The Wider Picture 22 Jul 2020
The level of economic activity in the UK has improved materially since March. Many companies have reported that whereas three months ago they might have only been operating at 5 or 10% of capacity, the figure is now nearer 70%. This is quite a marked change and some businesses, such as in the Hospitality, Pubs and Restaurants sector have only recently reopened and are yet to establish activity levels. The pandemic is totally unlike a normal cyclical slowdown and recession, it is a natural disaster, but unlike other disasters such as earthquakes, no capacity has been destroyed.
The real uncertainty is the question of demand, rather than supply. Let us look at some of the positives and the possible negatives of today’s situation. Positive influences include pent up spending power in many households. During the severe lock down, families were able to save quite considerable sums compared with that in their normal lifestyle. Nevertheless, this may not be quite the spending bonus it first seems, because in this period, many households have been busy paying down debt as a reaction to the uncertainty of the situation. They will, however, find some lower costs, such as petrol prices, where despite a good recovery in the price of a barrel of Brent crude, pump prices are well below what they were at the turn of the year.
Another boost for business comes from the lowish Sterling exchange rates $1.24 to the pound and 1.10 for the Euro. This is excellent for exporters, although imports, especially of raw materials will cost more. Despite the latter, inflation is well under control and between only 1 and 2%. The Government has preserved jobs throughout the period and on into October with its furlough scheme. While it is easy to criticise some Government actions, the furlough initiative has been one of the major successes. The stock market has certainly reacted positively to this and other programmes such as deferral of corporation and other taxes.
There are, nevertheless, several uncertainties that are around and likely to be so for several months to come. These include the fact that with 9 million workers under furlough, there is a fear that not all will have jobs at the end of the programme. Unemployment currently stands at 3.9%, representing 1.3m unemployed people. I would hazard a guess that 10% of the staff currently furloughed are at risk. That could well take the unemployment level to over 2 million. Not conducive to a strong recovery in an economy which is very much service led and driven by consumer spending. Most companies that I speak to have no idea what level of demand will finally return for their businesses and are preparing their workforce to meet a basic level of demand which is much lower than previously was the case.
Then, of course, there are the behaviour changes that the pandemic has instigated. We can all see the increased use of the internet and on line shopping plus the use of Zoom rather than travel and arrange meetings, but there are other manifestations too, such as the increased consumption of alcohol at home and the use of streaming rather than cinemas. Despite the recent lifting of many restrictions, and pubs being patronised last weekend, there will be many people who will be too concerned to get on a train, visit a cinema or take an overseas holiday until they are confident that they are safe, because the virus is still out there and the risk of second spikes as real because irresponsible people have ignored guidelines with mass gatherings. These uncertainties promise that markets will be volatile and need great care in the near future.