A little over a week ago economists were talking of coronavirus Covid-19 shaving a few fractions of a per cent off global growth. You can forget that now. With increasing parts of the world in ‘lockdown’, with shops, restaurants and theatres closed, sporting events cancelled and people confined to their homes – possibly for months – it is pretty certain that we will now suffer a global recession, if not depression. The suspension of civic society is without precedence in peacetime and therefore there are no comparisons to draw upon when calculating the effect on the economy. But by just how far could the economy shrink this year?
UK GDP in the year to the third quarter of 2019 was £2.1 trillion. Spending by UK households in the same period was £1.35 trillion, according to the ONS. In other words, household spending is equivalent to around two thirds of UK GDP. Of household spending, 13 per cent is classified by ONS under recreation/culture and 8.7 per cent is spending in hotels and restaurants – so 21.7 per cent between them. So far, the UK government has not followed other European countries in ordering hotels, restaurants and so on to close – but has pretty well told us we shouldn’t go out socialising anywhere. Meanwhile, theatres and the like have taken the unilateral decision to close. Moreover, the government’s Chief Medical Officer, Professor Chris Whitty, last week suggested that the sort of measures now in place in Europe, and increasingly in America, could eventually be imposed in Britain – though the government hopes that the period of closure will be as short as possible. On the other hand, Whitty said that this virus will not peak for another 10 to 14 weeks.
Let’s make a crude estimate of what would happen to the UK economy if the entire leisure/recreation/ sector was closed down for three months. If 21.7 per cent of household spending disappeared for three months that would take a 3.6 per cent bite out of the economy for the full year. By contrast, in 2009, in the midst of the deepest recession since the 1930s, the UK economy shrunk by 4.2 per cent. But that is just for starters. Transport is another 14 per cent of household expenditure. If people are going to be stuck at home they are inevitably going to be cutting back on discretionary items like new outfits and household items – although maybe we will see an increase in DIY as people fill their time at home. If you add together food and drink and housing costs (ie rent, mortgages, utilities and so on) it only comes to 24 per cent of household expenditure. If we spent three months just buying the basic necessities of life it would shrink the economy by 12.6 per cent.
Then, of course, there is business spending. All those cancelled conferences and exhibitions are going to take a hefty chunk out of the economy. Could some of the missing spending be pushed back into later in the year? Some of it, no doubt, but there is a limit. If you can’t take a holiday in April you might take one in July instead. But you are not going to make up your twice-weekly visits to the pub, or your fortnightly visits to the theatre. Businesses won’t be able to reschedule all their conferences.
Could other parts of the economy expand as a result of the crisis? Medical supplies, pharmaceuticals, private medicine ought to do well. Soap manufacturers ought to benefit. For toilet roll manufacturers the effect ought to be neutral: they benefit during the hoarding phases only to see sales fall back later. Netflix and Amazon ought to do well with so many people stuck at home. Firms which specialise in video-conferencing and distance learning ought to benefit – as, sadly, will legal firms who specialise in business bankruptcies.