Sunday, September 26, 2021
Amid chaos, this recovery is starting to look very messy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

The story so far. Energy suppliers are dropping like flies and millions of households and businesses face higher bills. The government has just paid an American-owned fertiliser manufacturing firm tens of millions of pounds to keep production going and head off a crisis in the availability of carbon dioxide, vital to food supplies.

There are empty shelves in supermarkets and warnings that many products will not be available for Christmas. Fresh produce is rotting in fields because a lack of pickers. Panic buying of petrol is resulting in huge traffic jams.

It never rains but it pours, and this looks like a perfect storm. “Events, dear boy, events,” is the most overused phrase in politics but these are the kind of events that can make any government look incompetent, and this government has less of a journey to make than many.

They remind us that in normal circumstances the economy, which is a highly complex mechanism, works pretty well, even if some of those workings are below the surface. Many people will have been surprised both by the widespread need for carbon dioxide and that you need to be making fertiliser to produce it.

What has gone wrong? What has happened to post-pandemic, post-Brexit sunlit uplands, made possible by a successful vaccination programme? Why is there a level of chaos that was avoided during previous crises? Why does it start to feel a bit like the 1970s?

Let me introduce a new analogy into the discussion. I have an old sports car, as well as a sensible vehicle. It is not a vintage model, though when I can get petrol it will fall foul of the expanded London ultra low emission zone, which comes in next month. I think I cut quite a dash in it with the top down - the car's not mine - though others disagree.

At 50 mph, the car goes along smoothly. At 60 it starts to rattle and at 70 I hear it saying: "What do you think you are doing?" At much more than 70, not only would I risk a speeding fine but I would expect the attentions of the national society for the protection of cruelty to cars.

For Britain's economy, one or two per cent growth is the equivalent of 50 mph. We are comfortable pootling along at this unremarkable speed. Three per cent growth is achievable, perhaps equivalent to 60 mph. It used to be a regular occurrence but we have not had growth of three per cent or more since 2005.

Now, how about the 6.7 per cent growth for this year for the UK predicted a few days ago by the OECD? It is not the highest growth prediction for this year but is the most recent. It is the kind of growth rate, even as a bounce from last year's near 10 per cent slump, which in motoring terms would have bits falling off and a screaming engine threatening to explode on the carriageway.

A growth rate of 6.7 per cent has never been achieved in the post-war period. The nearest was 6.5 per cent in 1973, the peak year of the Barber boom. Younger readers and some older ones may need reminding that this was when a Tory chancellor pumped up the economy to such an extent that high inflation was inevitable, even without the additional factor of a sharp rise in international oil prices.

Why is this recovery proving so troublesome when, after all, the economy is only getting back to where it was before the pandemic, having suffered a once in 300 years slump in 2020, and has not yet done so?

There are a few reasons. One is that strong growth is not confined to this country. The world economy will grow by 5.7 per cent this year, its best performance for decades, while G20 economies should expand by 6.1 per cent, the OECD says. That is putting pressure on energy supplies (though crude oil prices are no higher than they were in the spring), as well as shipping capacity, materials and components, and the availability of certain types of labour.

Second, the pandemic, and the restrictions introduced in response to it have reduced the supply capacity of the UK economy. We can be thankful as we approach the end of the furlough scheme this week that unemployment is low.

But, as the Institute for Employment Studies points out, the labour market is more than half a million people smaller that before the pandemic, the biggest contraction since the recession of the early 1990s and may end up being a million smaller as furlough unwinds. Two-thirds of this contraction is due to higher economic inactivity, among students, the long-term sick and others, and one-third is due to fewer foreign workers, particularly EU workers.

Supply capacity has been reduced in other ways. Many people work in sectors that are still operating at well below normal levels, such as aviation and parts of hospitality. The shock of the pandemic and its aftermath has yet to fully work through and may take time to do. Spare capacity in some sectors cannot be easily used by those experiencing rapid demand increases now.

Third, the crisis has exposed a lack of resilience. I learned my lesson on this during the financial crisis when, after the run on Northern Rock, the Treasury put out a lot of material on how resilient the UK’s economy and financial system was. Then we were hit hard by the crisis and discovered that there was not so much resilience in the system after all.

When the pandemic hit, we saw that there was a lack of resilience in the NHS, which was soon overwhelmed. Adding capacity, via the Nightingale hospitals, foundered because there were not enough people to staff them. The UK has fewer hospital beds per 1,000 people than the vast majority of advanced economies and operates at a higher level pf capacity, even in normal times.

A lack of spare capacity, and an emphasis on “just in time” is evident elsewhere. The UK has insufficient gas storage and an energy strategy which is not worthy of the name. The vulnerability of vital carbon dioxide supplies has been a shock. It may well be replicated elsewhere.

Worryingly, but perhaps unsurprisingly, the chaos is beginning to have an effect. The closely watched GfK consumer confidence index has slumped by five points to -13 this month, it was announced on Friday.

“On the back of concerns about rising prices for fuel and food, the growth in headline inflation, tax hikes, empty shelves and the end of the furlough scheme, September sees consumers slamming on the brakes as those already in economic hardship anticipate a potential cost of living crisis,” said Joe Staton of GfK. “All measures have declined this month and consumers are clearly worrying about their personal financial situation and the wider economic prospects for the year ahead.”

The latest “flash” purchasing managers’ survey for the UK showed a drop to a seven-month low to 54.1 amid rising inflationary pressures, signalling some loss of economic momentum. There was also a fall in the eurozone, for similar reasons, though to a higher level of 56.1.

It is much too soon to call a halt to the recovery, because of shortages and higher prices, but they are taking some of the steam out of the economy. In leaving interest rates unchanged at 0.1 per cent on Thursday and maintaining quantitative easing at £895 billion (though with two votes against), the Bank of England’s monetary policy committee also revealed a downgrade to third quarter growth from 2.9 to 2.1 per cent, which will leave the economy 2.5 per cent below pre-pandemic levels. This is turning into a very messy recovery.