Integrated, agile evidence from social scientists is helping policymakers respond to Covid-19
There is a widespread call for an evidence-based response to the pandemic
‘The Science’, we are told, informs government policy on the medical aspects of the problem. We might reasonably ask what evidence base can social science provide to support the policy response to the economic and business aspects of Covid-19? If government is to look to ‘The Social Science’, what evidence can it depend on?
Our own experience of recent events tells us that the economy has been severely disrupted – many shops have been shut, travel has been restricted, people furloughed or working from home, the schools have been open only to children of frontline workers. This is a situation few of us have experienced before. Uncertainty about the future of our businesses, our jobs and our way of life makes decision making far more difficult than normal. Whether we will return to ‘normal’ any time soon is equally difficult to determine, since so much depends on when restrictions are lifted, and then whether the pandemic will recede or create a second wave.
If businesses and policymakers are to make decisions in this environment there is an urgent need for social science to provide robust data, and quickly. Social scientists, and especially those focused on economic statistics and measurement, have a vital job to do. Providers of national statistics such as the Office for National Statistics (ONS) have faced immense challenges since no part of the economy is untouched by the virus, as Jonathan Athow has explained. Helpfully, ONS have responded with faster indicators and a new Business Impact of Covid Survey. These tell us important information about conditions in the UK business sector such as shipping movements, traffic volumes and changes in VAT receipts, which track transactions in the economy. They also tell us how many firms have temporarily ceased trading (24% at the end of March and 18% in May); how many firms applied for government support (for example, 79% had applied for the Coronavirus Job Retention Scheme as of May 2020) according to the latest survey results.
"In the May DMP survey released on 4 June, businesses expected their sales in 2020 Q2 to be 42% lower than they would otherwise have been, employment to be 6% lower and investment to be 43% lower."
The impacts of Covid-19 have not been not evenly spread. Temporary business closures have been concentrated most heavily in the leisure, manufacturing, construction and retail sectors as we might expect. Almost half of businesses responding said they do not know when they will restart trading, and as Grant Fitzner has noted, businesses in accommodation and food, and leisure industries are most severely affected. Policymakers need to know where the problems are most acute in order to respond effectively.
The Decision Maker Panel (DMP) survey, originally developed in 2016 by the Bank of England in partnership with Stanford University and the University of Nottingham to provide direct insight into business expectations and uncertainty, has been able to shed light on Covid-19 effects. It draws information from senior executives in UK companies operating in a broad range of industries and has been designed to be representative of the population of UK businesses.
The impact of business closure and uncertainty about reopening reported in the ONS BICS survey is confirmed in the DMP survey. Most firms expected to see large reductions in sales because of Covid-19, but some businesses expected to be more affected than others. DMP shows a sales reduction of up to 80% was expected in the accommodation and food sector. Other sectors expecting a large reduction in sales were recreational services, construction and wholesale and retail. Firms in the DMP survey in May reported furloughing around a third of their employees, but the extent of furloughing varied significantly across industries, and was positively correlated with their expectations for size of the reduction in sales and employment.
In the May DMP survey released on 4 June, businesses expected their sales in 2020 Q2 to be 42% lower than they would otherwise have been, employment to be 6% lower and investment to be 43% lower. These effects too vary across business sectors.
Regarding business expectations about the future and the shape of the recovery, businesses expected sales to recover only gradually over the next year with the negative impact from Covid-19 lessening from 42% in 2020 Q2 to 30% in Q3, 18% in Q4 and 10% in 2021 Q1. The greatest impact, and the slowest recovery expected over this time period, was in accommodation and food.
The impact on employment was expected to be even more persistent and to be larger in Q3 and Q4 of this year than in Q2, peaking at 10% in Q4. Investment was also expected to recover somewhat more slowly than sales. The reduction in investment due to Covid-19 is expected to be 43% in 2020 Q2, 37% in Q3, 28% in Q4 and 18% in 2020 Q1.
The message is that the effects of Covid-19 are expected by businesses to be deep and persistent, on sales, investment and employment, and therefore the recovery will be less rapid than the initial fall. These effects vary by sector and they are clouded with uncertainty.
Covid-19 remains an important source of uncertainty for most businesses and will be extremely damaging for the UK economy. In May, 95% of firms viewed Covid-19 as one of the top three sources of uncertainty for their business, very slightly down from 97% in April.
The survey data and analysis arising from it, shows the vital role of social science in providing critical business information for policymakers and businesses. Since these data are regularly refreshed and delivered with a very short lag, they are as near to real-time information as can be provided. This has proven essential for the response to the Covid-19 pandemic, but it also points to the future. Having developed the new technology, based on rapid business surveys gathering representative samples of data across a range of businesses types, we are hardly likely to return to the old. With government funding, these surveys will become increasingly integrated and connected to administrative, web-based and transactions data providing better quality data for policy makers for the challenges that lie ahead.
This article is co-authored by
Paul Mizen, Professor of Monetary Economics at the University of Nottingham, and:
Nicholas Bloom and Scarlet Chen of Stanford University
Phil Bunn and Pawel Smietanka of the Bank of England
Greg Thwaites of the London School of Economics
The Decision Maker Panel was set up in August 2016 by the Bank of England, Stanford University and the University of Nottingham. It provides direct insight into business expectations and uncertainty. Our panel of more than 8000 firms draws information from Financial Officers in UK companies operating in a broad range of industries and is designed to be representative of the population of UK businesses. More information is available at www.decisionmakerpanel.co.uk
The views expressed in this paper do not necessarily represent those of the Bank of England or its Committees. The authors would like to thank the UKRI for financial support.