William McChesney Martin served as Chairman of the Federal Reserve Bank Board of Governors for an astonishing 20 years under five Presidents. But he is best known for saying that the role of the Fed was to take away the punchbowl just as the party got going. And historically economists and central bankers have been famed for their pessimism. But just as economists have a role in dampening excessive optimism, we also should dampen excessive pessimism. And there are, I think three good reasons for optimism that things could be a whole lot better next year.

 

First, the virus. The mood among the scientists in the UK is currently pessimistic. The number of cases has flatlined since lockdown restrictions began to be lifted and the experience of other countries suggests that there are risks of a second wave as lockdown ends and colder weather emerges. As the personal and economic damage done by the prolongation of the lockdown is becoming unsustainable, there is little appetite for stopping the gradual ending of lockdown – hence the emphasis on masks, about the only measure left without reinstating stay-at-home measures. But the disease is getting less virulent and the daily number of cases requiring hospital admission in the UK continues to fall. More importantly the clinical trials on a vaccine have gone well and it is now very likely that there will be a working vaccination available for mass production at the end of the year. Coronavirus is unlikely to be eliminated but by next year it should be a far lesser danger to people’s health than it is today.

 

Second, Brexit. The rhetoric has been pessimistic and both negotiators, Frost and Barnier, said in their statements on the resumption of negotiations last week that there was a chance of no deal. But there were three major stumbling blocks at the beginning of the year and two have been largely overcome. The EU have retreated from an unsustainable position on fishing where they were claiming the same access to British waters post Brexit as before. They have now accepted that there will be a reduction in access. Since the UK fishing industry does not have anything like the capacity to fish all of Britain’s waters, there is now scope for a deal. On arbitration mechanisms, the EU has also dropped its insistence that its own court, the European Court of Justice, should be the only arbitrator for disputes on the withdrawal agreement. Again there is scope for a compromise. The issue where least progress has been made is what the EU call the level playing field, covering state aid and other support for business which the EU see as a necessary underpinning for trade. Yet because of the coronavirus crisis, neither the EU nor the UK is currently observing these restrictions and both are unlikely to do so for many years. And it just seems unlikely that a Tory government will treat the right of government to intervene in industry as a deal breaker on a negotiation that otherwise is largely worked out. A Brexit deal is highly probable.

 

Finally Trump. The US President feeds an isolationism that is dangerous for the US at a time when economic trends mean that the US needs allies. The gulf between the West and Europe is especially dangerous. Coronavirus is a crisis that showed up the Trump administration’s fundamental dysfunctionality and it will be very hard for him to win the Presidential election from his present position. Joe Biden may not have sensible economic policies but his foreign policies are likely to help rebuild the US’s international stature and will allow the democracies to take a more consistent line against the autocrats.

 

So the world could look very different in a year’s time. But to get there we will have to cope with what could be a tsunami of failed businesses and lost jobs. We expect about a third of all UK businesses who were trading on 1 January 2020 to cease trading by mid-2021. If this seems dramatic, bear in mind that in a normal 18 months over 15% of businesses shut down. The termination of the furlough scheme in October could push unemployment up to 5 million, assuming little more than half of those currently on furlough (just under 8 million people) come back to work. There will need to be more measures to sustain business and support jobs in the Autumn.

 

But it does look as though by early 2021 we will have climbed the mountain and can start the descent. For that we should be grateful.

 

Douglas McWilliams:  dmcwilliams@cebr.com   +44 7710 083 652