Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

Perspective matters

Vaccinating the population, moving out of lockdown and then ‘building back better’ all require policy informed by different measures and methodologies. A balanced approach that incorporates a variety of perspectives is essential.

Newsletter from 26 February 2021

To solve any difficult problem, there is value in looking at things from a range of perspectives. Using different measures and methodologies can help us to draw nuanced conclusions, and a balanced approach is critical for designing good policy.

With Covid-19, it’s no different. Arguably, this is all the more important because the challenges posed by the pandemic have called for such extreme measures. Protecting the population has meant nation-wide lockdowns. The Coronavirus Job Retention Scheme has kept millions of furloughed workers from losing their jobs. And medical innovation has been supercharged in pursuit of new vaccine technology.

It is certainly striking that the global economy has been hurt by a collection of viral particles that could fit into a single Coca-Cola can – a fact highlighted by Tim Harford in a recent episode of BBC Radio 4’s More or Less.

Here at the Economics Observatory, our commitment is to provide balanced, evidence-driven analysis of the challenges facing the UK economy – from Covid-19 and Brexit to climate change and inequality. Grappling with these questions has revealed the value of analysing questions from more than one angle. Sometimes taking a step back and getting a ‘zoomed-out’ view can help researchers spot particular patterns. In other cases, it’s useful to drill down into the data, uncovering the hidden truths behind the headlines. This week’s articles have done both.

Measuring the crisis

Meeting the challenges of Covid-19 has required mammoth levels of public spending, leading governments around the world to borrow vast sums of cash. This week we asked whether the balance sheets of central banks – often the ‘lenders of last resort’ – can handle the challenges of Covid-19.

To address this question, Willem Buiter takes what I call a zoomed-out approach, focusing on the bigger picture of central banks’ assets and liabilities in economies around the world.

What we learn is that in response to the crisis, the European Central Bank, the US Federal Reserve and the Bank of Japan have all dramatically increased the size of their balance sheets, representing a surge in central bank lending (see figure below). Viewing the crisis from this perspective helps us see the shift in its historical context, highlighting how Covid-19 differs from, say, the global financial crisis of 2007-09.

Balance sheet (% of 2019 GDP)

Source: Bloomberg Finance LP, Deutsche Bank

Yet ‘zoomed-in’ analyses are also vital for measuring the impacts of the pandemic. This week, the Office for National Statistics released the latest labour market overview, and Stuart McIntyre – of the Fraser of Allander Institute (Strathclyde) – drilled into the data in search of the story behind the headlines.

While several reports highlighted the overall unemployment rate of 5.1%, Stuart’s Observatory article provides a sector-by-sector, region-by-region and age-by-age analysis of the data. As he points out, headline measures such as the unemployment rate ‘do not reflect the full scale of the economic crisis’. Looking at the charts below, it is clear that effects of the pandemic on jobs are uneven and vary greatly according to a number of factors.

Payroll employment by age

Source: Office for National Statistics

Changes in payroll employment January 2020 to January 2021 by sector

Source: Office for National Statistics

By taking a close-up look at the data, we can see that people working in accommodation and food services, or in the arts and recreation, have a very different story to tell compared with those employed in public administration. And it is clear that young people continue to bear the brunt of Covid-19 job losses.

Just as Willem’s work gave a useful view of the rapid change in public borrowing and spending, Stuart’s zoomed-in analysis of the labour market data helps reveal the diverse experiences contained within headline stats.

Brexit means more than just Brexit

Like Covid-19, Brexit is a challenge that is affecting the county in a number of different ways. The final trade agreement requires a complete rewrite of the UK’s commercial relationship with the European Union (EU) – a task grand in scale and daunting in scope. But within this, all manner of industries and individuals are affected, and issues like the future of Scotland's fishing industry, music and theatre tours, and even lorry drivers’ lunches have quickly drawn widespread attention.

In response to these varied and often contradictory concerns related to the UK’s exit from the EU, Observatory contributors have once again risen to the challenge of offering a range of perspectives.

This week Christopher Coyle – of Queen’s University Belfast – explores the impact of Brexit and other large events on the value the pound. He shows how, since the referendum, the strength of the pound has fallen significantly (see figure below). He argues that this ‘seems to reflect a generally negative outlook’ of the UK’s economic prospects outside the EU.

Pound/Euro daily exchange rate 2015-2021

Source: Bloomberg

Looking at currency fluctuations is an example of taking a zoomed-out view of the economy. We can trace the effects of significant events like Brexit or the pandemic through aggregate dynamics, such as investors buying or selling currency en masse. These movements help tell an underlying story, in this case, the lack of faith in UK businesses in the near future.

But, once again, other stories can be uncovered by taking a more zoomed-in look at the situation. This week, Joel Carr, Joanna Clifton-Sprigg, Jonathan James and Sunčica Vujić investigate the impact of the Brexit vote on hate crime in the UK. By analysing crime statistics from the months leading up to and immediately following the referendum, they find that Brexit was followed by a 15-25% increase in race and religious hate crime in England and Wales.

While this does not necessarily imply that Brexit directly caused rises in such crimes, the authors argue that a series of economic and political factors may have resulted in boththe Brexit vote and the changes in hate crime incidents.

Brexit is a complex and multidimensional issue. Analysing its true effects requires a balanced approach that examines broad measures, including currency value or GDP alongside individual experiences, such as business closures, crime or changes in household earnings.

The limitations of measurement

For all the value of zooming in and out in our analysis, there are, in my view, still some limitations to measurement.

This week, another grim milestone was reached. The United States surpassed half a million Covid-19 deaths, with the UK reportedly reaching over 135,000 lives lost. From whatever angle you look at numbers like this, the immense suffering brought about by the pandemic is clear.

But rather than dismissing the role of balanced and impartial analysis, this should be seen as a rallying call for continued rigour in the struggle against Covid-19.

Yet there are now some reasons to be hopeful. This week the UK reported that over 18 million (first) vaccine doses had been administered, with the prime minister announcing on Monday the ‘roadmap’ out of lockdown –a plan driven by data, not dates.

Central to this data-focused strategy is a set of measures that involve looking at the pandemic at both a national level, as well as up close. Vaccinating the population, moving out of lockdown and then ‘building back better’ will all require intelligent policy informed by several different perspectives and methodologies. If we have learned anything over the last year, it should be that perspective matters.

Author: Charlie Meyrick, Economics Observatory Manager
Photo by Nadine Shaabana on Unsplash
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