HAMISH MCRAE: Governments can clamp economy down for a while, but have no control over how consumers will behave when clamps come off
The great reopening has begun. We may still be under heavy restrictions on our movements, and the pubs, hair salons and restaurants remain closed. But the way we behave has started to shift.
The roads are busier. The construction industry is racing along. Offices are starting slowly to reopen. And unsurprisingly, the housing market is stronger than ever.
So people are thinking ahead. What will we do when we are allowed off the leash? How much of that cash pile that many people, not all, have managed to build up will be spent?
Boost: You can see the markets already reacting to this prospect of a return to normal service
This is partly a Government decision and the great question is whether it will feel able to lift the curbs more swiftly – a decision not only for Westminster but also for the devolved administrations.
But it is also a personal decision. Governments can clamp the economy down for a while. But they have no control over how consumers will behave when the clamps come off. What we can see is that different parts of the world economy will reopen at different speeds. The US will lead the pack. That is because of three things. The huge fiscal boost is already putting money into people’s bank accounts; the latest payment landed last week. The Federal Reserve has just committed to hold interest rates down, despite the surge in house prices and speculative boom in fringe assets, including Bitcoin. And the US vaccine programme is stepping up the pace.
You can see the markets already reacting to this prospect of a return to normal service. Shares in basic enterprises, as represented in the Dow Jones index, hit an all-time high on Thursday.
Europe by contrast is lagging. That is partly because of the mess over vaccinations and partly because the European stimulus programme is moving more slowly than the American or indeed the British ones. How far the various European economies will trail behind depends on how serious the third wave of the pandemic turns out to be.
And the UK? As so often seems to happen we are in the middle, somewhere between the US and Europe. There will be a lot of data coming through this week – jobs, inflation, retail sales, and so on – but there are so many distortions in these numbers that you get a better feeling for what is going on by looking at real-time data.
So the Citymapper mobility indices for London, Birmingham and Manchester are creeping up and Google searches for cruises have hit record levels.
The Bank of England, which has better access to payments data than the rest of us, thinks we are raring to go and I think they are right. So we can sketch a pattern for the months ahead.
The US will have a boom through the summer. It will be uneven because many people have had their finances badly damaged by the pandemic. But the way the US stimulus works is to bang in a huge amount of money straight away, rather than give the multilayered support that the UK and much of Europe has done. I do worry about what happens when those payments end.
The European economies, however, will struggle to gain traction. Britons will see that directly if they are unable to visit until well into the summer. Eventually the lost ground will be clawed back, and Northern Europe will be fine. But I do worry about Spain and Italy. Did you know that Italian GDP per head, a rough proxy for living standards, was no higher when the virus struck than it was 20 years earlier?
For the UK it is all to play for. It is pretty clear that the economy has pulled through the past year in somewhat better shape than everyone expected. Take one number: cash receipts. On Friday, we learnt that cash receipts in February were actually up 1 per cent on 2020, which was before the pandemic struck. True, some of that comes from capital gains made the year before, but if tax revenues are holding up that is not an economy that is flat on its back.
Then, when the brakes come off, what will we do? We will all have different answers to that, but I feel there will be a lot of frustration to be worked off – almost a desperation to get back to normal.
The net result of that will be a spending spree that will show through first in sales of big-ticket items such as cars and then, when we are allowed to, in travelling and hitting the pubs and restaurants. The industries that have been hardest hit, such as the motor trade and the hospitality industry, will come though the most strongly. I for one will be glad of that. They need all the help we can give them.