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The devil is in the detail

If you get your news from the BBC, you might be forgiven for thinking that the economic hit from the pandemic lockdowns and restrictions has come to an end.  Indeed, if you merely skim through the headlines in your social media feed, you might believe that the UK is poised for an explosion of growth, the like of which we haven’t witnessed since the late 1960s.  “Retail sales,” we are told, “rebound in January as Omicron eases.”  The “UK economy rebounds,” they say, “with fastest growth since WW2.”  Chancellor Sunak – who wants to be seen as a prime-minister-in-waiting – announced that:

“Today’s figures show that despite Omicron the economy was remarkably resilient. We were the fastest growing economy in the G7 last year and are forecast to continue being the fastest growing economy this year.”

The GDP figures are certainly better than they might have been if more businesses had been left to go bust during lockdown.  Nevertheless, they are still well below February 2020, following the massive crash immediately after lockdown was ordered.  As the Office for National Statistics explain:

“UK gross domestic product (GDP) is estimated to have increased by 1.0% in Quarter 4 (Oct to Dec) 2021… Compared with the same quarter a year ago, GDP increased by 6.5%.

“Following the large 9.4% fall in 2020 because of the initial impact of the coronavirus (COVID-19) pandemic and public health restrictions, UK GDP saw an annual rise of 7.5% in 2021.”

Worse still, manufacturing GDP was negative, and continues to lag well behind its February 2020 level:

“Production output fell by 0.4% in Quarter 4 2021 and is now 3.6% below its pre-coronavirus levels. The fall in production output was because of a 3.2% fall in electricity, gas, steam and air conditioning supply (energy) and a 4.5% fall in mining and quarrying.”

Even the growth in services was largely the result of renewed activity in the NHS and in social care, as the sector seeks to begin the long task of addressing the massive waiting lists which have grown up during the pandemic.  This is certainly activity, but whether it should be considered to be value added is moot.  As with growth-during-recession activities like prostitution and drug dealing, it is included in the figures whether it adds value or not.

January sales – after the omicron pessimists almost ruined Christmas again – largely look bright because petrol and diesel sales have grown by 4.1 percent as workers returned to the daily commute as restrictions were lifted.  Even this growth though, leaves fuel sales 3.3 percent below their February 2020 level – no doubt tempered by the oil price rising above $90 per barrel, and fuel prices rising to their highest level since 2013. 

Online sales and food sales are down as the economy adjusts out of the pandemic restrictions.  Most of the January growth was in non-food retail:

“Non-food stores sales volumes rose by 3.4% in January 2022 as home improvement sales volumes picked up with increased sales in household goods and garden centres; non-food sales volumes were 1.1% below their February 2020 levels.”

We might, as the BBC and the Chancellor chose to do, regard this as the beginning of a period of consumer-led growth.  There is though, a less palatable explanation.  As Andy Beckett at the Guardian argues:

“Most British shops may have been made to close, some of the time, during the early phases of the pandemic, but since last spring they have been allowed to stay open regardless of its resurgence. Going to the shops has been seen by government and many citizens as almost as important as public health.

“So the onset of the cost-of-living crisis, which looks likely to last many months and quite possibly years, is a direct challenge to how many of us live. Already squeezed by a dozen years of falling or stagnant wages, Britain now faces its worst inflation and fuel prices for decades, rising taxes and interest rates, more expensive loans for students and extra import duties thanks to Brexit. To an extent that has yet to be fully appreciated, many people will become significantly poorer: on its own, the recent increase in the household energy price cap of £693, which is expected to be followed by others, represents more than 2% of the average full-time salary.

“And unlike the last time we faced such a significant threat to our standard of living, in the 1970s and early 1980s, most Britons will not be protected from inflation to some extent by the negotiating leverage on pay of strong trade unions. Instead, we are about to learn what it’s like to live in an inflationary economy dominated by corporate interests, such as the fossil fuel companies, which can profit from the crisis without being required by the government to pay windfall taxes that might soften it for their customers.”

The first quarter of 2022 may well see an increase in sales of more expensive household goods, as consumers seek to purchase them before rising prices render them less affordable.  But consumer sentiment in the UK – as in the USA – has already fallen in anticipation of the massive cost of living hit coming at the beginning of April:

Note that falling consumer confidence is a leading indicator for recessions.  That is, it is falling confidence – which creates a crisis of under-consumption – which causes recessions, rather than recessions causing the decline in sales.  It is likely that households will be reining in their spending in anticipation of higher energy, fuel and food costs.  Moreover, with wages lagging behind inflation, we are likely to experience a shift away from discretionary spending during 2022.  And since the majority of the working population is employed in discretionary sectors of the economy, such as retail and hospitality, we can look forward to more business failures despite prices continuing to rise and vacancies – particularly in London – remaining high in areas where there aren’t enough workers.

This looks like a recipe for stagflation, since, while businesses are currently being forced into raising prices due to the uncontrollable rise in energy, resource and shipping costs, there is no means by which a population facing higher costs of essentials can maintain current levels of consumption.  It is likely that businesses will be forced to cut production, but this will come at the cost of shedding workers – the wage bill being by far the biggest cost to most businesses.

The government and the central bank are the wildcards in the short-term.  It looks likely that the central bank will continue to raise interest rates, but by far too little to create the kind of depression needed to bring inflation tumbling down again.  In any case, it makes little sense raising interest rates while the Chancellor is spending newly created currency like a drunken sailor.  The package of supported consumption to cushion the impact of the energy price rise in April, flies in the face of the central bank attempt to make currency harder to come by.

A slight increase in the interest rate may be tolerable to the government, but the likelihood is that whichever leader or party is in government, growing unrest and the threat from parties of the extremes will force the state into a spending spree even if this fuels inflation.  As Beckett argues:

“Under capitalism, for there to be social and political stability, common expectations about living standards need to be satisfied. It’s no coincidence that British consumerism’s best years were also years of relative political calm – or that populism began to take off here, in the late 2000s, when the rise in wages started to stall. Once people feel life is getting too expensive, they often believe everything is getting worse. If enough people feel like that, governments don’t last long.

Indeed, with the energy cost of energy – reflected, but not always, in the price – rising above the cost of sustaining the current iteration of industrial civilisation, the government and the central bank may choose to inflate away the massive gulf between the claims on future wealth – bonds, stocks, currencies, etc. – and the actual, much lower, levels of real wealth that remain.  The alternative being a massive crash in asset prices followed by a depression deep enough to make the 1930s look like a golden age.

As you made it to the end…

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