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There are no reasons to pay much attention, anywhere, to economic data from February — the month before most of the world was forced into some form of lockdown. These numbers from the past don’t tell us much about the direction of the global economy, on the eve of the major destruction it will suffer in the coming months.
But the U.K.’s gross domestic product number for February, however, tells us something that will weigh on future political and economic choices: the country’s economy was already crippled before the virus hit in full.
GDP grew 0.1% in the three months till the end of February, the Office for National Statistics said on Thursday. It was barely better than in the three months ending in January, when the economy was flat. The services sector grew (+0.2%), but manufacturing (-0.4%) and construction (-0.2%) continued to decline.
Those are preliminary estimates that can and probably will be revised. Investors took the news in their stride, with the FTSE 100 UKX, +1.30% up 1% in midday trading, slightly ahead of other European markets. But it reminds us that the U.K. economy, even before the government started to take significant steps to fight the coronavirus pandemic, was hit by a double whammy.
First, uncertainties over global growth, with trade wars (or the threat thereof) taking a toll on trade — the German economy, once Europe’s powerhouse, only grew 0.6% in 2019. Second, the Brexit conundrum, with businesses and consumers beginning to worry about the outcome of difficult trade talks with the EU.
The poor pre-virus state of the U.K. economy creates for the government two temptations it should resist.
The first would be to speed up the exit from the current lockdown, in the hope of limiting the damage done by thousands of businesses going bankrupt and millions of workers out of a job. According to some reports, a spirited discussion may have occurred a few days ago on the matter between U.K. chancellor Rishi Sunak and health secretary Matt Hancock.
The U.K. government seems to have opted for strengthening and lengthening the lockdown. That is for health reasons, but it is also the best economic choice. The damage done by a continuing health crisis because of a premature lockdown exit would be much worse than the one induced by the current measures.
The second temptation for the government relates to Brexit. It may want to keep to its pledge not to ask for an extension of the current “transition period,” when it is formally out of the EU but legally and technically still part of it while engaged in talks about a future trade agreement. The government line is that it still wants to exit at the end of the year and that it will not ask for an extension that would help the two sides negotiate a better deal.
But the Brexit talks have been suspended, not only because European policy makers are focused on dealing with the outbreak, but also because the EU chief negotiator has tested positive for the virus while the U.K. one has isolated himself with the symptoms. The date for the U.K. to request an extension of the talks is the end of June.
It may be tempting for the government to confirm that it wants to go full steam ahead on Brexit because the economic price the country will have to pay for a quick-and-dirty, bare-bones trade deal can then be blamed on COVID-19.
That would be a dangerous game to play. The only hope for the economy to bounce back swiftly and strongly after the first phase of the current crisis is for the government to muster all the tools and resources it will need to boost growth in the second half of the year and beyond. That includes becoming reasonable about the EU trade talks, and taking all the time needed for a deal that would limit, as much as possible, the unavoidable Brexit damage.
