Economic Confusion Reflects Covid ‘Freedom Day’ Mess in England | Larry Elliott
Ssupermarkets warning of empty shelves. Metro lines closed due to lack of personnel. A “pingdemia” which asked more than 500,000 people to isolate themselves last week. Funny day of freedom.
Still, everything was supposed to be so easy. Britain would gradually emerge from its winter hibernation in a series of measured steps. By June, according to the original roadmap, all restrictions would have disappeared.
As the economy accelerates over the summer, support from the Treasury to individuals and businesses may be reduced. In the fall, Rishi Sunak – questioned after coming into contact with infected health secretary Sajid Javid – would be able to provide a budget for a post-Covid country that would make support more responsive and much less expensive.
This prospect seems more and more unlikely because things have really gotten very complicated. The completion of the roadmap has been delayed for four weeks and even now all restrictions will not be lifted. Downing Street’s message has shifted from going out and celebrating to being safe, which will affect consumer and business behavior.
On the bright side, the economy has gotten through winter lockdown with less damage than originally feared. There was an explosion of activity when the restrictions started to be lifted. Millions of workers quit their leave, leaving an estimated 1.5 million people on wage subsidies. It was reported that companies were struggling to find workers in certain sectors, with vacancies 10% higher than pre-crisis levels. Inflation fell from a low of 0.2% last summer to 2.5%.
Less encouraging, the economy still has some catching up to do. Employment levels are down from what they were before the crisis, as are the total number of hours worked. Credit card payments, restaurant reservations and online job postings fell in early July after previously rising sharply. Even before the latest setbacks, the Bank of England and the Treasury expected unemployment to rise as the holiday falls. The increase can now be larger and last longer.
Both institutions have helped mitigate the economic impact of the pandemic, with most of the heavy lifting being done by the Treasury. Sunak’s hand has been forced: Spending for the NHS has skyrocketed as the end date for leave and support for self-employed workers has been repeatedly pushed back. There are currently no plans to extend the wage and income subsidies beyond the end of September, but it would be unwise to rule out this possibility altogether.
What is certain is that the Treasury is withdrawing its financial support more quickly than other countries, notably the United States, and the Chancellor will have to rethink his strategy if – as seems possible – the economy stagnates over the years. next months. It would be a good idea to have the next budget in the spring rather than in the fall so that a more complete picture is available on how the economy is running without the support provided by the holiday. Sunak must also err on the side of generosity in the three-year spending review he will announce this week. The risks of spending too little outweigh the risks of spending too much.
The same principle applies to the Bank of England as it assesses what to do about interest rates and quantitative easing. Last week, two members of its monetary policy committee, Dave Ramsden and Michael Saunders, raised concerns about rising inflation and hinted that they may soon vote for a stricter approach. This could take the form of either an increase in official interest rates – currently 0.1% – or the failure to execute planned bond purchases as part of its QE program. Three more MPC members are giving speeches next week and it will be easier to see what the committee collectively thinks after that.
At some point the Bank will have to start tightening its policy, but now would be a curious time to start doing so. The Treasury is already withdrawing its support, so a Threadneedle Street action would mean fiscal and monetary policy would simultaneously become tighter.
Fears that UK inflation will soon reach US levels – currently 5.4% – are overblown. Britain has experienced a deeper and longer downturn than the United States, and the economy is far less stimulated. It would be wise to see whether the alleviation of supply bottlenecks leads to lower inflationary pressure.
The Bank also has a small communication problem. Financial markets are not ready for policy tightening and are struggling to understand exactly what the MPC is thinking. Until recently, Threadneedle Street’s thrust was that interest rates would be raised to a more normal level – around 1.5% – before any unwinding of QE by selling bonds back into the market. Whether this remains the case is no longer clear. It is also not clear to end QE prematurely, other than to fend off the accusation made by a House of Lords committee last week that the Bank is addicted to buying bonds. . It is important that the Bank uses its upcoming Monetary Policy Report – due for release early next month – to clarify what it intends to do and why.
As with the Treasury, the risk for the Bank is to assume that the economy is stronger than it is. This could prove to be a repeat of last summer, when a fleeting period of strong growth was mistaken for a sustained recovery. Boris Johnson is not the most trustworthy politician but when he says the pandemic is not over, for once he is saying it as it is. And if the health crisis is not over, the economic crisis is not over either.