We have now gone through the first wave of Covid-19. Towards the end of the first quarter to March 2020, the economy was brought down to standstill and towards the end of second quarter to June, there was some opening of the economy. In May, June and July we started seeing economic growth of up to 6%. And now we are in to a semi lockdown.
There is a lot of uncertainty about job losses in certain sectors, especially the hospitality sector. We should not lose sight of the fact that the likes of supermarkets, NHS, logistics companies have all been recruiting. There are new jobs created that never existed. All the staff involved in Covid-19 testing and tracing are all new positions. Home delivery activity is on the up with more people employed to deliver products and ready meals to homes.
In the brief controlled relaxation that started in July and August, we had a snippet of the behaviour of the consumers. We have witnessed growth in various sectors. The holiday sector started to pick up fast with people starting to travel. The restaurants and pubs started to get full. Rishi Sunak’s idea of Eat Out scheme gave this the much-needed boost. The food sector has done well too. Fresh fruit companies who distributed to hotels saw their sales collapse but they got their business replaced by sales of fruits to Mayor’s schemes and home deliveries. One distributor of fresh flowers that I talked
to has seen sales increase by 40%.
I was talking to my nephews who run a successful second-hand car business in Bedfordshire. They had to recall all their staff from furlough as their business was 20% more than year before. Clearly, people are using their furlough money savings resulting from low routine outgoings to buy a car.
Similar pattern has been experienced with white goods and other capital expenditure. So, it is not bad everywhere. Many businesses are quietly doing well. The travel sector has suffered. The redundancies and unemployment will emerge in the winter months as furlough will stop. The Chancellor’s latest economic support initiatives like the job support scheme will now focus the minds of employers to plan ahead. The scheme is innovative as it enables the non-viable jobs to be ended
and helps businesses to slowly grow as consumer demand starts increasing.
The brief relaxation of the economy showed that as soon the brakes are off, demand goes up. During the economic crisis of 2008/09, the UK government injected a fiscal stimulus of £70 bn. By comparison during this Covid crisis the stimulus is now around £350 bn for 2020. This is five times that of 2008! All this money has to work its way through the economy.
When we look at the ratio of public debt over GDP (Gross Domestic Product), UK stands at around 86%. The US is 106% and Japan 234%. These are ratios before Covid-19. Back in 1946 post World War II, this ratio for UK had reached 150%. So, we have plenty of headroom to go. This means the current jump in government debt is controllable and not going to bankrupt our economy.
Further benefit to the government is that all this extra national debt is at near zero interest rate. So. the capital repayment will be faster as the economy gets to a new normal Questions are being asked about how and when will all this fiscal injection be repaid. Ultimately the government has to recover from tax revenue and reduction in spending. I feel that the economy will not be ready for large tax increases nor another austerity period. This is evident with the latest
decision to postpone the autumn budget. I see therefore that the government will play a balancing
long-term act by not increasing taxes quickly nor bring in austerity but allow the recovery process to take place over a longer period.
