In the year of the plague, the road back to recovery is looking bumpy

Larry Elliott Economics editor
·3-min read
<span>Photograph: Geoffroy van der Hasselt/AFP/Getty</span>
Photograph: Geoffroy van der Hasselt/AFP/Getty

Never in its history has the United States seen anything like it. The world’s biggest economy grew at an annualised rate of just over 33% in the three months ending in September. The eurozone will break all records when it reports GDP figures tomorrow, as will the UK when the Office for National Statistics publishes its third-quarter data next month.

In normal times, booming economies would mean soaring share prices, with the bullish mood tempered perhaps by a bit of concern that central banks might put an end to the party by raising interest rates.

These, though, are not normal times. In the year of the plague, governments deliberately take steps that they know will weaken activity, central banks look for creative new ways to stimulate demand, and the International Monetary Fund says the more stimulus the better.

Forty-four years ago, a team from the IMF was in London telling the then Labour government that it had to make deep cuts in public spending to receive financial support. The deficit in 1976 was not a patch on the one being run up by Rishi Sunak in 2020, but the advice of the IMF in its new annual health check of the UK could not have been clearer: keep on spending, chancellor, and worry about the deficit some other time.

That was one of the highlights of an action-packed day. The others were weak equity markets, falling oil prices, a boast from Donald Trump of how only a Joe Biden victory can prevent 2021 being a fantastic year for the US, and the clearest of signals from the European Central Bank that it is going to provide more help to the eurozone economy in December.

So what’s going on? Well, impressive though the US growth figures looked, there is still a lot of ground to be made up for the economy to return to its pre-crisis level. What’s more, the financial markets are already looking back on the third quarter as ancient history, even though it ended less than a month ago.

In the US, activity is slowing. Consumers are becoming more cautious for two reasons: the number of new Covid-19 cases continues to rise, and Trump can’t get a new stimulus package through Congress.

The outlook for the eurozone looks even bleaker. Holger Schmieding, the chief economist at Berenberg, thinks the decision by Emmanuel Macron to put France into a one-month lockdown will shave 3%-4% off GDP in the fourth quarter. Germany, where the new restrictions are less severe, will take a hit of 1% of GDP.

The ECB already has negative interest rates and is pumping money into the eurozone economy at a rate of around €15bn (£13.5bn) a week. It can and will provide more stimulus, but it is getting close to what Keynes called pushing on a piece of string.

Indeed, the ECB chief Christine Lagarde’s downbeat message was as much an appeal to eurozone finance ministers to do more – individually and collectively – as it was a statement of the ECB’s intent.

Britain has many problems but, unlike the US and the eurozone, a lack of coordination between monetary policy and fiscal policy is not one of them. The IMF was full of praise for the way in which the actions of the Bank of England and the Treasury have dovetailed during the crisis. Less good news for Rishi Sunak was that the IMF cut its growth forecasts for the UK this year and next, less than a month after announcing them. Its message seemed to be: nice policy framework, shame about the economy.

Until recently, financial markets have been priced for rapid global recovery. The wobbles in recent days suggests they are now pricing in a slower recovery in the US and the risk of a double-dip recession in the eurozone.

No question, 2020 will go down as one of the worst years ever. And it has a sting in the tail.