Never have the opening lines of TS Eliot’s The Waste Land seemed more apt. In 2020, April really was the cruellest month, as the first wave of Covid-19 deaths peaked and businesses were shuttered. Between March and April, UK output slumped by a fifth.
This year, April will be different. The success of the vaccine programme means the government can go ahead with the next phase of the gradual unlocking of England’s economy. From Monday, it will be possible to go to the pub for a pint, provided you are prepared to brave the spring weather and drink outside.
Unless something goes seriously awry, further easing of restrictions will follow, allowing the return to a semblance of normality by the middle of the year. Make no mistake, the picture looks a lot brighter than it did in late December, when the talk was of how “Plague Island” would be overwhelmed by a combination of the pandemic and Brexit chaos.
It would be wrong to imagine that there have been no repercussions from the third wave of Covid-19 or from the UK’s new trading arrangements with the European Union, but neither has been as catastrophic as was feared. The M20 has not been turned into a giant lorry park and any Brexit disruption was dwarfed by the EU’s heavily criticised vaccine programme, which was the perfect advertisement for nation states having the autonomy to make their own procurement decisions.
The hit to the economy’s output in January – the first month of the new national lockdown – was 2.9% of gross domestic product rather than the 19% drop suffered last April. Firms have started to hire. Consumer and business confidence has picked up sharply. The International Monetary Fund has revised up its forecast for the UK this year.
In the short term, it is not hard to find reasons why the UK should grow strongly. Interest rates are at rock bottom levels and the March budget announced fresh stimulus measures, including the extension of the furlough and the stamp duty holiday for people buying a home. Businesses think there is light at the end of the tunnel. The savings accumulated during a year of lockdown will be run down as people go out and enjoy themselves. There will be no need for the Bank of England to use negative interest rates to stimulate activity.
At issue is not whether there will be a post-lockdown bounce because there clearly will be one. Rather, it is the shape of that recovery and how long it will last, and in both respects much will depend on factors outside the government’s control. Ministers can’t legislate for new variants of the virus which, if they prove resistant to vaccines, will call into question the assumption that lockdowns are a thing of the past. The risk of reimporting the pandemic necessitates caution when it comes to easing restrictions on international travel.
While it might be tempting for Boris Johnson to gloat privately at the travails of Angela Merkel and Emmanuel Macron after all the “Plague Island” jibes, the fact that the EU is tightening restrictions as the UK is easing them is no cause for celebration. There will be some boost to the economy due to people staying in the UK for their holiday this summer, but the sooner the EU vaccinates its population the better. Nor is it just the well-off citizens of Europe who need jabs. There will be no lasting security until all countries – rich and poor – are vaccinated.
Everything is neatly in place for a classic short-lived consumer-led boom and the risk is that a new wave of infections will arrive in the autumn just as the UK’s growth spurt loses momentum. Cheap borrowing costs and the stamp duty holiday mean the residential property market is red hot. Some consumers will have plenty of ready cash to fund their spending; those that don’t will load up their credit cards. The Bank of England has made it clear it will be in no hurry to raise interest rates.
Things look less rosy from the perspective of businesses, especially smaller companies. On the face of it, things are looking pretty good for the corporate sector, because despite the deepest one-year slump in output in three centuries, the total number of company insolvencies last year was the lowest since the late 1980s.
Government support – the furlough, bounce-back loans, business rates holidays, grants, deferral of VAT payments – has been one of the factors that helped businesses survive. Yet life has still been tough, with cash reserves run down and savings depleted. Bank of England figures show that SMEs (small and medium sized enterprises) have been borrowing heavily recently.
As Ian Kernohan at the research firm Heteronomics has noted, many businesses now lack the working capital that will be needed to allow them to expand as demand picks up in the coming months. “As deferred VAT and rent payments become due, many companies will face challenges to their longer-term viability. Many more must live with the opportunity cost of having accumulated debts to survive through the lockdown. They now lack the balance sheet capacity to invest in the recovery.”
This constraint won’t become immediately apparent but it will bite eventually. For the recovery to have legs, the surge in consumer spending needs to be the trigger for businesses to expand their capacity. Unless that happens, the risk is a mismatch between demand and supply that ends with higher inflation and a ballooning trade deficit.
There are ways round this problem. One option would be for the Treasury to help businesses generate working capital by turning state-backed loans into equity stakes. It would make more sense than inflating an overheated housing market, that’s for sure.