Some considerations for monitoring the effects of Covid-19 on UK business

Some considerations for monitoring the effects of Covid-19 on UK business

By an economist

We asked a distinguished economist for his ideas for our on-going research into the impact of Covid-19 on the UK business community. Here are his thoughts:

One possible objective of current research is to monitor blow-by-blow how much (revenue-earning) activity has slowed as we go through this crisis.
I’m actually not convinced that that is particularly interesting for policymakers, although it may be a useful cross check for statisticians. The collapse in output now in progress (and the surge in some individual sectors) reflects a combination of supply and demand factors which will be almost impossible to pick apart, and will (I hope) be temporary, as will any weird/unsavoury price behaviour. (And of course the statisticians will have a problem that prices for some goods and services in the CPI may not be obtainable at all while retail outlets are closed – I leave that to them).
I can also imagine that it might be more difficult than usual to get responses, by phone or other means, in present circumstances, and that surveys might be more than usually prone to “survivor bias” i.e. only those which are OK will respond.

So what will be interesting?

1. On a longer horizon, and in the gig economy theme, it will be interesting to know whether there are individual companies or whole sectors which change their working methods permanently.

• presumably those companies which are enabled to work at home will have been more robust than others. Having put such arrangements in place, they may keep them for future robustness. So technology may be used to enable a permanent change in the way in which services and some goods are delivered. And doing that may have higher priority than before the outbreak, if companies now attach greater probability, or greater impact from, pandemic outbreaks than hitherto.
• so there may be interest in surveying how many companies have permanently changed working methods to allow more “remote” delivery.

But that need not be a frequent survey. It might even be a one-off, once the smoke has cleared.

 

2. On a shorter horizon, it will be helpful to know how much output can be expected to bounce back (or fall back, in the case of those companies which have been a surge in demand), and over what sort of timescale.

• • how would companies expect their output in 2020 Q3 to compare with 2019 Q3? Would they regard the 2020 Q3 level as the “new normal”, or is further adjustment expected? NB, if output/demand is still seriously affected in July, as must be likely, Q3 averages will still be depressed, and maybe the Quarter to look at should be 2020 Q4.

 

3. To what extent have there been (and will be) big swings in output the result of swings in demand, or of supply capacity, and to what extent are these temporary, or permanent? For example:
there has clearly been a huge rise in demand in the shops for toilet paper. But I doubt whether actual usage has changed much, so what has happened is a transfer of inventory from shops (and ultimately manufacturers) to households. We can expect demand to fall off as households adjust back to their normal inventory level, with no longer term consequence.

• but there may be longer lasting effects on the demand for overseas travel, if people distrust some foreign countries as unsafe
• and on the demand for care homes if, brutally, there is a substantial increase in the death rate of very old people who require that sort of accommodation, as seems likely.
• there may be short term effects on supply capacity, if eg auto manufacturers switch their production to ventilators, since as long as they stay in business they will switch back when that surge is over.
• there will be longer lasting effects on supply capacity, if eg some companies go out of business as a result of closures during this crisis period (airlines).

In due course, the B of E, and central banks around the world, will need to assess the impact on the relative balance of potential supply and potential demand, and hence on the prospects for inflation beyond the short term (more than ever, I can imagine a disposition to allow short term overruns).
Finance ministries will have to re-estimate the tax base. The cost of the health emergency itself, plus all the economic support measures being put in place, plus for the affluent countries of the west helping out others, will be a huge cost, while economic activity takes a short term hit. Economic forecasters will be flying blind, but they’ll need to know the new base level rather than the ups and downs during a highly unrepresentative period.

 

4. It will be useful to get a feel for the impact of different policy interventions. Eg what % of businesses benefit from the various loans and grants, and what difference does it make to their behaviour: will they be able to stay in business when they might not have done; will they keep staff on the payroll who would otherwise have been chopped. Again, that doesn’t feel like a week by week question, perhaps a once off or before and after.

 

5. Given the previous scope of the ideas underlying the UKPLC website, one key question might be how many gig economy people are at risk of going out of business and being unable to start again over what sort of timescale. (A difficulty will be that at some point the most interesting people to ask will be the ones who have gone!). Going back to earlier debates, there’s a distinction between say zero hours contract people who lose their hours (who have living expenses to meet but not business running costs, who will be thrown onto the benefit system but can presumably restart work when there is work to do), and genuinely self-employed people who have some kind of business expense, eg their wework office, or at least their van.

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