Category: Economics: Ch 02

Posted on

Why is there a driver shortage in the UK?

Long queues at petrol pumps, with many filling stations running out of fuel; fears of shortages of food and various other items in supermarkets; orders by shops and warehouses unfilled or delayed. These have been some of the headlines in the UK in recent days.

The immediate problem is a shortage of over 100 000 lorry drivers, with thousands of drivers from EU countries, who were previously living and working in the UK, having returned to their home countries. Their numbers have not been replaced by British drivers, a problem exacerbated by a decline in HGV tests during the pandemic. Thus the supply of lorry drivers has fallen.

At the same time, as the economy recovers from the COVID-19 pandemic, aggregate demand has risen and with it the demand for lorry drivers.

The shortage is pushing up wages somewhat, but not enough to eliminate the shortage. What is more, the supply of lorry drivers is relatively wage inelastic: a higher wage does not attract many more drivers into the market. Also the demand is also relatively wage inelastic: a higher wage does not do much to dampen the demand for drivers.

But why has this happened? Why has the supply of drivers fallen and why is it inelastic? And what will happen in the coming months? The three main causes are Brexit, COVID-19 and working conditions.

Brexit

With Brexit, many EU workers left the UK, finding life and working conditions more conducive in the EU. Many EU drivers had faced discrimination and felt that they were not welcome in the UK. It has been difficult finding replacement drivers from the EU as the UK’s immigration system, which now applies to the EU as well as other countries, prioritises workers who are classified as high-skilled, and these do not include lorry drivers.

Those EU drivers who do want to stay as UK residents are finding that settled status or visas are not easy to achieve and involve filling in various documents, which can be an onerous and time-consuming process. As the writer of the first linked bog below, who is a Polish worker in the transport industry, states, ‘Would you rather come to Britain and jump through all the hoops, or choose any of the well-paying EU countries, for example, Germany that, if you live in Western Poland, is just a short drive across (virtually non-existent thanks to Schengen) border?’ Another problem is that with EU driving licences: it is harder for potential employers to check on their status and thus they may prefer to employ UK drivers. This, again, puts off EU drivers from seeking to stay in the UK.

Even in the case of EU drivers living in the EU but delivering to the UK there are problems. First there are the dangers for drivers of boarding ferries in France, where people from migrant camps seek to board lorries to get passage to the UK, often threatening drivers. If illegal migrants do succeed in boarding a trailer unseen by the driver, the driver can then be arrested in the UK. According to the Polish blogger, it’s ‘no surprise that I hear more and more drivers who, when taking on new jobs, demand guarantees from their employers that they won’t be sent to the UK’.

Then there is a decline in the system known as ‘cabotage’. This is where an EU driver delivers from the EU to destination A in the UK and takes back a load to the EU from destination B in the UK. To avoid having to travel empty between the two UK destinations, the driver could pick up a load to take from A to B. With a fall in imports and exports from and to the EU following Brexit, there are fewer EU lorries on UK roads. This means that there is now less capacity for transporting loads within the UK.

There has also been a large rise in ‘red tape’ associated with post-Brexit customs checks and border controls. This means that lorries can be held up at ports. This makes it much less attractive for EU haulage companies to export to the UK rather than to other EU countries, where paperwork is minimal. In addition, m many drivers are paid by the length of the journey rather than by the time spent, so delays result in them earning less per hour. Full checks have not been introduced yet. When they are, in January and July next year, the problem will be worse.

Tax changes make it more difficult for drivers to avoid taxes by claiming that they are self employed when they are in reality employees. This too is discouraging drivers from the EU from moving to or staying in the UK since many would now (since April 2021) be paying more tax.

COVID-19

Another contributing factor to the shortage of drivers has been COVID-19 and the government’s response to it. COVID rates are considerably higher in the UK than in most EU countries and, not surprisingly, many EU drivers are afraid to come to the UK.

The pandemic led to fewer HGV driver tests, with 25 000 fewer candidates passing their test in 2020 than in 2019. It takes time to train new drivers and then to test them. However, even if there had been no reduction in HGV drivers passing their tests, there would still be a significant shortage of qualified drivers.

A further problem with the effects of COVID-19 on the economy has been the initial recession and then the bounce back. The sheer size of the bounce back has exacerbated the problem of driver shortages, which otherwise would have been slower to develop, giving the market more time to respond. Real GDP grew by 5.5% from 2021 Q1 to 2021 Q2, giving an annual growth rate of 23.6%. Nevertheless, GDP was still some 3.3% below its 2019 Q3 level.

Pay and working conditions

Working conditions are very poor for many drivers. The following are common complaints:

  • Driving jobs are often very tightly controlled, with computer monitoring and little freedom for the driver. Some cabs have cameras aimed at the drivers so that they can be constantly monitored.
  • Drivers are subject to very stringent health and safety regulations, such as not being allowed to drive longer than a certain time, even when they are queuing in congested traffic. Whilst many of these regulations are desirable to protect both the public’s and the driver’s safety, they can discourage drivers from entering or staying in the industry. And some regulations are hard to justify on safety grounds (see second linked article below, point 13).
  • Just-in-time deliveries at supermarkets, regional distribution centres (warehouses) or factories make timing very important and add considerable stress to drivers who may face abuse if they are late, even though it was not their fault, with their employer perhaps facing a fine. And yet on other occasions they might have to wait a long time to offload if drivers before them have been delayed, and often the conditions in waiting areas are poor with few if any facilities.
  • Drivers often feel a lack of respect from employers, trainers and the general public.
  • Rest and refreshment facilities are often very poor in the UK and generally much worse than in the EU. In the EU, motorway service areas have better parking, toilets, showers and shops. Restaurants are better and cheaper. Dedicated truck stops have supermarkets, laundrettes, showers or even open-air gyms dedicated to making drivers’ lives easier and more pleasant. The UK by contrast often has very poor facilities. Unlike in most EU motorway services, drivers have to pay to park and are faced with poor toilet and eating facilities. ‘Meanwhile, a typical British truck stop is some dusty yard full of potholes on the side of some industrial estate with a portaloo and a “greasy spoon” burger van parked next to it.’
  • Hours are long. Even though driving hours are restricted to 10 hours per day (recently extended to 11 hours), the average working day may be much longer as drivers have to wait at distribution centres, fill in increasing amounts of paperwork and help load or unload their vehicle. Also drivers may have to work variable shifts, which leads to disturbed sleeping patterns.
  • The work is often physically demanding, especially when a large part of the job involves loading and unloading and moving items from the lorry to where the customer wants them.
  • Many vehicles are hard and unpleasant to drive, with leased vehicles often low-spec, dirty, uncomfortable and poorly maintained.
  • Many of the jobs are agency jobs that do not offer stable employment.

Although pay is higher than in some parts of the labour market where there are shortages, such as social care and hospitality, pay per hour is still relatively poor when compared with many industries which have better conditions of employment.

The future

The government is allowing more foreign workers into the UK from this month (October); more training places will be offered for potential drivers and the number of driving tests will increase; the government is also encouraging retired drivers or those who have left driving for other jobs to return to the industry.

However, there are shortages of drivers in other EU countries and so it will be difficult to attract additional drivers to the UK from the EU. What is more, with wages and working conditions remaining poor and the labour market remaining tight in other sectors, it might be hard to fill new training places and encourage workers to return to driving. Also, with the average age of drivers being 55, it is likely that the outflow of workers from driving jobs could be large in the coming years.

Articles

Questions

  1. Why are the supply of and demand for lorry drivers relatively wage inelastic?
  2. Use a marginal productivity diagram to explain the current situation in the market for lorry drivers.
  3. What policy measures could be adopted to increase the supply of lorry drivers? How successful would these be?
  4. Is it ‘rational’ for consumers to ‘panic buy’ fuel and other products in short supply?
  5. Find out why there is a shortage of lorry drivers in the EU. Are any of the explanations similar to those in the UK?
  6. What are the macroeconomic implications of a shortage of lorry drivers and other key workers?
Posted on

Demand and supply in the uranium market


The transition towards clean energy in combination with a shortfall in supply has seen the price of raw uranium, also known as ‘yellowcake’, rise almost 60 per cent in recent weeks. It is now trading at over $50 a pound – a nine-year high. The market has been described as being at a ‘tipping point’. Given the recent boom in the market, the current conditions could tip the balance towards an era of rising uranium prices.

What is uranium?

Uranium is a heavy metal which has been used as a source of concentrated energy for over 60 years. Uranium ore can be mined from underground, milled, and then sold. It is then used in a nuclear reactor for electricity generation. About 10% of the world’s electricity is generated from uranium in nuclear reactors. There are some 445 nuclear reactors operating in 32 countries. It is the most energy-dense and efficient fuel source we have, with just ten uranium pellets able to power the average household for an entire year.

In March 2011, Japan’s most powerful earthquake on record triggered a tsunami, which then caused a meltdown at a nuclear power plant in Fukushima. It forced residents from their homes as radiation leaked from the plant. Since the Fukushima accident, uranium prices had been on a downtrend trend – enough to force several miners to suspend or scale back operations.

However, there has been a 42 per cent increase in the price of the metal in the first nine months of 2021 alone.

Demand for uranium

Since launching in July, a new investment trust, run by Canadian asset manager Sprott, has snapped up about 6m pounds of physical uranium, worth about $240m. This aggressive buying has helped push prices of uranium to more than $40 per pound, up from $30 at the start of the year. In the first part of September alone, prices surged by around 40%, outperforming all other major commodities. In just a few weeks, millions of pounds of supply were scooped up by the Sprott Physical Uranium Trust. This puts pressure on utilities that need to secure supplies of the commodity for electricity generation.

This increased demand is occurring at precisely the same time as countries and companies around the world are committing to net-zero carbon targets. As a result, nuclear power companies are now facing competition for supplies of uranium from financial investors, who are betting on sharply higher prices and demand for the radioactive material used to fuel reactors. This boost in demand is said to be due to uranium being used as a low-carbon energy source, despite the radioactive waste problem that comes with it. Investors are betting that nuclear power will be a key part of the move away from fossil fuels.

Production from world uranium mines has in recent years supplied 90% of the requirements of power utilities for uranium, with the current global mine supply expected to be about 125m pounds for 2021. In addition, there are secondary sources such as commercial and military stockpiles. However, according to the World Nuclear Association, demand for uranium is expected to climb from about 162m pounds this year to 206m pounds in 2030, and to 292m pounds by 2040. This is largely driven by increased power generation in China. China is planning a big increase in its nuclear power capacity over the next decade as the country seeks to cut its emissions.

Supply of uranium

Although uranium is relatively abundant in the Earth’s crust, not all uranium deposits are economically recoverable. While some countries have uranium resources that can be mined profitably when prices are low, others do not. Kazakhstan is the largest producer of uranium and in 2019 produced more uranium than the second, third, and fourth-largest producers combined.

The big issue is that supply to the market is falling significantly. For deliveries that would start in 2022, Kazakh producer, Kazatomprom, is now discussing the possibility of supplying the metal directly to Sprott. However, it also warned of the risk that its mines would not reach their output target for 2021, and it said earlier this year that it would keep its production at reduced levels through 2023. In addition to this, the recent surge in buying is also reducing the inventories that accumulated after the Fukushima accident.

The supply of uranium is set to fall 15 per cent by 2025 and by 50 per cent by 2030. This is mainly due to a lack of investment in new mines. The lack of new uranium mines will mean the price has to move higher. Namibian mines, accounting for 8 per cent of world supply, are approaching the end of their lives. Cameco of Canada, another important source, has shut one large pit because of uneconomic prices. According to BMO Capital, a mine supply deficit since 2019 will continue.

Supply has also been affected by the pandemic. The boom in demand has coincided with historically low prices and pandemic-driven mine disruptions, prompting uranium producers to buy from the spot market to fulfil long-term contracts with consumers. Some of the largest mining operations in Canada and Kazakhstan had to suspend production temporarily due to a shortage of workers.

Adding to the security of supply concerns is the role of commercial and state-owned entities in the uranium market. Uranium is a highly trade-dependent commodity with international trade policies highlighting the disconnect between where uranium is produced and where it is consumed. About 80% of primary production comes from countries that consume little-to-no uranium, and nearly 90% of uranium consumption occurs in countries that have little-to-no primary production. As a result, government-driven trade policies can be particularly disruptive for the uranium market. It is argued that the risk to uranium supply may create a renewed focus on ensuring availability of long-term supply to fuel nuclear reactors.

The role of financial players

Financial players have been accelerating the recent recovery in the price of uranium, with large-scale speculative buying and withholding of supply. But it can be argued that this would not have occurred if there were not a fundamental and substantial shortage.

If investors keep buying uranium, analysts expect utility companies will come under pressure to replace long-term supply agreements before they expire. At the moment, long-term contracts cover 98 per cent of the uranium needed by US utility companies. But that figure drops to 84 per cent next year, and 55 per cent by 2025, according to uranium investment company, Yellow Cake.

As annual supply declines, demand for uranium from producers and financial players increases, and with trade policy potentially restricting access to some markets, it is believed the pounds available in the spot market will not be adequate to satisfy the growing backlog of long-term demand. As a result, companies expect there will be increased competition to secure uranium under long-term contracts on terms that will ensure the availability of reliable primary supply to meet growing demand.

What will the future look like?

Many countries are turning their attention to nuclear power in order to become net-zero economies. Even in Japan, nuclear generation has slowly been returning. It is argued that nuclear power is needed to some degree for the country to achieve its pollution-curbing goals. However, not all nations are re-embracing nuclear. Germany, for example, is set to shut its last reactor next year.

The concern is whether the recent gains in investor demand is enough to underpin the market. It can be argued that even before the recent price rally started, demand for uranium from the investment sector was already growing. However, observers of the market have suggested that just as quickly as uranium skyrocketed, prices may now be hitting the brakes. Producer stocks that got swept up in the frenzy seem to have peaked. In addition, the world’s top uranium miner Kazatomprom has warned that the recent price action was being fuelled by financial investors rather than the utilities that use the radioactive metal as fuel in their reactors. On the other hand, it is argued that this pickup in the spot market will be the catalyst to push more utilities to get involved in term contracting.

Despite the impact of the pandemic on global energy demand, it is now growing again. Gas and other energy shortages are being seen and the price of gas has been rising rapidly. This rise in energy prices plus a focus on carbon-free generation is likely to continue driving demand for nuclear power and hence for uranium. In addition, producers have warned of supply shortages in the long term as investors scoop up physical inventory and new mines are not starting quickly enough. Thus nuclear’s growing role in the clean energy transition, in addition to a supply shortfall, could turn the tide for the uranium industry.

Articles

Data

Questions

  1. Using the uranium market as an example, describe the relationship between an increase in demand and the market price.
  2. Explain whether the supply of uranium would be price elastic or inelastic in (a) the short run; (b) the long run.
  3. What is the role of speculation in determining the recent movements in the price of uranium and likely future price movements?
  4. Given your answers to the above questions, draw supply and demand diagrams to illustrate (a) the recent increase in the market price of uranium; (b) the likely price of uranium in five years from now.
Posted on

The red hot housing market

House prices are soaring throughout the world, making them unaffordable for many first-time buyers. In the UK, for example, according to the Nationwide, the annual house price increase was 13.4% in 2021 Q2. In the USA, house prices are rising by over 23% per annum.

The reason for this rampant house price inflation is that demand is rising much faster than supply. What is more, with inelastic supply in the short term, a given percentage rise in demand leads to a larger percentage increase in prices.

Reasons for rapidly rising house prices

But why has demand risen so rapidly? One major reason is that central banks have engaged in massive quantitative easing. This has driven down interest rates to historic lows and has led to huge asset purchases. Mortgage lenders, awash with money, have been able to increase the ratio of lending to income. Borrowing by house purchasers, encouraged by low interest rates and easy access to mortgages, has thus increased rapidly.

Another reason for the increased demand is that economies are beginning to recover from the COVID-induced recessions. This makes people more confident about their future financial positions and more willing to take on increased mortgage debt. Another reason is that, with increased working from home, people are looking for larger houses where rooms can be used as studies. Another is that, with less spending during the lockdowns, people have built up savings, which can be used to buy larger homes.

Some countries have deliberately boosted demand by fiscal measures. In the UK, the government introduced a stamp duty ‘holiday’. Previously a 3% ‘stamp duty’ tax was applied to purchases over £125 000. Under the holiday scheme, the rate would only apply to purchases over £500 000 until 30 June 2021 and then to purchases over £250 000 until 30 September 2021. This massively boosted demand, especially as the deadlines approached. In the USA, there are various schemes at federal and state level to support first-time buyers, including low-interest loans and vouchers. Supporting demand is counterproductive if it merely leads to higher prices and thus does not make it easier for people to buy.

Speculation has played a major part too, with many potential purchasers keen to buy before prices rise further. On the supply side, some vendors have held back hoping to get a higher price by waiting. Gazumping has returned. This is where vendors accept a new higher offer even though they have already accepted a previous lower one.

Effects of higher house prices

Higher house prices have had a knock-on effect on rents, which have also soared. This has encouraged house purchases for rent both by individuals and by property investment companies. The effect of rapidly rising house prices and rents has been to increase the divide in society between property owners and those unable to afford to buy and forced to rent.

Increased housing wealth is likely to lead to greater housing equity withdrawal. This is where people draw on some of their equity in order to finance increased consumer spending, thereby boosting aggregate demand and possibly inflation.

Will the house price boom end soon?

One scenario is that there will be a gradual slowdown in house price increases as quantitative easing is tapered off and as support measures, such as the UK’s stamp duty holiday, are unwound.

There is a real possibility, however, that there will be a more severe correction, with house prices actually falling. This could be triggered by central banks raising interest rates in response to higher inflation caused by the recovery and by higher commodity prices. In the UK, labour shortages brought about by Brexit could make the inflationary problem worse. With high levels of mortgage debt, even a half percentage point rise in mortgage interest rates could have a severe effect on demand. Falling house prices will then be compounded by speculation, with buyers holding off and sellers rushing to sell.

Articles

Data

Questions

  1. Use a supply and demand diagram to illustrate what has been happening to house prices. Illustrate the importance of the price elasticity of supply in the process.
  2. Under what circumstances might tax relief help or not help first-time buyers?
  3. Use a supply and demand diagram to illustrate the effect of speculation on house prices? Under what circumstances might speculation (a) make the market less stable; (b) help to stabilise the market?
  4. Explain what is meant by housing equity withdrawal. Using the Bank of England website, find out what has happened to housing equity withdrawal in the UK over the past 15 years. Explain.
  5. Under what circumstances would a sudden house price correction be more likely?
  6. Write a critique of housing policy in the light of growing inter-generational inequality of wealth.
Posted on

Bounce back for the UK economy but with cloudy horizons

The OECD has recently published its six-monthly Economic Outlook. This assesses the global economic situation and the prospects for the 38 members of the OECD.

It forecasts that the UK economy will bounce back strongly from the deep recession of 2020, when the economy contracted by 9.8 per cent. This contraction was deeper than in most countries, with the USA contracting by 3.5 per cent, Germany by 5.1 per cent, France by 8.2 per cent, Japan by 4.7 per cent and the OECD as a whole by 4.8 per cent. But, with the success of the vaccine roll-out, UK growth in 2021 is forecast by the OECD to be 7.2 per cent, which is higher than in most other countries. The USA is forecast to grow by 6.8 per cent, Germany by 3.3 per cent, France by 5.8 per cent, Japan by 2.6 per cent and the OECD as a whole by 5.3 per cent. Table 1 in the Statistical Annex gives the figures.

This good news for the UK, however, is tempered by some worrying features.

The OECD forecasts that potential economic growth will be negative in 2021, with capacity declining by 0.4 per cent. Only two other OECD countries, Italy and Greece, are forecast to have negative potential economic growth (see Table 24 in the Statistical Annex). A rapid increase in aggregate demand, accompanied by a decline in aggregate supply, could result in inflationary pressures, even if initially there is considerable slack in some parts of the economy.

Part of the reason for the supply constraints are the additional barriers to trade with the EU resulting from Brexit. The extra paperwork for exporters has added to export costs, and rules-of-origin regulations add tariffs to many exports to the EU (see the blog A free-trade deal? Not really). Another supply constraint linked to Brexit is the shortage of labour in certain sectors, such as hospitality, construction and transport. With many EU citizens having left the UK and not being replaced by equivalent numbers of new immigrants, the problem is likely to persist.

The scarring effects of the pandemic present another problem. There has been a decline in investment. Even if this is only temporary, it will have a long-term impact on capacity, unless there is a compensating rise in investment in the future. Many businesses have closed and will not re-open, including many High Street stores. Moves to working from home, even if partially reversed as the economy unlocks, will have effects on the public transport industry. Also, people may have found new patterns of consumption, such as making more things for themselves rather than buying them, which could affect many industries. It is too early to predict the extent of these scarring effects and how permanent they will be, but they could have a dampening effect on certain sectors.

Inflation

So will inflation take off, or will it remain subdued? At first sight it would seem that inflation is set to rise significantly. Annual CPI inflation rose from 0.7 per cent in March 2021 to 1.5 per cent in April, with the CPI rising by 0.6 per cent in April alone. What is more, the housing market has seen a large rise in demand, with annual house price inflation reaching 10.2 per cent in March.

But these rises have been driven by some one-off events. As the economy began unlocking, so spending rose dramatically. While this may continue for a few months, it may not persist, as an initial rise in household spending may reflect pent-up demand and as the furlough scheme comes to an end in September.

As far as as the housing market is concerned, the rise in demand has been fuelled by the stamp duty ‘holiday’ which exempts residential property purchase from Stamp Duty Land Tax for properties under £500 000 in England and Northern Ireland and £250 000 in Scotland and Wales (rather than the original £125 000 in England and Northern Ireland, £145 000 in Scotland and £180 000 in Wales). In England and Northern Ireland, this limit is due to reduce to £250 000 on 30 June and back to £125 000 on 30 September. In Scotland the holiday ended on 31 March and in Wales is due to end on 30 June. As these deadlines are passed, this should see a significant cooling of demand.

Finally, although the gap between potential and actual output is narrowing, there is still a gap. According to the OECD (Table 12) the output gap in 2021 is forecast to be −4.6 per cent. Although it was −11.4 per cent in 2020, a gap of −4.6 per cent still represents a significant degree of slack in the economy.

At the current point in time, therefore, the Bank of England does not expect to have to raise interest rates in the immediate future. But it stands ready to do so if inflation does show signs of taking off.

Articles

Data, Forecasts and Analysis

Questions

  1. What determines the rate of (a) actual economic growth; (b) potential economic growth?
  2. What is meant by an output gap? What would be the implications of a positive output gap?
  3. Why are scarring effects of the pandemic likely to be greater in the UK than in most other countries?
  4. If people believed that inflation was likely to continue rising, how would this affect their behaviour and how would it affect the economy?
  5. What are the arguments for and against having a stamp duty holiday when the economy is in recession?
Posted on

Health vs the economy: is there a trade off?

Throughout the pandemic, the fight against COVID-19 has often been framed in terms of striking a balance between the health of the public and the health of the economy. This leads to the assumption that a trade-off must exist between these two objectives. Countries, therefore, have to decide between lives and livelihoods. However, one year on since lockdowns swept the globe the evidence suggests that the trade-off between sacrificing lives and sacrificing the economy is not necessarily clear cut.

Controlling the virus

Restrictions such as social distancing and lockdowns were introduced in order to minimise the spread of the virus, prevent hospitals from being overwhelmed, and ultimately save lives. However, as these measures are put in place, schools were closed, businesses and factories stopped operating, and economic activity shrank. This would suggest therefore, that society inevitably faces a trade-off between lost lives versus lost livelihoods.

It could be argued, therefore, that in the short run these interventions create a ‘health–wealth trade-off’. The lockdown restrictions save lives by preventing transmission, but they came at the cost of lost output, income and therefore GDP. This would also imply that the trade-off works in reverse when the lockdown restrictions are eased. As measures are relaxed, the economy can begin to recover but at the cost of an increased threat of the virus spreading again.

What are the costs?

In order to work out if a trade-off exists and what costs are involved, there must be a monetary value placed on human life. While this may seem unethical, governments, civil courts, regulatory bodies and companies do it all the time. The very existence of the life insurance industry is testament to the fact that human lives can be measured in monetary terms. One approach to measuring valuing life, commonly used by economists who conduct cost-benefit analyses, is the ‘value of statistical life’. It measures the loss or gain that arises from changes in the incidence of death, by eliciting people’s willingness to pay for small reductions in the probability of death, or their willingness to accept compensation in exchange for tolerating a small increase in the chance of death. (see the blog Lockdown – again. Is it worth it?)

Take the example of a complete lockdown. The potential number of lives saved can be estimated based on infection and fatality rates estimated from epidemiological models. This can then be multiplied by value of statistical life to compute the monetary value of saved lives. If this number exceeds the economic costs of a complete lockdown, then we know that it is desirable.

The trade-off between lost lives versus the economy is often erroneously viewed as an all-or-nothing choice between complete lockdown versus zero restrictions. However, in reality, there is a continuum in stringency of restrictions and it is not an all-or-nothing comparison.

Death rates vs downturns

In order to explore the existence of this trade-off, we can compare the health and economic impacts of the pandemic in different countries. If such a trade-off exists, then countries with lower death rates should have experienced larger economic downturns. However, when comparing the COVID-19 death rates with GDP data, the result is the opposite: countries that have managed to protect their population’s health in the pandemic have generally also protected their economy too. This suggests that there was never a simple binary trade-off between the two factors. Those countries that experienced the biggest first wave of excess deaths, also had the biggest hits to the economy.

The UK was the hardest hit of similar countries on both measures within the G7 group of industrialised countries. The shape of the recession in the UK from the pandemic and lockdowns was extraordinary and historic. However, it was also unique as there was a very sharp fall followed by a rapid rebound. Over 2020, GDP saw the largest hit in three centuries; larger than any single year of the Great Wars or the 1920s Depression.

Studies of the declines in GDP contradict the idea of a trade-off, showing that countries that suffered the most severe economic downturns, such as Peru, Spain and the UK, were generally among the countries with the highest COVID-19 death rates. There are countries that have experienced the reverse too; Taiwan, South Korea, and Lithuania all experienced modest declines in economic output but have also managed to keep the death rate low.

It should also be noted that some countries that had similar falls in GDP experienced very different death rates from each other. When comparing the USA and Sweden with Denmark and Poland, they all saw similar declines in the economy with contractions of around 8–9%. However, the USA and Sweden recorded 5–10 times more deaths per million. This therefore suggests that there is no clear trade-off between the health of the population and the health of the economy.

There will be many different factors that impact on the death rate for each individual country and by how much the economy has been affected. Such factors will even go beyond the policy decisions that have been made throughout the pandemic about how best to suppress the transmission of the virus. However, from the data available, there is no clear evidence to suggest that a trade-off between the health and the economy exists. If anything, it suggests that the relationship works in the opposite direction.

Save the economy by saving lives

Given the arguments against the existence of the trade-off, it could be argued that in order to limit the economic damage caused by the pandemic, the focus needs to start and end with controlling the spread of the virus. Experiments that have been conducted across the world definitively show that no country can prevent the economic damage without first addressing the pandemic that causes it. Those countries that acted swiftly in implementing harsh measures to control the virus, are now reopening in stages and their economies are growing. Countries such as China, Australia, New Zealand, Iceland, and Singapore, which all invested primarily in swift coronavirus suppression, have effectively eliminated the virus and are seeing their economies begin to grow again.

China, in particular, stands out amongst this group of countries. The Chinese authorities acted very quickly, and firmly, but also the levels of compliance of the population have been very high. However, it could be argued that few countries possess the infrastructure that exists in China to facilitate such high compliance. The fact that the lockdown in China was so effective reduced both losses to the economy and the need for stimulus measures. China is also one of the few countries that have achieved a “V-shaped” recovery. Countries such as Korea, Norway and Finland also appear to have responded relatively well.

Most of the countries that prioritised supporting their economies and resisted, limited, or prematurely curtailed interventions to control the pandemic faced runaway rates of infection and further national lockdowns. The examples of the UK, the USA and Brazil are often quoted, with many arguing that these countries responded too late and too haphazardly. Both have experienced high numbers of deaths.

Conclusion

Discussions around the responses to the pandemic and what appropriate action should be taken have predominately been about how countries can strike the balance between protecting people’s health and protecting the economy. However, from observing the GDP data available there is no clear evidence of a definitive trade-off; rather the relationship between the health and economic impacts of the pandemic goes in the opposite direction. As well as saving lives, countries controlling the outbreak effectively may have adopted the best economic strategy too. It is important to recognise that many factors have affected the death rate and the impact on the economy, and the full impacts of the pandemic are yet to be seen. However, it is by no means clear that the trade-off between greater emphasis on sacrificing lives or sacrificing the economy is as real as has been suggested. If such a trade-off does exist, it is, at best, a weak one.

Articles

Questions

  1. Define and explain the difference between a substitute and complementary good.
  2. Using your answer to question 1, describe the existence of a trade-off.
  3. Discuss the reasons why the trade-off between health and the economy would work in the opposite direction.