11 June 2021

Beware the “V” word

As I write this, a degree of normality does seem to have returned in England.


Gatherings inside people’s homes are now allowed, pubs and restaurants can welcome customers back indoors (a major plus, given May’s indifferent weather) and thousands of people have jetted off on foreign holidays denied to them for so long. Travelling abroad may not be quite as straightforward as once it was, but at least it’s a start. 

What is all this going to mean for our economic wellbeing? So far the signs are encouraging. The company results season for the last calendar year and for the first quarter of 2021 indicates that businesses have managed the exceptional circumstances wrought by the pandemic rather better than we might have feared. There have been casualties, of course, but some firms have actually benefitted, while others have demonstrated a fleetness of foot that have mitigated some of the worst effects of the slowdown.

Even unemployment has not risen as much as forecast. Indeed, the latest figures showed a modest decline, while job vacancies are now back up to pre-pandemic levels. True, this reflects the difficulty in recruiting in the hospitality sector, where many have left the industry because of the uncertainty, while foreign workers are also in short supply, thanks to both COVID-19 and Brexit. The unemployment figures could take a turn for the worse as government support is withdrawn, but so far we are way short of the most pessimistic expectations.

On the wider economic front, we know much of the protection accorded to business has been at the expense of much higher borrowings, but the low level of interest rates has meant that the cost to the Exchequer has not been excessive. And although last year did see our economy contract by nearly 10%, all the indications are that the recovery is on track and that ground is already being made up, despite the lockdown continuing well into this year. It is estimated that UK households have some £130 billion in excess savings, thanks to restrictions. If a sufficient amount of this is released into the economy, we could return to pre-pandemic GDP levels by the third quarter of the year.

Have you tried to get hold of a builder recently? Such is the demand for home improvement that it is one sector of the domestic economy that might be said to be a beneficiary of recent events.

All well and good, particularly as other indicators are also showing strong reasons to believe in the recovery. Broad money supply growth is running at 16% which matches previous credit booms, while house prices are also rising strongly. And have you tried to get hold of a builder recently? Such is the demand for home improvement that it is one sector of the domestic economy that might be said to be a beneficiary of recent events. The risk is a rekindling of inflation and, while most commentators still believe this is likely to be short-lived, if central banks have to step in, it will be a risk to keep an eye on.

Nor are we alone in seeing stronger economic conditions that we had any reason to deserve. In the US, the vice chairman of the Federal Reserve Bank has said he expects the economy to grow at between 6% and 7% in real terms this year, which is pretty much what the market has factored in. There are plenty of signs to support this, with house prices and building materials booming, while business surveys are also more bullish than for some time – something that is increasingly seen here as well.

So, what could go wrong? Inflation needs to be watched closely, of course, but there is another known risk that keeps cropping up. The development of new variants in the coronavirus strain that has been causing us so much grief may yet slow the return to normality that the government so wishes to implement. Because of the increasing presence of the so-called Indian variant on these shores, Prime Minister Johnson warned that it could result in a delay in implementing the final stage of dismantling restrictions. Indeed, by the time you read this, we may already know what will be happening at the end of June.

How seriously do we need to worry about the consequences of new variants developing? This is difficult to determine though, at the time of writing, the consequences are not looking too alarming. While investigations into the Indian variants still continue, it seems that the current range of vaccines remain effective, even if the transmission rate is faster. Given the progress made in implementing our vaccination programme, it possibly will not be seen as a great enough threat to derail the Roadmap, but even if it doesn’t, it could have consequences for overseas travel if other countries seek to prevent its importation.

Overall, I have confidence that the flexibility and innovation that has been displayed in fighting this pandemic will stand us in good stead for any future developments. We cannot be absolutely certain, of course, and there may yet be other consequences from this disease we have yet to fully encounter. Perhaps inflation will turn out to be the greater threat, but at present the future looks a lot brighter than it did just six months ago. Fingers crossed it continues this way.


Illustration by Jordan Atkinson

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