HAMISH MCRAE: Heave a sigh of relief that economy is bouncing back

HAMISH MCRAE: Let’s heave a sigh of relief that despite everything thrown at it during coronavirus, the economy is bouncing back

So it looks very much as though Freedom Day will be postponed. That will be miserable for people who had planned something special – and devastating for businesses which had counted on a return to normal from June 21 onwards. 

If you are in the entertainment and hospitality sectors, every week of lost business is an extra week of disappointment. As for the airlines looking at another lost summer, I’m afraid they will take years to recover. 

But a few weeks’ delay does not change the big picture. By the autumn, the economy may be past its pre-pandemic peak – several months earlier than the official forecasters (and most of the more gloomy City ones) expected. We are racing out of the traps. 

Fast forward: By the autumn, the economy may be past its pre-pandemic peak

We should always be sceptical of economic numbers, but for what they are worth the latest GDP figures showed that at the end of April the economy was down just 3.7 per cent on where it had been in February 2020 before the pandemic struck. In March and April, the economy grew by well over 2 per cent. We will be up again in May, given that indoor dining returned halfway through the month. 

All this is much better than most economists expected, with the notable exception of Andy Haldane at the Bank of England. He thinks that the UK recovery will outstrip that of most other G7 economies and I think he is right. 

He moves shortly to become chief executive of the Royal Society of Arts, and I hope that the Bank’s next chief economist has a similar feel as Haldane for what is really happening to the economy. 

Let’s assume then that some time in the autumn we will be back to where we were at the beginning of last year. But we won’t be back to where we should have been, had there been no pandemic. There is a lot of ground still to be made up. There has also been huge disruption, with some sectors booming and others struggling to survive. 

The coming challenge is not how to dig ourselves out of the pit, for that job will soon be done. 

Rather it will be to make sure that the 2020s are a better decade for all of us than the 2010s were. We don’t want to go back to the fiscal austerity that marred the first half of that decade. 

With luck, we may not have to. If you remember, Rishi Sunak’s last Budget had all the nice things – such as the continued stamp duty holiday and extended furlough scheme – up front. 

Then it had the nasty things – the increase in corporation tax and the freezing of tax thresholds – coming in during 2023 and beyond. 

It is just possible, if the economy really gets going, that he won’t have to bring in all those nasties after all. The general buoyancy of revenues will do the job instead. The potential political benefit for the Government facing the next General Election is glaringly obvious. 

Rapid growth may, however, bring rapid inflation. That helps bring down the national debt in real terms but it also will eventually mean higher interest rates. In one sense that will be very welcome. You can’t run a society with inflation at, say, 3 per cent and banks paying 0.5 per cent on savings accounts. There is a limit to the extent you can cane savers. 

Inflation in the US is now 4 per cent, and while our own consumer price index is up only 1.6 per cent, the old retail price index, which they have tried to push aside, is up 2.9 per cent. The Bank of England has to move alongside other central banks in increasing interest rates, so let’s not be overcritical. 

But I do worry that the present inflationary pressures won’t subside and the longer the banks delay in tightening monetary policy the more sharply they will have to act in the future. 

Assuming we don’t make a mess of fiscal or monetary policy, what then? The really big thing we have to figure out is how to improve the fundamental competitiveness of the economy. 

We are in the early stages of three great transitions: the shift to online (speeded up by the pandemic); the move to a lower-carbon economy; and the switch of trade away from Europe and towards the rest of the world. 

These changes need calm and cautious nurturing. Meanwhile, let’s heave a sigh of relief that despite everything thrown at it, the economy is bouncing back.

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