Rishi Sunak has managed the economy on autopilot but must change course | Richard Partington
EEngland is on the move. Despite the rise in infections and the race between coronavirus vaccines and variants in full swing, there has been a marked change in tone from ministers over the past week over the UK’s release of the pandemic restrictions.
For several weeks, the government has been watching and waiting, looking at Covid-19 data in the hope that the link between infections, hospitalizations and deaths will be broken by the vaccination program. So far, the news is encouraging despite growing concerns that the Delta variant is causing a new wave of pandemic.
For the economy, it’s been a similar story, with Rishi Sunak now on a watch to assess how businesses and households have responded to the easing of the lockdown this spring before determining how best to respond. So far, the Chancellor has bet that ending the lockdown restrictions will allow him to cut back on emergency economic support from Covid.
In a pre-programmed fiscal tightening, holidays are reduced and tax breaks ended. But how wise is it to run the economy on autopilot as the terrain of the pandemic changes? With measures last updated in March, there is a risk that Sunak will find forecasts of a post-pandemic consumer spending boom to turn out to be much more low-key in reality.
At the heart of the problem here is a contradiction. Four months ago, when Boris Johnson established his roadmap to get out of containment, vaccinations were expected to end the crisis for good, in a return to normality. However, ministers now believe that the public must “learn to live with Covid” and exercise more personal responsibility.
For now, the government still seems to be betting that looser restrictions will only be the tonic for struggling businesses, as emergency support is reduced. While business leaders advocate a more relaxed approach, there are plenty of reasons why life without a mask isn’t the only ingredient in a raging economy.
The signs are already being felt. After a spring recovery in the economy, activity has slowed in recent weeks.
Data on credit and debit card spending collected by the Bank of England shows a steadily declining spending from peak reached in early May, with a 12% drop in aggregate transactions. Overall, spending is still at 93% of its February 2020 levels.
It is too early to tell if this is a reflection of increased consumer caution as Covid-19 infections increase. Life continues to go on and the easing of foreclosure restrictions could give businesses a welcome new boost.
But it’s a reminder that forecasts of a sustained explosion in summer consumption were a false prophecy. Further growth in infections will set the recovery in motion, whether or not restrictions are relaxed.
Research from the International Monetary Fund suggests that most of the economic impact of the first wave of Covid-19 last year was caused by voluntary physical distancing, as people chose not to go out to restaurants, pubs and stores when the risk of catching the disease was particularly high.
There are lessons here from Sweden, which used relatively light Covid restrictions and relied more on personal discretion. While the Swedish economy suffered less than most of its peers, the country’s 2020 recession was still one of the most severe in its modern history.
In April of last year, academics found that consumer spending had fallen by only four percentage points less in Sweden than in Denmark despite much more severe restrictions for its close neighbor.
Vaccines can change this story, if one can maintain the assurance that there is little danger in leaving the house to go to stores, the pub or on vacation. But at the moment, there is still a lot of caution. According to the first snapshots of activity in June, visits to shopping streets, malls and shopping parks are on the decline again in the north of England – where Covid-19 infection rates are higher – in a potential sign of growing consumer caution.
Higher infection rates mean more people must self-isolate to limit the spread of the disease, with nearly half a million people tasked with quarantining by the NHS Covid-19 app or staff of testing and traceability last week. With the increase in infections, this number could increase steadily.
Johnson is however expected to move the goalposts for the isolation rules this week, according to the Sunday papers, with plans to end the requirement for people to scan a QR code when entering a pub, a bar, restaurant or other place. But a smooth transition is unlikely if infection rates continue to rise.
Hospitality businesses could find themselves technically unconstrained by government restrictions, but still forced to shut down if too many staff become ill or have to self-isolate, at a time when many are already grappling with a shortage of workers at the time. nationwide.
Meanwhile, there is no specific government support available for businesses, at a time when holidays are reduced and will be phased out entirely by the end of September.
While pandemic controls should be relaxed, the story is quite different for international measures, where countries in Europe are increasingly stepping up border controls and using travel bans to limit the spread of Covid variants. This will keep the pressure on business supply chains while travel agencies have yet another summer vacation season to forget.
In the tough construction sites that will mark the end of the pandemic, and if the country has to learn to live with Covid-19, the British economy is unlikely to find itself in a position comparable to pre-crisis normality.
Given these developments, betting that removing restrictions alone will revive the healthy UK economy is not a course of action. Sunak’s watch and hold approach from No. 11 will soon have to be jettisoned.