COVID-19: part two, the economic impact of lockdown

If you are under the illusion that the plaudits being heaped on the NHS and its staff by our political leaders will swiftly translate into billions of pounds for the public health sector after the current COVID-19 crisis, then think again. In the past month it has become increasingly clear that not just the British economy, but the world economy, is being savaged by the pandemic. So, in spite of the hints dropped by Foreign Secretary Dominic Raab in 10 Downing Street’s daily press briefing two weeks ago, the government’s finances are going to be in such a dreadful state over the next few years that the best NHS staff can hope for is a token pay rise. However, given the public mood the NHS should evade another round of health sector ‘austerity’, as imposing that would be tantamount to committing political suicide. But how bleak is the economic outlook? And if it is as bad as many of the best economists in the world are suggesting, how do we ensure long-term financial sustainability of the NHS in the post-COVID-19 era?

To take the economics first, last week (April 10), the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, issued a cri de coeur, calling onhumanity…to harness its greatest strengths’ to confront ‘a crisis like no other’ as ‘we anticipate the worst economic fallout since the Great Depression’. Over this year, of the 189 nations who are members of the IMF, 160 will experience declines in national income per head, she said. This is the exact opposite of what the IMF expected three months ago.

How can this be? In his seminal study of the Great Depression era ‘Golden Fetters: the Gold Standard and the Great Depression,’ the renowned economic historian Professor Barry Eichengreen writes that most people think it started around the time of the Wall Street crash of October 1929, but,  he says, business activity was already weakening over significant parts of the globe in 1927/28. The USA was hardest hit, with the slump beginning in late 1929 and continuing until early 1933. From peak to trough, real gross domestic product fell 30% and unemployment soared to a peak of over almost 25%.  

The contrast with events today is striking. In the space of around three months the global economy has fallen off a cliff edge, it is still in freefall, and nobody knows where the bottom is. The sheer speed with which the crisis has engulfed the world was described in detail in the IMF’s comprehensive World Economic Outlook, published April 14. On April 10th , however, research published at the Peterson Institute for International Economics (PIIE) suggests that in the April-June quarter America’s output ‘is on track to decline at an annual rate of  50%  (and) the US unemployment rate will hit around 20% in the early summer.’ The research projects a vigorous recovery in 2021, but such predictions hinge on what some will see as optimistic assumptions.

Economists at J.P.Morgan Chase, the giant American investment bank, are not alone expecting similar declines. China, the world’s second biggest economy, officially published national output figures for the first quarter showing a year on year decline, which is the first time this has (officially) happened since the 1970s.

In Europe, official sources in Germany and France  have indicated that those two countries are already in recession. In the UK, meanwhile, the prestigious National Institute for Economic and Social Research warned on April 9th that if the current lockdown continues, which it is doing, there will be a 5% fall in national output in the first three months of the year, followed by a further 20% fall in the second quarter: ‘The lockdown is causing the largest contraction in economic activity since 1921,’ it said.

The pace of these declines is in itself destructive, not only of confidence, but also of the capacity of businesses to adjust and to recover. Some are comforting themselves with the view that, unlike in 2007/8 financial crisis, this time the banks seem to be in better shape. However, the truth is not so clear cut as the Chairman of J P Morgan noted on April 7th. Since 2007/8 it is correct that most banks in the UK (and in most advanced economies) have strengthened their balance sheets; however, high risk lending has continued to soar, migrating from banks to so-called ‘shadow banks’. Nobody knows how the corona-related losses will be absorbed, or how big a hit the banks will have to take not only from their own exposure to this “shadow” sector but also to the thousands of non-financial sector companies which will fail. A hint of the anxieties about the global financial system came last month when the US Federal Reserve agreed to provide inter-governmental dollar credits (Swaps) to thirteen countries, ‘to maintain the flow of credit during the coronavirus  epidemic’.

However, ‘unknown unknowns’ proliferate. There are no reliable economic models or theories that can be applied to the world’s economies to illuminate what is happening. What might happen is also problematic. Professor Charles Goodhart, a renowned monetary, financial and economic expert and former top government policymaker, warns of the risk of ‘a surge in inflation’. Professor Bo Becker, of the Stockholm School of Economics, worries that the heavy debt burden in companies will obstruct economic revival.

So what about the NHS and its ‘Cinderella’ sister, care homes? As long ago as October 2016, the Nuffield Trust, in evidence to the House of Lords Committee on the Long Term Sustainability of the NHS and Adult Social Care, said that the Office of Budget Responsibility’s  projections for the growth of healthcare spending until 2030/31 (of just under £100 billion) could be met: ‘60% would come from projected growth in GDP and remainder from a combination of  tax and re-prioritisation of public spending,’ it maintained.

The hit that the government finances will suffer as a result of the COVID-19 catastrophe will undermine current spending expectations for a health sector, in which for decades the growth of spending has consistently outpaced the growth of the economy. The government has consistently ducked publishing its assessment of how to reform the care sector and now its problems have become much worse; for it is recognised that, in the era of pandemics, that care homes have to be seen as part of an integrated health system.

What is urgently needed now, as when William Beveridge published his ground-breaking report, is a radical re-think of the healthcare system as a whole. This re-think needs to take seriously the lessons that can be learnt from overseas, including from neighbouring European countries. There has been much teeth gnashing in the Johnson government over the evidence that Germany, in particular, has coped far better with the crisis than we have. 

In the UK the NHS and social care have been a political football for too long, kicked around by too many politicians trying to win votes, build their careers or demonstrate the purity of their ideological preconceptions. This must end. The NHS has dramatically reorganised itself in weeks. The selfless commitment of its, mostly underpaid and too often inadequately protected, staff has been extraordinary. The depth of expertise in our research universities and hospitals, an extraordinary competitive advantage in a cut-throat world economy, is being demonstrated daily. We must capitalise on these strengths. This means some MPs must accept the obvious: that the privatised American system is deeply flawed. We must be open to learning from abroad. Belgium, for example, has an excellent public sector, healthcare system. It allows better-off citizens to opt for standard hospitalisation fees or pay extra to have a room on their own or with a smaller number of patients. The citizens’ annual payments to finance the system are linked directly to incomes and to the health system.

The case for reform must be built on stakeholder participation, not the party-political dominated approach which has, demonstrably, failed miserably in the past few weeks. As in Germany, such a stakeholder approach, bringing together, regional governments, staff, healthcare unions, pharmaceutical companies, research institutes and universities to oversee the long term management of this vital socio-economic sector, must be examined. To cope in the years ahead we need a healthcare model that is both politically and financially resilient.

Comments (6) Add yours ↓
  1. Nicola Stingelin Ethicist: advisor to academia, commercial sector and the NHS

    I agree that in considering who should contribute to bearing spiralling economic costs, although the major actors in a health crisis are States, government agencies, and global institutions such as the WTO, WHO and UN, we should recall that there is a ‘C’ for ‘Corporate in ‘pandemic’. As I have commented elsewhere in this blog series, the responsibilities that should be laid at the feet of the pharmaceutical sector in the age of pandemic must be revised.

    Health care research and development has been largely (perhaps oddly in many respects) delegated by society to the private commercial sector. Milton Friedman famously wrote back in 1962 that the social responsibility of business in free economy is to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game. “The game” the pharmaceutical industry is engaged in is contributing to improving access to the highest attainable standard of health (that has long been declared by the UN and WHO to be a human right).

    By the start of the 20th century the reality of ‘Corporate social responsibility’ (CSR) has been adopted by the pharmaceutical sector. The WTO adopted in 2001 a Declaration on intellectual property rights and public health in response to concerns that patent rules restrict access to affordable medicines in health emergences. This ‘Doha Declaration’ affirmed the sovereign right of governments to take measures to protect public health, giving primacy to public health over private intellectual property.

    How is the conduct of the pharmaceutical sector in the ‘Age of COVID’ faring? It seems to be responding with speed to leverage expertise in vaccine development; develop antiviral therapies; develop and market test to detect the novel virus and antibodies; undertake drug repurposing trials, as well rushing the manufacture of ventilators. The preparedness of China to share accurate and complete coronavirus data with the WHO, academia and the commercial pharmaceutical sector has become a central requirement. The COVID-19 Therapeutics Accelerator was launched in March 2020 by the Gates Foundation, Wellcome, and Mastercard comprises 15 major pharmaceutical companies who have agreed to share their proprietary libraries of molecular compounds.

    The Pharmaceutical Research and Manufacturers of America published their “Principles on Beating Coronavirus” based on ‘share’, ‘collaborate’ and ‘work with’ governments and fellow companies. The industry will furthermore coordinate with governments and insurers to ensure that treatments and vaccines will be available and affordable for patients. AbbVie is reported as deciding not to enforce patents (foregoing thereby higher level income streams) for its HIV therapy KaletraTM, a candidate COVID-19 repurposed drug.

    The future should lie in the sector embracing organisation such as the Medicines Patent Pool, a non-governmental organisation backed by the United Nations that supports access to drug treatment through a voluntary licensing mechanism for low- and middle- income countries.

    We are indeed all in this together; corporate social responsibilities must encompass global solidarity as an essential part of retaining a ‘licence to operate’ in times of global health crisis.

    April 21, 2020 Reply
  2. Brian Dye Lawyer

    The Financial Times is to be congratulated for waiving their paywall so that everyone can read their calculation of true numbers of Covid-19 deaths in the UK up to 21 April – they say 41,000 deaths, a very plausible number. This is more than double the 17,000+ figure circulated by the Government up to the same date. Here’s the FT link so that anyone can read the (I think, conservative) methodology for making calculation, which is also explained by Chris Giles, the FT’s Economics Editor on a thread on his Twitter account

    Looking at our UK lockdown by doing a cost benefit analysis, the economic costs are great as illustrated by the OP, but I’m afraid our lockdown was too late, too little (planes from Covid-striken countries still arriving in the UK), too disorganised (PPE in disarray, discharge of still infective patients to nursing homes, blindness to the needs of the care sector) too incomplete (inadequate testing) too muddled (who is in charge?) too propagandist (disconnect between 5:00 pm press briefings and situation on the ground) too cruel (remote goodbyes to the dying, direct funerals) and too uninformed (statistics wrong and incomplete, so no reliable guide to policy), too obstinate (public still not advised to wear masks in supermarkets etc).

    If the real position is that we do have 41,000 Covid dead and that is just up to 21 April, with more to come, and if it’s really true that Germany, which has had a different Covid strategy to us, has had only 5,090 deaths up to the same date, I hope someone in the future is going to have to answer the question: how did we allow this number of deaths to come about. That’s for another time.

    In the meantime, the implication for releasing lockdown, in my view, is this: how can we relax lockdown if deaths at this level? We need a change of crew at the top, and a change of policy. That’s the only way to curtail the deaths and cut the economic loss. Until we have a vaccine, the way out is to move to a compulsory universal, locally operated weekly testing of the population, with self isolation of positive testers until they test negative, and everyone else able to go about their business, as proposed by Peto et al. It’s not perfect, but it’s a lot better that the unsuccessful policy bodge we’ve implemented to date. Here’s the paper – it should be better known:

    Peto J. Covid-19 mass testing facilities could end the epidemic rapidly. BMJ 2020;
    368: m1163.

    My only concern is that what Peto is proposing is too sensible and that whatever body is in charge of policy at the moment (who knows which one that is?) may move to relax lockdown while deaths are still running at a high level, and we get a second Covid wave. Let me say, if we have then a second lockdown, goodness only knows what that is going to cost.

    April 22, 2020 Reply
  3. Culley Carson Rhodes Distinguished Professor (emeritus)

    This very thoughtful and well written blog covers the impact of the COVID 19 pandemic well. The impacts are more wide ranging than, I think, we or our governments have realized. We will mostly live through the pandemic but the impact on our way of life and economies has yet to be written. The unemployment per capita in the US is now higher than the depths of the Great Depression. Small businesses are barely staying alive and will falter as the isolation continues. People will begin to default on their loans and repossessions will soar. The service, travel and construction industries, already devastated will take decades to recover. Meanwhile the spending on bail outs will require repayment in the form of increased taxes giving working people less money to spend further depressing the economy. The downward spiral is unavoidable and will likely define our lives and those of our children and grandchildren,

    While I don’t like to be the shroud, we must face the reality of what is happening and what is to come.

    April 25, 2020 Reply
  4. Christopher Smith Director of Investment Manager

    An interesting and thoughtful analysis of the present situation and its effects on health care . In the depths of this crisis, it is easy to be concerned about the prospects for the global economy. Unlike in 2008/9 , however, when there were concerns about moral hazard, the authorities have responded speedily . Helicopter money is firmly on the Agenda. The U.S.Congress has agreed a fiscal stimulus package of $2trillion and a massive programme of QE will doubtless be implemented. The U.K. Government has announced similar measures . And interest rates everywhere in the developed world are back to Zero and look like staying that way for a long time to come – indeed the return of negative yields on a wide range of financial assets looks highly probable .

    All this suggests, however, that the rebound when it comes, as it will , may take us by surprise. In the medium to long term, this extent of these fiscal and monetary measures could lead to the return of inflation, as indeed Professor Goodhart suggests. For the foreseeable future, the marked deterioration in public sector finances across the developed world as a whole is, of itself, unlikely to have significant adverse consequences though the factors that have caused this will be with us for a long time to come.

    Where does all this leave healthcare? The school report for the UK Government’s performance in, admittedly, a difficult situation is likely to read … “ could have done better “. The events of the past few weeks have, though ,been a big wake up call and perhaps will encourage the various conflicting and vested interests in and around the NHS to work together more closely to bring about much needed changes . The precedents are not encouraging but maybe this time it really will be different. Let’s hope so.

    April 30, 2020 Reply
  5. Peter Rimington Urologist

    Just a short comment from the Urological front-line: apart from the complicated economic predictions and political changes we need, lets just learn one obvious immediate fact. Obese people are at higher risk. Obese people! What percentage of UK children are obese? 33%!! A third!! And apart from COVID Obesity is linked to a myriad of health problems. So can we send a clear message to the general public, it is NOT acceptable to be obese and do nothing. It is NOT OK to continue to smoke! There has not, for some time already, been enough money to support dreadful life style choices and in the future there will be even less money.
    So whether we manage to resolve the political and economic detritus of COVID or not, we urgently need to be honest with the public that the NHS simply cannot bear the burden of self inflicted morbidities, that a health care system needs to accommodate and applaud some private care, that some sense of own responsibility for health is immediately needed and the NHS will not be able to be a catch all in future. As this message is political suicide, the NHS needs to devolved from political process and separated like the Bank of England.
    Finally, may I recommend everyone reads Walking on Lava from The Dark Mountain Project just in case you were starting to forget about the Climate change consequences of COVID! The interview with Dmitry Orlov is uncannily predictive. Best of luck to all

    May 6, 2020 Reply
  6. Stewart Fleming Former US Editor Financial Times

    Stewart Fleming

    The evidence is mounting that the British economy is on its knees, battered into submission by the corona virus. Chancellor of the Exchequer Rishi Sunak has warned (May 19) that we face the worst economic slump in history which will leave permanent damage or “scarring”.

    “We are likely to face a severe recession, the likes of which we have not seen, and of course that will have an impact on employment,” he said as the Office for National Statistics reported that the number of people claiming unemployment benefit had soared at a record rate of over 2 million. (FT “Sunak warns UK economy could suffer permanent scarring.”

    He also told the House of Lords Economic Affairs Committee that the Treasury has given up hopes of a swift, or “V” shaped “economic bounce back. With some 10 million now technically still employed, but only because the state is temporarily paying as much as 80% of their wages, “scarring” does not quite describe what lies ahead, although Prime Minister Boris Johnson’s rhetoric at Prime Minister’s Questions this week (May 20th) seemed, at least, to rule out another round of budgetary austerity to curb health sector spending.

    No sector of the economy is going to be spared painful upheavals however, as Rolls Royce, the pride of British engineering technology, made clear this week when it announced (May 20th) plans to axe one fifth of its work force, some 9,000 jobs ( The job cuts are being made because Rolls Royce, like Airbus and Boeing, have come to the conclusion that it will, at best, be several years before demand for air travel, and so for aircraft powered by its engines, will revive. Many of the more than 100,000 workers in companies in its supply chain will be fearing for their jobs too, hoping, according to Paul Everitt of industry lobbyist ADS Group, (BBC “Today” May 21st) that accelerated defence spending will cushion part of the blow.

    Marks and Spencer, another, albeit already fading, pillar of the British business establishment, has also warned of long-term damage, leaving experts saying that some of the stores it has closed already will never reopen because shopping habits are changing so dramatically. On the evidence of the public’s wary response to calls to send their children back to school, confidence in society at large is also, at best, fragile, worrying for other consumer businesses such as pubs and restaurants.

    In short, as Sunak intimated, even without a second peak in the epidemic in the autumn, the whole country is facing several years of economic hardship. The young, paradoxically the least-at-risk clinically, will be amongst the hardest hit economically and psychologically, not least as they wonder where their jobs are going to come from. So, what is to be done?

    The first step the government must take is to try to build public confidence. John Maynard Keynes, the preeminent political economist of the last century, said that, when assessing future levels of economic activity, you should pay attention to what he called “animal spirits.” In their book “Animal Spirits: How Human Psychology Drives the Economy” Nobel prize winning economics professors George Akerlof and Robert Shiller say that “economic decision makers are often intuitive, emotional and irrational,” adding, “thus confidence, or lack of it, can drive or hamper economic growth.”
    How effective, so far, has the government been in sustaining public confidence? Two recent opinion polls on May 17th from “YouGov” (Sky News “Public support for Boris Johnson’s handling of Covid-19 pandemic plummets,”) and “Opinium” (Observer “ Revolt over easing of coronavirus lockdown spreads as poll slump hits Boris Johnson”) are not reassuring.
    Even senior Conservative Party MPs are uneasy. Greg Clark, Chair of the House of Commons Science and Technology Committee, in a 19 page letter to the Prime Minister (May 18), says that, despite its protestations to the contrary, “the transparency around scientific advice has not always been as clear as it should have been.” He calls for much more of the advice to be published.
    Bluntly, the letter says “it is not clear that the lessons of the delays to testing have been learned.” He adds, “strategies to deal with carriers of COVID-19 who were asymptomatic have not been clear,” so reinforcing fears that care workers have been transmitting the disease to vulnerable people. The letter also says that “the UK’s limited capacity for contact tracing was an important factor in the decision to stop full contact tracing on 12 March.” He presses the government “urgently to build up contact tracing capacity.” (FT: “MPs criticise UK’s handling of corona virus pandemic.” ).
    Signs that some government ministers, notably Therese Coffey, work and pensions secretary, are turning on the scientists whose advice they claim has been instrumental in their decisions, will not build confidence either. (FT May 19 “UK Minister sparks blame game over coronavirus policy mistakes.” ).
    In short, it is time for a re-set in public policy making. As the eminent former Conservative Minister Lord Michael Heseltine argued on May 20th on the BBC’s Channel 4 News (, although the government has “been doing some sensible practical things,” meeting the long term challenge of the coronavirus will demand a far- reaching shift away from its current, central-government focused approach, and a major shift towards empowering regional and local governments in order to “create jobs, hope and optimism,” and so build a more resilient economy.
    To head off the long term unemployment of young people, for example, will require the development of locally engineered, government-led training, education and employment policies going way beyond the current short-term “Pick for Britain” initiative to stop fruit and vegetables rotting in the fields. For, while “animal spirits” are flagging, there will be no private sector led “bounce back” in training and employment for the young.
    Beyond the emergency cash injections today, coping with the harsh economic times and intense pressure on government finances which lie ahead will also require re-thinking policy, not least in relation to the structure and financing of the health and social care sector.
    This is something which, according to Laura Kuenssberg, the BBC’s political editor, at least for the care sector, the government was beginning to grapple with once more before the coronavirus crisis struck ( BBC May 21st “Cap on care costs considered before outbreak”). The Beveridge plan, which led to the NHS, was conceived during the Second World War. Similar far-sighted thinking is needed now if the health sector is to be prepared for the challenges ahead.

    May 25, 2020 Reply

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