Comment

Believe it or not, there are reasons to be cheerful about the economy

Ultra-cheap debt, unspent savings and a vaccine could help rescue the economy if Boris Johnson plays his cards right

As a biographer of Winston Churchill, the Prime Minister should know all about the fall of Tobruk. The surrender of the Allied-held Libyan port in 1942 was one of the biggest capitulations of the Second World War, with 19,000 British prisoners of war captured.

To add insult to injury, Churchill received the shattering news from the US president, Franklin D. Roosevelt. In his memoirs he wrote that “defeat is one thing, disgrace is another”.

As the Covid-19 crisis endures into its eighth month and England heads back into a lockdown heralded by shambolic leaks, Boris Johnson faces his own Tobruk; his lowest ebb. Only a month ago, the Bank of England’s chief economist Andy Haldane was chiding us all against the economics of Chicken Licken, warning that “encouraging news about the present needs not to be drowned out by fears for the future”. Even at the time that sentiment seemed a hostage to fortune; now it looks downright foolhardy.

Despite Johnson’s myriad mis-steps and mistakes, even at this dark hour there are reasons for hope. The lockdown U-turn is politically crushing, but financial markets have barely blinked at the cost of paying for an extra month of furlough and the £3,000 grants to businesses.

The latest largesse from the Chancellor, Rishi Sunak, is likely to cost at least £20bn according to City economists, pushing the deficit well over £400bn or 20pc of GDP. But the country’s cost of borrowing for 10 years is just 0.23pc. The clamour for safe havens is such that even to borrow over 30 years, the Government is paying an eye-poppingly low 0.8pc.

Locking in those low costs now, as figures such as former Bank of England Governor Lord King have advised, allows the Government to spread the cost of the pandemic over generations without reaching for the hatchet. Talk of consolidation in the teeth of the storm is dangerous – a lesson it is high time Sunak learned – as it also unsettles the businesses and consumers we will need to spend to support the recovery. We paid just £4.9bn in interest on a record debt pile in September and debt interest payments as a share of revenues are just 3.1pc – half the 6pc set out by former Chancellor Sajid Javid in his own short-lived fiscal rules.

Those debt costs are partially down to the Monetary Policy Committee stepping up with more quantitative easing, as it will do on Thursday to the tune of at least £100bn. Whatever the failings of politicians, central banks around the world are still shovelling on the stimulus; the European Central Bank president Christine Lagarde all but promised further action next month while the Federal Reserve’s revised mandate in August is also a clear signal of its “looser for longer” intent.

The latest lockdown has also arguably hastened the prospect of negative rates in the UK, even with the misgivings among economists over the practical impact of a small dip below zero, as well as the large share of retail deposits among UK banks. The Bank also has the potential option of using negative rates on its Term Funding Scheme to support lending for smaller companies, if the Government is willing to stand behind what amounts to a central bank subsidy for UK lenders. 

In short, if the UK is heading into a double-dip recession, it won’t be for lack of support from Threadneedle Street - even if the decision to close non-essential retail despite a “very minimal” impact on the virus reproduction rate is pushing us that way.

At least the welcome determination to keep schools open will cushion the economic hit by allowing more parents to work, although this fades into insignificance against the importance of avoiding yet more lost learning. That five month gap earlier this year has already undone 10 years of progress in closing the educational attainment gap between the richest and poorest, and will show up in lower skills, productivity and earnings for decades to come. Not compounding the damage already done is vital. 

Looking elsewhere for hope, there are also signs – though faint – of the economy readjusting. Admittedly, the immediate prospects for the jobs market look dire, even if the furlough scheme has prevented most of the bad news from showing up in the headline figures so far. But the latest faster indicators from the Office for National Statistics show a 4 percentage point rise in online job adverts, taking them up to 70pc of their 2019 level in the week to October 23. Interestingly, the biggest rise was in health and social care, where job ads are actually 6pc above 12 months ago. Ideally, Sunak would have pursued a Trump-style approach of enhanced benefits rather than the extended furlough to aid the evolution, but at least the process is, in some small part, underway.

Furthermore, Sunak’s furlough support and the enforced “saving” brought about by restrictions have put household balance sheets in better shape to support a recovery when Covid-19 finally recedes.

The Institute for Fiscal Studies rightly pointed out last week that the poorest fifth of UK households – typically in lower-paid jobs most exposed to the pandemic – have lost out to the tune of £170 a month, either digging into savings or racking up debts. But the middle 60pc have seen big increases in savings. While the Covid cloud remains over the economy, an element of precautionary saving will inevitably remain but it would also be unwise to under-estimate the extent of pent-up demand.

That might well be unleashed by the roll-out of a vaccine potentially cleared for use by the end of the year, according to SAGE member Sir Jeremy Farrar. In a welcome change of tone Sir Jeremy said a vaccine “will change the nature of the pandemic” even if not 100pc effective, while chief medical officer Chris Whitty added to the cheer by insisting that UK science has “multiple shots on goal”.

If the government doesn’t squander the next month to boot and sets up a track and trace system worthy of the name, and then gets the tailwind of a vaccine, it can finally get ahead of the virus with all the benefit that brings for the economy. Maybe then Johnson can turn the disgrace of Tobruk into the tide-turning victory of El Alamein.