK’s bungled reopening over the summer demonstrates, governments are heavily incentivised to try to restart their economies as soon as possible. Lockdowns are hugely expensive, both in terms of the additional public spending they require, and of the output lost as the economy shrinks. But rushing out of lockdown ahead of getting the virus under control means risking a further surge in infections. This would appear to have happened in the UK, which now faces the prospect of further restrictions and lockdowns with all the economic costs they inflict.

This is the new “virus business cycle” in action: as the virus surges, lockdowns are imposed, tanking the economy; restrictions are then lifted, restarting the economy, but bringing about another surge in infections and so forcing further lockdowns. Until the virus is brought properly under control – which means suppressing it thoroughly, and ensuring tests and contact tracing are used – we will be trapped in this stop-go cycle. There will be no secure economic recovery until the virus is suppressed: the Organisation for Economic Cooperation and Development’s forecasts from June suggested that a second lockdown would severely hinder any recovery from the first. If third or fourth or more rounds of restrictions and lockdowns are needed, long-term economic growth will be pushed towards zero, depending on the scale of the restrictions. Suppression is essential.

But suppressing the virus imposes its own costs. Producing and distributing vaccines on the scale needed will be an enormous resource burden in its own right. Given how infectious the Sars-CoV-2 virus is, around 60 per cent of the population need to be immune for “herd immunity” to be effective. And if we have no long-term immunity to this virus, this is a resource challenge that will never go away, as successive rounds of vaccination and re-vaccination may be required. Ideally this would be internationally coordinated, allowing limited resources to be used effectively and fairly. The World Health Organisation’s Covax programme is supposed to provide that global coordination, but both the US and China have so far refused to sign up.

Alongside the resource costs of vaccination, there are the additional costs of surveillance, testing and measures necessary to support social distancing. These are real costs, in the sense of requiring a diversion of resources to sustain, and (other things being equal) will make economic activity harder and more expensive across the economy. And they are costs that, even in the best-case scenario of a rapidly available, effective vaccine with long-term immunity, will not be removed entirely, since the risk of future epidemics is increasing with climate change and environmental collapse. All these signs point to a reduction in long-term potential for growth, with increased activity and investment in some sectors, such as medical research, unlikely to overcome rising costs across the rest of the economy. In the past few years, the UK’s official forecaster, the Office for Budget Responsibility, has already revise downwards its long-term projections for the economy’s growth potential. Another downwards revision may not be too far behind.

These new costs also raise direct, political questions about how they are paid for, and who should pay: for example, the test-and-trace chief Dido Harding has proposed that the “moonshot” daily tests should be paid for by those taking them – a clear squeeze on real incomes if, for instance, test results are required to continue working in some circumstances.

The Bank of International Settlements has raised the prospect of a future where inflation and debt are much higher, but the bargaining power of labour is also increased as a result. It is certainly possible to see a world where capital is far more constrained by the pandemic and its aftermath, and those who work are better able to assert their claims against it – pushing back against the imposition of these new costs.

After decades of the widespread pretence that economic issues were almost completely separate from political questions, the crisis is dragging the state back into the centre of economic decision-making. A world of low growth, high costs and permanent government intervention would be dramatically unlike the one we have grown used to over the past 40 years. But unlike the period after the Second World War, where high growth stabilised the Western world, lower growth points to continued political instability.