What Rishi Sunak must do to sustain the recovery

The economy will be squeezed as the furlough and other support schemes end, meaning it is too soon for the Chancellor to start raising taxes

There are not that many positives to be had these days amid the ongoing train crash in public policy, but perhaps surprisingly one of them is in the economy.

This is bouncing back much more rapidly than anyone dared hope, such that the Bank of England’s last published central view that it would take until the end of next year for the economy fully to recover from Covid lockdown – widely thought unduly optimistic at the time it was issued – is beginning to look a little on the cautious side.

Much depends, obviously, on the progress of the virus and the Government’s response to it. There is still plenty of room for disappointment. It’s also very hard to know what’s going to happen when the Government’s various support schemes come to an end. The degree of fiscal stimulus currently being applied to the economy is quite without precedent outside a major war. How high is unemployment going to rise once this begins to fall away?

There is a triple whammy of negatives approaching – the end of Eat Out To Help Out, the scaling back of furlough support, and perhaps equally important, the end of the good weather. Glorious sunshine was one of the few things that helped sustain us through the madness of the past six months.

But for now, things still look pretty good. Consumer spending is back to normal, and activity in the lockdown-crushed hospitality sector is also at pre-Covid levels. Business surveys point to growing confidence and economic rejuvenation, house prices are rising, factories are whirring again, and jobs are being created in the online world almost as fast as they are being lost from the high street.

Let’s take the good news in turn. Activity seemingly fell by a fifth in the second quarter as a whole, but it grew 8.7pc in June – a rebound that appears to have further strengthened in July and August. In any case, the volume of retail sales in July was 3pc higher than the pre-pandemic level of February this year.

Internal analysis by HM Treasury suggests that the Government’s discount dining scheme, offering consumers meals out at half price three days a week, has spurred the hospitality sector to the scarcely believable outcome of higher activity in August than the same month last year.

Admittedly, this must be partly down to staycations, such that a suspicious mind, searching for reason in the otherwise unfathomable nonsense of the Government’s quarantine policy, would think it deliberate so as to force citizens to spend their holiday pounds at home rather than abroad.

Be that as it may, there has been only a relatively small shift in the pattern of spending away from weekends to Mondays, Tuesdays and Wednesdays the scheme applies to, suggesting that the bounceback in hospitality may be more persistent than generally assumed.

Repeated local lockdowns are obviously not going to help, but let’s take a positive view and hope that the psychotic phase of the Government’s Covid response is now largely over, and that with better treatments and testing, a degree of sustained normality is at last beginning to establish itself.

Outside hospitality, manufacturing has also come back strongly, and perhaps oddly, so have housing transactions and house prices. Both phenomena may be down to pent up demand, hitherto denied an outlet by lockdown, and might therefore prove temporary. Housing has also benefited from the stamp duty holiday on purchases up to £500,000. But again, let’s be generous and assume the V-shaped recovery in these sectors the Bank of England and the Treasury hope for.

However – and when it comes to the economic outlook, there is always an however – there is one rather big fly in the ointment: rising unemployment. And not just because of the hardship it imposes on those affected, but also because of its depressing effect on demand in the round. Rising unemployment creates a vicious circle of reduced demand, declining economic activity and business investment, and therefore growing joblessness and further deficiencies in demand.

Scarcely a day goes by without another slew of job losses. Tesco’s announcement on Monday of 16,000 new jobs to cater for online growth provides a rare ray of sunshine amid the gloom. Otherwise, there is little to cheer, with the latest CBI distributive trades survey pointing strongly to continued jobs destruction in high street retailing. Prospects for live entertainment, a once big business, also continue to look grim, though partially offset by the growth in demand for streaming content.

All the same, the impending end of furloughed income support is not quite as much of a cliff edge as it can sometimes appear. Some 9m employees have been furloughed at some point under the Government’s Coronavirus Jobs Retention Scheme, peaking at about 7m in May, according to Bank of England estimates.

In addition, some 2.5m have applied for self-employed income support. About a third of furloughed workers had already returned to work by the end of June, polling by Ipsos Mori found, and the great bulk of the rest are expected to return in the third quarter, leaving perhaps as few as 1m still on furlough when the scheme ends two months hence.

Many of these can be expected to lose their jobs. But quite a lot of them will voluntarily choose to become economically inactive. Some migrant workers will also choose voluntarily to leave the UK workforce and return home. Predictions of double digit unemployment therefore look somewhat exaggerated.

The post-Covid economy is going to look very different from its pre-pandemic incarnation. There will be more home working, less commuting, and much retailing will have shifted online. Centrifugal forces will replace the centralising ones that previously focused economic activity in inner city clusters. Big cities such as London may well return to the series of villages from which they originally sprung.

But more diffuse economic activity doesn’t necessarily mean less activity. The planned Autumn Budget must work hard to ensure this transition takes place as smoothly as possible. Inevitably as support schemes come to an end, the economy will be squeezed fiscally, but the Chancellor cannot at this stage afford to deepen those negative effects by raising taxes to pay for the largesse of the last six months.

Instead, carefully targeted tax cuts to support hiring must be the order of the day. The recovery is so far looking promising; ensuring that it continues is going to require some delicate footwork.