The Covid-19 recession is very different to previous ones, and its recovery is likely to be so too. We should expect the UK economy, and many of its cities, to experience a sharp bounce back.
Last year the UK encountered its deepest recession on record, which prompted warnings of a return to 1980s levels of unemployment. But this recession is very different to previous recessions. And because of this we should expect the UK economy, and many of its cities, to bounce back quickly.
Previous recessions have been led by exporting industries – for example manufacturing in the 1980s and finance and manufacturing in 2008-2010. That’s not the case this time round. The huge falls in output have been led by customer facing local services, particularly in hospitality and entertainment. This changes how quickly the economy should be able to bounce back.
The charts below look at the month-on-month performance of exporters (defined as those industries that sell beyond a local market to regional, national and international customers) for the financial crisis of 2008-2010 and the current downturn. It shows two things.
The first is the relative difference in performance. In the financial crisis, both exporters and local services saw similar declines in output. This time round local services saw a deeper fall, especially in ‘high street’ services such as accommodation, food and leisure.
The second is that exporter industries have been in recovery mode for many months. Their drop in 2020 was much more severe than 2008 – a big hit to the economy – but the sharp bounce back suggests that this was a mix of supply chain disruption and initial adjustment to lockdown, which was short lived, rather than something more fundamental. In comparison the export sector didn’t start to recover until 19 months after the start of the recession at the end of the 2000s. If the bounce back of recent months continues then the recovery of this sector will be significantly quicker than the last recession.
Charts 1 and 2: Month-on-month performance of exporters
Source: ONS, Centre for Cities calculations
Why does this matter? Because it is the export sector that generates prosperity. It brings money into the economy, and is the driver of long-term productivity growth. This puts money in people’s pockets, which in turn generates demand for local services such as cafés, theatres and restaurants.
For local services, the strong bounce back of exporters means that there is likely to be demand to spend (indeed, the bounce back of retail to pre-lockdown levels by July backs this up). So when Covid-19 restrictions are lifted, local services should see a bounce back too, both in terms out output and employment. The question is whether the businesses serving this demand will be the ones that currently exist or ones that set up in the aftermath.
This bounce back is likely to be felt across most parts of the country. As Cities Outlook 2021 shows, the limited data that is available suggests that the export bases of most cities have weathered the storm – be that people carrying on from home or being able to work in a Covid-secure way in factories. The exceptions to this are places like Crawley, Slough and Luton – the impact that Covid-19 has had on the airline industry means that their export motors are faltering, and their recoveries may look much more like that of the late 2000s than the early 2020s.
This, of course, is all predicated on the assumption that the mass roll out of vaccines will continue at a pace, and it will be effective against any mutations of the virus. But if all that holds true, we won’t be going back to the 80s very soon, but back to early 2020. The issue then will be to address firstly the output gap created by the deep falls in output in Spring 2020 (something the OBR forecasts will be permanent) and secondly levelling up, a much longer-term, more intractable problem.
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John Charlesworth
The wider scenario to all of this is the need to repay the massive financial outlay to support the last 12 months. Recovery will be selective (presumably export led if possible) and as much consumer spend being promulgated within the UK. Some cities, and some sectors, benefitting more than others. Infrastructure spend is key. (My views but surely is will be far from a walk in the park as we say!!)