“Having recovered half of its losses, now is the time to see the economic glass as half-full not half-empty”. So said the Bank of England’s chief economist, Andy Haldane, in a recent article for the Daily Mail. In such febrile times, confidence is hugely important in influencing behaviours, whether we are talking about consumers or businesses.
That said, even if one wants to steer towards the optimistic there is no getting away from the fact the economy is still running someway short of where it was before COVID-19 struck. The investment bank Jefferies is currently monitoring a series of high frequency indicators which form what it describes as an Economic Activity Radar (EAR). The latest EAR figures suggest the economy is still only operating at around 60% of where it was at the beginning of this year.
Reading across in this way is, I would acknowledge, probably a little too simplistic. However, there are some significant bright spots that the EAR is able to draw attention to. Electricity consumption, for example, is now just over 91% of the level that would typically be expected – it had been under 80% at one point – which is indicative of something happening more broadly across the economy. And, being a little more specific, hits on property portal sites are now 40% above pre-pandemic levels with auto dealer site visits also running above norms.
However, it is hard to ignore some of the more challenging signals from the EAR, in particular hiring activity, which according to the Jefferies analysis is only a little more than one-third of where one would typically expect it to be at this time of the year. Moreover, this has to be seen through the prism of a number of recent high-profile corporate redundancy announcements and the likelihood of more job losses as the furlough scheme draws to a close.
The government will still cover 60% of the usual wages of employees on this programme through October, but thereafter the support becomes a lot less generous; the Job Retention Bonus amounts to a one-off payment of £1,000 to UK employers for every furloughed member of staff who remains employed through to the end of January 2021.
Against this backdrop, it is hardly surprising that the level of unemployment is widely anticipated to increase sharply during the remaining months of 2020. The Office for Budget Responsibility, created by the government in 2010 to provide independent and authoritative analysis of the UK’s public finances, recently suggested that the unemployment rate could climb to just short of 9% this year, moving above 10% through the course of 2021.
And, though the Bank of England’s judgement is slightly more sanguine, it still sees the jobless rate moving above 7% over the coming months. Even that more modest rise would still represent a significant shock compared to a figure of less than 4% earlier in the year.
As is the case with forecasts, neither of these estimates could reasonably be expected to be bang on, which is why most economic analysis is now built around scenarios and probabilities. But the immediate direction of travel is clear from both sets of projections and the big question is how households react, whether it is at the upper or lower end of the range of expectations.
Will they pull down the shutters and look to build up what may be viewed as precautionary savings balances or could they retain, possibly through some encouragement, a more positive view?
Just as significant will be the way businesses respond. It would be nice to think that cheap borrowing costs will fuel a wave of investment expenditure as companies look to prepare for the new opportunities in the aftermath of the pandemic, but uncertainty as to the nature of the recovery will be a big drag.
This will be exacerbated by a lack of clarity regarding post-Brexit future trading relationships, with a deal with the EU yet to be reached and the transition period clock ticking. Recent noises around this issue have been a bit more promising, and the likelihood is that there will a pragmatic resolution of the situation, with the UK aligning on goods if not on services and agri-foods.
For what it is worth, the latest Deloitte survey of chief financial officers bears out this concern, with two-thirds of respondents stating that they anticipate reducing, rather than increasing, their capital expenditure at this point, with Brexit as well as COVID-19 cited as the reasons.
Given the scale of the near-term macro risks, my sense is that we can expect further policy initiatives from the government in the autumn to try and get the economy over the next hump. Another fiscal package, worth as much as 2% of GDP could be announced as part of the Budget, which could push this year’s budget deficit to in excess of 16% of GDP, the highest since the second world war.
I do recognise the resulting debt mountain will need to be repaid but that is something that can be addressed when the economy is back on an even keel. Whether the measures are as eye-catching as the stamp duty holiday on residential property or “eat out to help out” remains to be seen, but they will be designed to provide a bridge over the expiry of some existing initiatives.
Meanwhile, the possibility of further quantitative easing and even negative interest rates remain on the agenda, even if the Bank of England has expressed some misgivings about the latter.
Critically, as Andy Haldane noted in concluding his own article, “at difficult times like these, boosting confidence about our financial future would reap its own economic reward”. The building blocks for recovery are in place but it is absolutely crucial the foundations now remain solid through any wintery squalls encountered.