ALEX BRUMMER: The perils of closing Britain

The annual gathering of the International Monetary Fund (IMF) without the cacophony of voices heard when you bring together financial officials, economists and bankers in one place cannot be re-created online.

It is the focused conversations in and around the IMF/World Bank meetings which make them the Wimbledon of global finance.

After the collective misery spread by the Fund in the spring there has been a sort of effort to improve the narrative this time around. 

Covid crunch: The IMF believes Britain will end up with an economy 9.8 per cent smaller in 2020 than when the pandemic began

The World Economic Outlook seeks to lift spirits by pointing out that testing has been ramped up, treatments have improved and vaccine development speeded up, allowing economies to bounce back from the Great Lockdown.

The underlying message, to be usefully listened to by naysayers in Whitehall, is: don’t step backwards into the darkness.

Nevertheless, forecasts still show that 2020 is going to be the worst year for the global economy since the Great Depression.

There will be an estimated £8.5trillion loss of output this year and as much as £21trillion by midway through the decade. 

Britain will end up with an economy 9.8 per cent smaller in 2020 than when the pandemic began. 

The UK is more vulnerable than most advanced nations to Covid restrictions because of its open economy and exposure to the global trade in goods and services, which is forecast to plunge by 10.4 per cent this year.

If it is of any comfort, Britain’s GDP shrinkage is no worse than France, Spain and Italy, in spite of the insistence of Government critics that the UK is having the worst of deaths and economic scarring among advanced nations. 

It is also reassuring that in 2021 the Fund expects the UK economy to expand by 5.9 per cent, which places it among the best-in-class G7 rich nations.

Even if that is achieved, there can be no complacency about the medium-term damage. 

The Fund’s top economist, Gita Gopinath, notes most economies will bear deep scars from this year’s slump and the progress which has been made on rebuilding living standards since the financial crisis will be wiped out.

The IMF expects extreme poverty to rise for the first time in two decades and inequality to rise, especially for women. 

The loss of human capital from school closures is an additional challenge. Let’s pray that teaching unions listen before putting young people through the wringer again.

It has been useful for financial stability that the banking system was repaired and recapitalised after the crisis of 2008-09. 

US giant JP Morgan Chase is doing well. Profits jumped and it was confident enough to cut its reserves against losses in the third quarter. But the Wall Street investment banks may be the exception rather than the rule.

The IMF points to big increases in sovereign debt levels. We need no reminding of what has happened in the UK, where debt – at £2trillion – is the same as national output before it started to shrink.

Catastrophe has been averted during the pandemic by healthy stock markets, fuelled by central bank money creation.

The IMF says that equity prices may have risen too far and ‘overvaluations are at historically high levels’. 

Its financial stability report also warns that widespread bankruptcies in ‘contact-intensive’ industries such as hospitality could be on their way as support programmes fade.

It believes that most banks will be able to absorb the losses but reckons that there could be a capital shortfall of £170billion.

The worst of the economic fallout from the pandemic, especially in the UK’s collapsing jobs market, has yet to be seen.

Placing great swathes of Britain into the very high Covid risk category should be avoided if further wanton destruction of the nation’s commercial and economic fabric is to be kept at bay.

Sir Samuel Brittan

One of the most arresting features of the economic and financial landscape from the 1960s onwards was the wit and intellectual wisdom of Sam Brittan (1933-2020) in his Financial Times columns.

No aspiring financial writer seeking to understand how free markets work could afford to miss his musings.

His advice to policy makers on such diverse topics as devaluation, monetary targeting, membership of the exchange rate mechanism and profit sharing were a constant source of irritation to politicians and the Treasury. 

So he must have been doing God’s work.

Farewell and rest in peace.

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