A “V” or a “swoosh”? Why we shouldn’t talk about the shape of the COVID-19 crisis recovery

Dr Hanna Szymborska is a Senior Lecturer in Economics at Birmingham City Business School and member of the Centre for Applied Finance and Economics (CAFE). She researches wealth inequality and the impact of economic policy and financial sector operations on economic disparities across gender, race, and social class. Twitter - @HannaSzymborska.

Posted 12 August 2020

COVID Economic Recovery 1200x450 - Cartoon globe with a finance chart on top

The UK has officially entered the deepest recession on record. According to ONS data, the economy shrank by over a fifth between April and June 2020 (the worst fall among all G7 countries), following a 2.2% decline in the first quarter of the year. While easing of the lockdown restrictions since May has provided some boost to industrial production, services, and consumer spending, the amounts produced by firms and spent by consumers remain substantially below their pre-lockdown levels.

Many experts have engaged in predictions of how long the crisis will last and what type of recovery lies ahead. Will it take the shape of a “V”, a “Z”, a “W”, a “U”, or a “Nike swoosh” (see, for example, analyses by the Bank of England, the World Economic Forum, and Bloomberg)? But what these debates are missing, in my view, is paying due attention to the experiences of the recession itself. By focusing on the predicted paths of recovery, the analyses risk brushing over the devastating impact that the COVID19 depression has had on people’s livelihoods.

This is especially important given that many families have not yet recovered from the economic losses after the 2007 crisis. Over a decade of austerity has led to rising costs of housing and basic public services and sluggish wage growth for many lower paid workers. Despite record low joblessness rates before the pandemic, the rise in employment in the 2010s needs to be understood in the context of more people being employed on insecure and zero-hours contracts, a general increase in the number hours worked, and real average weekly earnings still largely below their pre-2007 levels.

What’s more, the experiences of growth and employment have varied vastly within society. Gains in employment, income, and wealth have been substantially lower for Black, Pakistani, and Bangladeshi households. The UK has also one of the worst regional income inequalities among high-income countries. Poverty is also rampant: a record of nearly 2 million food bank parcels were distributed to people in the financial year 2019/20, while almost one in four people in the West Midlands lived in poverty between 2015/16 and 2017/18.

While growth of the UK’s Gross Domestic Product (GDP) provides a broad indication of how the country as a whole is doing, it hides the unequal trajectories of growth and recovery across regions and social classes, as well as age, gender, and ethnic groups. The rate of economic growth, so revered by many economists, politicians, and media outlets, is merely an average recorded for the aggregation of firms and households over a specified period of time. It does not take into account structural discrimination or any economic activity that does not have a market value assigned to it. Most notably, the GDP neglects unpaid care work, which is disproportionately performed by women, and whose importance in driving and maintaining economic activity has been highlighted by the COVID19 pandemic.

GDP growth is a flawed measure of the economy’s wellbeing. So, to meaningfully deal with the current crisis, the government needs to look beyond aggregate data and guide its policy decisions by focusing on the most disadvantaged members of the society. However, much of the current policy responses to the crisis have focused on households that are already well off. Initiatives such as the Stamp Duty holiday, the “Eat Out to Help Out” scheme, extending the Help to Buy scheme, and encouraging commercial banks to offer mortgage holidays are beyond reach for the most financially vulnerable families in the UK. As such, these policy measures risk exacerbating inequalities, which is not only unfair but also not sustainable in the longer term, as inequality has been shown to reduce growth itself by dwarfing consumer spending and private investment.

What policies should be implemented to ensure a true recovery for the majority of people? We need to fundamentally rethink the role of the state in driving economic activity. On the side of the labour market, the public sector should actively engage in employment creation to counteract layoffs in the private sector, and the furlough scheme needs to be extended. In terms of housing, rent payment moratoria and rent freezes should be introduced to help low-to-middle income families manage their bills. In addition, public investment in the social welfare system and the NHS should be urgently – and permanently – increased. Importantly, the government should not be preoccupied with the accumulation of public debt. Experts are increasingly saying that governments can afford to spend more, and that there are various measures (such as a wealth tax) that could be introduced to finance public spending in a feasible and sustainable way.

The above are just a few measures that would be effective in support financial wellbeing for the majority of people in the UK. Policy makers should not aspire to pursue a recovery that brings the economy back to some predicted long run trend, but instead focus on people’s actual lived experiences. To achieve that, economic policy should rely more on disaggregated data and be more explicit about the potential impacts of various policy measures on different groups in the society and on the natural environment.

You can read more of Hanna's insight into the post-COVID economy on The Conversation.