We are entering a critical period for the economy. Tuesday marks the start of meteorological autumn, and the autumn will bring a series of challenges for the economy.
Will most children go back to school, thus freeing parents to return to the workplace? What will be the unemployment fallout of the ending of the furlough scheme, which Rishi Sunak is under growing pressure to extend? And is a government that wings it on most things prepared to wing it towards a no-deal Brexit, piling uncertainty and disruption on a fragile economy?
I shall keep that list of questions as an aide-memoire as we move through the coming weeks. In the meantime, Tuesday also marks the start of the final month of the third quarter, a three-month period that is crucial for the economy’s path out of the crisis.
Some readers got quite agitated a few months ago when I first suggested that this recession and recovery would have a “V” shape. They pointed to the lasting impact of Covid-19 on the way we live, work and spend. Indeed, to some it is strange to be talking about a recovery at all when city centres are deserted and commuter station car parks (including mine) have lots of empty spaces.
The answer is that people can still be working productively, and they are, even if they are not occupying city centre offices. However, the change in working patterns is severely damaging businesses that rely on commuters, the same way that public transport is being damaged.
The idea of the V was straightforward and logical. When the economy was in maximum lockdown, economic activity would be most severely curtailed, naturally picking up as lockdown measures were eased. It was more logical than an L — the economy drops sharply and stagnates at the lower level — or a U, a prolonged period of bumping along the bottom before a recovery.
The beginnings of a V were seen in the monthly gross domestic product (GDP) data for the second quarter. These and other data led Andy Haldane, the Bank of England’s chief economist, to declare his confidence in a V-shaped recovery. Politicians, including the chancellor, are understandably reluctant to join in with such talk, given that a rise in unemployment and further business failures look inevitable and that GDP does not mean much to most people.
So what are the prospects for this quarter? David Owen, European economist at Jefferies International, an investment bank, has been monitoring the downturn and upturn since the crisis began, with his economic activity radar.
His latest readings show two things. One is that recovery is continuing. Electricity consumption has risen to 98% of normal levels, while traffic congestion is at 95%. Flights are increasing, albeit from a low base. Public transport is flat. Web searches of car dealerships are 14% above normal, while visits to property portals are 46% above normal, supporting the housing mini-boom story described here last week.
The evidence of a continuing recovery in these economic activity measures is enough to persuade Owen that there will be a 15%-plus rise in GDP in the current quarter, which would be good. We should take note of this. Very early on, his economic activity radar persuaded Owen that there would be a 20% fall in GDP in the second quarter, after which the Office for Budget Responsibility predicted a 35% fall, and the Bank of England a drop of 25%. The fall was 20%, so top marks to him for that prediction.
The other significant thing about these measures of economic activity is that they suggest that the UK’s recovery, which was lagging behind others, is now roughly on a par with those of Europe and America. There has been some evidence in Europe of an easing back in the pace of recovery.
There is other evidence of recovery. Barclays’ recovery tracker, which is largely based on spending trends, found that overall consumer spending in the middle of August was a hefty 10% up on a year earlier. There is more physical spending and less online spending, it suggested, and Sunak’s Eat Out to Help Out scheme has led to a significant increase in trade for restaurants, cafés and hotels. Its overall tracker is running at an impressive 98% of normal.
Domestic spending may have been boosted by the fact that many fewer people have been travelling abroad for holidays this summer, although the UK has lost the spending of foreign tourists. One interesting question is whether private versions of Eat Out to Help Out, introduced by some restaurant groups, can maintain the spending momentum.
Finally, the Office for National Statistics has its own coronavirus economic indicators. The latest of these showed that footfall at retail parks in the week beginning August 17 increased to 90% of year-ago levels, while shopping centre footfall was at just under 70% of last year’s levels.
Motor vehicle traffic was at 94% of pre-lockdown levels, while the issuance of energy performance certificates, a vital component in home buying and selling, rose to 83% of normal, adding support to evidence of a housing recovery. There has also been a sharp upturn in company formations: this month they have been running at 3,393 incorporations per working day, up from 2,612 a year ago. It could be that a lot of phoenixes are rising from the ashes.
All this bodes well for a strong growth number in the third quarter. But there is a sting in the tail of the ONS’s release: it is that 13% of the workforce is still furloughed this month, according to its survey of the business impact of the virus. Most workers (70%) are having furloughed pay topped up by employers, which suggests to me that these firms are not using the job retention scheme as a pathway to redundancies.
However, that 13% figure is significant. At face value, given that there are 28 million workers in employment (not including the self-employed), it suggests something like 3.6 million on furlough.
Those furloughed employees not finding their way back to work are one of the risks to recovery, together with the other questions I raised at the start of this piece. I don’t think this V will turn into a W, but the risks cannot be denied.
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