Sunday, July 18, 2021
Plenty of bumps in the road on the long walk to freedom
Posted by David Smith at 09:00 AM
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My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

There was a time when tomorrow was loudly and repeatedly dubbed Freedom Day by ministers, particularly the prime minister, with repeated assurances that the removal of remaining restrictions would be irreversible. Things are a little different now and the idea that policy would be driven by “data not dates” now looks like a meaningless slogan. There have been days recently when the number of new Covid-19 cases in the UK has been the highest of any country in the world.

Yes, restrictions will be lifted, but with a list of caveats as long as your arm, including the warning that they could be reimposed This was not how it was meant to be.

Or maybe it was. In some ways the position the government is about to adopt is what it could have done in March last year, with responsibility for the response to the pandemic shifted to businesses, individuals, local authorities and mayors.

That leads to a new phase in the experiment. It was always the case that voluntary changes in behaviour by people and firms in the initial stages of the pandemic had a big negative impact and would have continued to do so even if lockdowns had not been imposed.

For the moment, we are in a different phase. Many businesses hate the onus being shifted to them, with justification, but it seems likely that in practical terms the opening-up process will be more cautious than was hoped. Even after tomorrow, things will seem less free than they were last summer when, under Eat Out to Help Out, the chancellor was bribing us with our own money to do our bit for hospitality.
None of that will prevent the economy from continuing its recovery, for now at least. When “Freedom Day” was postponed from June 21 to July 19, I and others pointed out that while this would be painful for some businesses, such as nightclubs, the effect on the economy as a whole would be small.

So it appears to be proving. New official figures show that there was a huge 356,000 jump in the number of employees on payrolls last month, reflecting the re-opening – with conditions – of hospitality in mid-May.

There is more to come in terms of the impact of lifting restrictions, if it can be done in a meaningful and sustainable way, but it is important to recognise that you can only have this effect once. Thus, the two big increases in monthly gross domestic product we have seen so far this year were in March, up 2.4 per cent, and April, up 2 per cent, as schools and non-essential retail re-opened, followed by a smaller 0.8 per cent increase in May. It remains to be seen what happens in June from the hospitality effect, but it seems certain that the April-June quarter will see the strongest rise of any quarter this year, with a diminishing impact as the year goes on.

Incidentally, while the growth prospect for this year remains very strong – economists are debating whether the calendar year figure will be closer to 6 or 8 per cent – the strongest post-lockdown bounce came in the spring and summer of last year. From May to August, there were monthly GDP rises of, in order, 3.1 per cent, 9.2 per cent, 7.3 per cent and 2.2 per cent. And, after a record quarterly slump in April-June last year, 19.5 per cent, the economy grew by a record 16.9 per cent in the third quarter.

These lurches are not good for economic or business health. They are smaller this year; the second quarter bounce should be about 5 per cent after a 1.6 per cent drop in the first. This time, however, the economy is closer to capacity than it was, and the impact is clear.

One of the unwelcome consequences of the lurch to faster growth is inflation. The latest figures show that consumer price inflation last month was 2.5 per cent, above the official target, and a consensus is emerging that it will hit 4 per cent by the end of the year.

That this is happening before the economy has got back to pre-pandemic levels is concerning. Gross domestic product is below where it was before the pandemic and hours worked in the economy in the March-May period this year were 7 per cent below the three months to February 2020.

Even so, the labour market is tight, with shortages of some key workers including lorry drivers. Supply chain issues are creating difficulties, and not just in the availability of microchips. This is turning into a trickier period than was hoped.

Demand is returning as restrictions are lifted but supply constraints are now one of the factors clearly pushing up inflation. Pinging of people by the NHS app is becoming a significant additional supply constraint for many firms.

The Bank of England’s monetary policy committee (MPC) having essentially erected a “nothing to see here” sign last month, when I warned that it was in great danger of falling behind the curve, appears to be waking up to the danger. Two of its members, Sir Dave Ramsden and Michael Saunders, have hinted that the time may be approaching for the Bank to halt some of the final £150 billion instalment of quantitative easing (QE), announced last November, which was due to be completed by the end of the year. They even hinted about interest rates going up sooner rather than later.

For Rishi Sunak, rising interest rates are something he does not want to see, because of their impact on the government’s debt interest bill. The chancellor has other worries. The cut in the overseas aid commitment from 0.7 per cent of gross national income, with little prospect of it returning there for the foreseeable future, has been done in a way which has inflicted maximum damage on the many programmes that help the world’s poor, and will damage this country’s reputation, soft power and, ultimately, trade.

The chancellor has also refused to countenance maintaining the £20 a week universal credit uplift, this time hitting the UK’s working-age poor. These moves only make sense if, at the same time, the government scales back the distorted triple-lock rise in the basic state pension.

There is an easy way of doing this, even without abandoning the triple lock entirely. Average earnings in the latest three months were up by 7.3 per cent on their depressed level a year ago but the Office for National Statistics suggests that underlying, or non-distorted growth was between 3.2 and 4.4 per cent, which would clearly be a more sensible figure to use, if the government is brave enough to risk a pensioner backlash.

There is an even bigger potential headache for the chancellor. If, as many scientists suggest, restrictions will need to be reimposed come the autumn and winter, the question then will be whether the Treasury will need to wheel out its pandemic support again, including restarting the furlough scheme.

That is not part of the plan, though it was not part of the plan last autumn, when the furlough scheme had to be hastily extended. The government’s fiscal response to the pandemic has been bigger than for any major economy except for America, relative to the size of the economy. It was done on the understanding that it would be time limited. The chancellor has ever reason to hope that the path to freedom, while bumpy, does not include any U-turns.

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