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The bleak mid-winter

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The British Government is about to commit economic Seppuku.  It doesn’t know it yet; and its spokespeople are determined to put off the day of reckoning.  Nevertheless, with SARS-CoV-2 infections spiralling out of control despite official attempts to curb the spread through local lockdowns, it cannot be long before the government bows to the growing pressure for a second UK-wide lockdown.  Pressure will be greater because the government is widely believed to have waited too long back in the spring; allegedly causing thousands more deaths.  Then, as now, our European neighbours are already locking down while Britain will be seen to be dithering.

The reason the UK government is likely to give in to pressure is the simple – albeit cynical – calculation that it is better to follow official advice that is wrong than to follow unofficial advice that may be right.  In this case, the official advice from the SAGE group is that Britain – and Europe – is in the grip of the long-feared “second wave.”  Coming on top of the ordinary pressure that the NHS comes under every winter, this new upsurge of infections looks set to overwhelm the NHS in the next couple of weeks unless decisive action is taken now.

Clearly, the government is going to end up following this advice, no matter how much contradictory unofficial advice is offered.  It would be political suicide not to follow it if it were to prove to be correct.  And so, whether we are in a second wave or merely engulfed in false positives, or whether the harms caused by economic collapse are worse than the harm from Covid-19, we are already on the road to a second lockdown; something which will be widely welcomed by a UK population which has been far more risk-averse than the government from the very beginning.

Let us not pretend however, that lockdowns are risk free.  The full effects of the spring lockdown are only now becoming clear as the various government support schemes come to an end.  We were already looking at hundreds of thousands of redundancies in September; and these were only the ones officially notified by large firms which intend to stay in business.  The bigger hit may well come from tens of thousands of small businesses that could just about keep their heads above water with government support, but which are doomed as that support is withdrawn before the pandemic has come to an end.

We should also be clear that a second lockdown in the weeks leading up to Christmas will have a far more damaging economic impact than the lockdown in the spring.  That lockdown was partially mitigated by the Easter holidays and the run of spring bank holidays, when employees would have been off work anyway and retail spending would have been curtailed.  A late-autumn/early-winter lockdown is a different matter; shutting down retail at the time when it would ordinarily make the most sales.

According to the Office for National Statistics, 15 percent of the UK workforce is employed in the retail sector.  A further 10 percent is engaged in the accommodation sector and in the supply chain.  In other words, at least a quarter of UK jobs are impacted to some extent by the government response to Covid-19.  And this is impacting a sector of the economy that was already in trouble.  As the Centre for Retail Research (CRR) explained in September:

“The effect of the coronavirus lockdown came on top of retail’s existing problems. It has been a hammer blow against the sector. Government advice to stay at home, avoid shops, pubs and restaurants was followed a few days later by the lockdown and closure of most stores. We have revised our figures to show the impact on jobs in retail and the number of stores being closed… Our Economic Forecast for the Sector is that lost sales in 2020 will amount to -£17,281bn and retail’s Annual Sales Total will fall by -4.6% this year… Hence in 2020 our revised figures are that 20,622 stores will close (against 16,073 in 2019) and job losses will rise to 235,704 people (against 143,128 last year).”

These figures will no doubt have to be revised again in the event of a pre-Christmas lockdown.  The CRR also points out that:

“A large part of a retailer’s annual sales and profits occurs in the three months before Christmas. For this to work perfectly, retailers know that having the right goods at the right price in the weeks leading up to Christmas is essential.

“Christmas planning for the next season starts just after last Christmas. This is not only true for gift-related vertical markets, such as toys, fine wines, perfumes & fragrance, luxury goods, beauty products and jewellery. Logistics are important: for example, supermarkets have to start stockpiling alcohol from September to ensure they have sufficient for Christmas.”

Planning though, is near impossible when there is no certainty about the restrictions that will be in place, or the state support on offer, in the run up to Christmas or during the holidays themselves.  On top of this, without a fall in the reported infections, a largely coronaphobic population may refuse to eat, drink and be merry (and, crucially, to go out and shop) even if the restrictions are relaxed.

Historically, the value of retail sales in December is far higher than at any other time of year.  Although the origins are less than clear, one reason why US retailers adopted the term “Black Friday” as the official start of the Christmas spending spree is that this was the point when their accounts finally got out of the red.  That though, was in the good old days prior to the 2008 crash.  The retail apocalypse that has unfolded since has resulted in hundreds of big name stores going to the wall.

Even without Covid-19, Christmas 2020 was going to be bleak.  With widespread public fear, tighter restrictions, local lockdowns and the remorseless grind toward a second national lockdown, a large part of Britain’s retail and hospitality sector is not going to make it.  There will be a few winners of course.  Online retailers like Amazon will recruit additional warehouse workers and freelance delivery drivers.  But given their ruthless efforts to drive wages to the bare minimum, this will be of little comfort to the wider economy.

The problem is much wider though.  The loss of rents from Britain’s High Streets is already being felt by pension and insurance funds that are heavily invested in commercial property.  This is further impacted by the growth in home working and the loss of rents on city centre office space.  Local authorities – already struggling with the cost of the pandemic – also face a decline in business rates income as shops close and firms give up their office space.  At the same time, the cost of supporting thousands of newly unemployed former shop workers will strain council tax income and housing support budgets.

Beyond this, the loss of spending power to the economy as thousands of jobs are lost will have a major impact on utilities and services which depend upon marginal use to remain profitable.  To understand this, consider the oft raised complaint that “if only we could get rid of all the rubbish posted on the internet, it would become a font of knowledge.”  The problem with this view is that it is precisely the additional advertising revenue which comes from people posting and watching cat videos and fake news which makes social media profitable.  Take away the trivial and the banal, and the internet is going to cost more than most of us are willing or able to pay.

The same goes for public utilities like energy, water and sewage and telecommunications.  Most of us can afford light and heating because the cost is spread across millions of households and businesses.  But the more of us who cut our use to a minimum in order to make ends meet, the more of the cost that has to be passed on to everyone else.  And as the cost increases, so more and more of us are driven to cut our usage – great news from a climate change perspective, but a nightmare when your business model assumes ever increasing consumer spending.

There is a real risk that the economic impact of another national lockdown will set off a series of utility “death spirals” in which the profitability of the various services we depend upon collapses as we each seek to cut our spending.  In a death spiral, falling customer spending forces a service provider to raise prices to remain profitable.  But because the customer base cannot afford the increased price, usage falls even further; ultimately bankrupting the supplier.  We have already seen railway companies being nationalised and airlines bailed out as a result of this.  In addition, seventeen energy supply companies went bust in 2018 because they could neither expand their usage nor raise their prices; a further 24 went bust in 2019.  In the wake of the 2020 lockdowns and restrictions, even the so-called “big six” are likely to feel the pressure.

Telecommunications, too, depends upon mass usage to remain profitable.  As millions of us scale back our usage, expect prices to rise.  Indeed, if usage falls sufficiently, we can kiss goodbye to the “free” internet that we have become accustomed to.  Readers will no doubt be aware that the volume of internet advertising they are being subjected to has increased considerably during 2020, as internet platforms seek to recoup the losses from the spring lockdown.  But unless this advertising is converted into increased sales, then revenue from advertising will fall even further.  In these circumstances, subscriptions may well replace advertising as the main means of funding internet platforms.

In short, the likely outcome of the various responses to the pandemic – including our own behaviour changes – is likely to be higher prices at a time when we collectively have far less currency to spend.  This may be experienced in the short-term as a wave of inflation, as monopolistic suppliers assume they can simply jack up prices.  But in the medium term it suggests a wave of bankruptcies as those same suppliers fail.

In the course of the 1979-81 recession, Britain lost more than two million high-paying jobs; mostly in heavy industries like mining, steelmaking and engineering.  Although the economy around the City of London recovered by the mid-1980s, it was only in the mid-1990s that recovery was felt nationally.  Even then, large swathes of ex-industrial Britain never fully recovered.  It was through this shift from a manufacturing economy to a consumer economy that so many workers ended up in accommodation, hospitality and retail jobs.  Hardly a replacement for the mass of well-paying semi-skilled employment lost in the early 1980s.  But even these jobs were only possible because of a money laundering City of London underwritten by the once and for good oil and gas flowing from the North Sea.

Today Britain is a net importer of oil and gas.  It has few assets to sell in order to prop up the value of the Pound on international markets.  What remains of its manufacturing base is in various hi-tech, automated sectors like pharmaceuticals and aerospace which cannot expand to absorb the 2020 unemployment. 

So long as the UK government can continue to borrow, the government can maintain – and even expand – the second largest employment sector; health and social care.  It will also be able to fund unemployment benefits and pensions.  But the moment the wider world realises that Britain has no means of paying back the currency it has already borrowed, interest rates are going up and it will be game over.

Far from saving us, a pre-Christmas Covid lockdown may prove to be the final nail in our economic coffin.

As you made it to the end…

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