HAMISH MCRAE: The turning point in the economic cycle has been passed, from now on the direction is up
The mood has changed. You can feel a bustle in the streets. Yes, we are still cautious when we go into a shop. Yes, those of us who can are still working from home. And yes, things can’t really be normal if we can’t go out to the pub. But the turning point in the economic cycle has been passed. From now on the direction is up.
But that tells us nothing about the shape or pace of the recovery. Will it be a V, with the downswing matched by an equally fast climb out? Or a W, with us coming up a bit then slipping back again? Or a U, with a long period bouncing along the bottom before recovery becomes secure?
My instinct now is that it will look more like a tick, with the very sharp fall that we have had followed by a sustained but somewhat slower pull back upwards. I can see four reasons to be positive about this, and one to be negative – if you like, Four Weddings and a Funeral.
Retail sales in May surprised on the upside, for though they were still down on February they were much better than in April
Wedding number one is that we are shopping again. Retail sales in May surprised on the upside, for though they were still down on February they were much better than in April. June will almost certainly be better still.
Wedding two is that the Bank of England seems more positive about the economy. Though the Monetary Policy Committee voted last week to pump another £100billion into the economy, the planned pace of this programme was slower than in the past.
In addition, the Bank’s chief economist, Andy Haldane, voted against this – he clearly thinks the economy will grow faster than generally expected. The Bank’s forecasts were also upgraded slightly.
Wedding three is the Treasury is on the case. You could justifiably say that the surge in Government borrowing last month was a disastrous state of public finances. The fall in GDP and the rise in borrowing means that for the first time since the 1960s the National Debt is above 100 per cent of GDP.
We must think long-term about what will make us prosperous
But equally you could note how this means that the Government is prepared to throw everything needed to get the economy moving again. Borrowing costs are historically low and as growth resumes the numbers will begin to look more manageable.
As for Wedding four, remember we are not alone. The world is coming up too, with the US in particular staging a decent bounce, and the German economy now growing well again. Those are our two biggest export markets and will act as locomotives for the rest of us.
The funeral, or rather the potential funeral, would be if there were a second wave to the pandemic before a vaccine was available. The world is throwing everything it has at developing one, and AstraZeneca is mass-manufacturing the vaccine pioneered by Oxford University.
Chief executive Pascal Soriot said last week that they thought it would protect people for about a year. Many other vaccines are being developed too. But obviously quite aside from the human cost, a second wave would lead to another economic downturn. That would be grave indeed.
‘Bank’s chief economist, Andy Haldane, voted against more QE – he clearly thinks the economy will grow faster than generally expected’, says McRae
The best thing to do for those of us not in the front line surely is to remember this. At the bottom of a recession everything looks dreadful. At the top of a boom everything seems wonderful. The hardest thing to do is to look through both the gloom and the euphoria – and think long-term about what really makes countries prosperous in a highly competitive world.
Thinking long-term is not a bad thing to do regarding that other economic issue that is back in the headlines: our trading relationship with the EU. It is four years on Tuesday since the referendum, and a bumpy four years it has been. Just when we begin to think that things are being sorted, bang, all the unpleasantness comes back.
What should we make of the deal or no deal stories now coming out? First, this was always going to be ill-tempered because the objectives of the UK and Europe are different. If it wasn’t ill-tempered there would be something going wrong.
Next, disruption is never good and Europe will remain an important market. But trade deals are not essential to economic success. China became the world’s second largest economy (second to the US and larger than the EU now the UK has left) without any significant deals.
And third, the long game for the UK will be to maintain its exports to Europe as far as possible, but to focus on markets that are growing faster. That inevitably means the wider world beyond.