Coronavirus, Scottish Economy

How do we define the bottom of the curve?

One of the challenging features of this crisis is that traditional economic statistics aren’t the best at tracking the reality of what is going on in the economy at the current time, or getting ahead of understanding the risks facing businesses and employers.


Metrics such as GDP, turnover and the like, track levels of day-to-day activity. And in normal times this makes sense. But in times of crisis, or stress, they fail to capture or monitor the underlying viability of businesses, the risks that they face, or what might happen next. Instead, non-official indicators and – crucially, intelligence and insight from businesses themselves – such as on cashflow, working capital, debt stress, and employment plans, are more accurate and relevant for assessing the real-world challenge facing businesses.

[As an aside, and as the ONS have written about here and we did here, there are some major challenges in trying to estimate GDP at such times due to issues around the surveys used, apportionments used and absence of accurate deflators. Therefore, one of the main features of such statistics is that they will be subject to much higher levels of revision than normal.]

In many ways, the issue shares some similarities with the financial crisis. Take Ireland as an example. In the run-up to the financial crisis, Irish GDP growth was at record levels – the so-called ‘Celtic Tiger’. But what was bubbling underneath the surface was a massive unsustainable debt burden that would eventually go bang.

In the current instance, we’re clearly not seeing fast growth in GDP, so the situation is quite different. And the challenge is not in the housing sector as it was in 2007, but the underlying business base. But the key challenge is similar– traditional economic measures of activity don’t track balance sheets, debt sustainability or the underlying health of business. They also don’t point to what might happen next.

To understand this, it’s useful to think through what the data will show us.

Traditional metrics such as GDP will show a sharp fall from March onwards as businesses were locked-down. This is likely to have continued through April, May and quite possibly early June.

But there have been remarkably few businesses going to the wall or a sharp rise in unemployment. Yet. Why? Because government has effectively stepped in to provide a cushion to help firms go into hibernation. So, whilst we’ve seen an unprecedented collapse in GDP, the real-effects of this have been much smaller.

Sadly the problem is that many businesses, when they start to re-open (or start to plan to re-open), will find that their businesses models are simply no longer viable. Customer demand, even with an easing of the lockdown will have fallen off a cliff, supply chains will be broken, bad-debts will be crystalized, and, logistics and transportation to markets will be difficult. Firms will go to the wall, unemployment will rise and the full effects of the crisis will become apparent. Unfortunately, expect more announcements such as yesterday’s announcement of jobs losses from Rolls Royce.

This is when the real-world impact of the crisis will hit the hardest. Government support can’t last for ever. And even though some support will continue to remain in place, the economic shock we are about to experience will cause major hardship for many.

In contrast, and counterintuitively, at this point GDP growth will start to pick-up again. Why? Because activity will start to grow from this low base.

Indeed, with the easing of the lockdown in early June the bottom of the crisis – from an economics statistics point of view – may have been reached. But from a real-world perspective it certainly hasn’t. The real peak of the crisis will not be reached for some time yet.

This matters not just as an intellectual curiosity. It’s crucial that policymakers get ahead of this.

Tracking traditional economic metrics like GDP, or stock market indices and the like, are of little use at the current time for policymaking. Instead proper intelligence gathering of the situation businesses find themselves in at the moment – not just in terms of activity, but crucially the balance of that activity to their cashflow and cost base both now and into the future – is of paramount importance.

This will vary by business-type (e.g. larger businesses may be taking on debt to build up their cash base whereas smaller businesses may be running it down), by sector (e.g. some sectors may have less scope to build up reserves compared to others) and by stage in growth-cycle (e.g. new companies may have less scope to raise finance or have had time to build up reserves).

With many businesses down to measuring resilience in weeks, the importance of such real-time intelligence cannot be underestimated. In our April Scottish Business Monitor, when asked how long businesses could survive under current levels of trading, of those who responded to this question, 54% said less than three months while a further 32% said they could survive for four to six months.

ONS responded quickly, by launching their Business Impact of Coronavirus (COVID-19) Survey which asks key questions about business activity, cashflow etc. We’ve yet to see anything similar from the Scottish Government. They are due to publish monthly GDP statistics later this month, but it would be a mistake to think that this will provide proper intelligence on the risks facing our economy – it will simply provide a number to what we already know.

This crisis is shaking our economy to the core. But it’s also shining a light on some of the key weaknesses in trying to rely upon traditional national accounts and economic statistics as a way to understand the crisis.

Whilst the economic statistics might show that we’re at the bottom of the downturn, the reality will be very different.


The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.