Chancellor Rishi Sunak is due to deliver his summer statement next week.
Economists from both sides of the political spectrum seem to share a consensus of respect for the Chancellor, who, new-to-post, endured a baptism of fire dealing the unique fiscal circumstances of the coronavirus pandemic.
So what might we expect?
Our original expectation was for a stimulus package focused on getting middle Britain out spending. The British economy is uniquely different from our nearest neighbours as typically between 65% – 70% of our Gross Domestic Product (GDP) is attributed to our discretionary expenditure. UK ‘social consumption’ is particularly higher than that of our economic peers, hence the importance of this weekend’s relaxation of social distancing controls allowing the hospitality sector to blink in the sunlight as it emerges from lockdown.
However, today (30th June) Andy Haldane, the chief economist and the Executive Director of Monetary Analysis and Statistics at the Bank of England, and one of the Time Magazine’s ‘worlds 100 most influential people’ reported that “The UK economy is still on track for a quick or so-called V-shaped recovery” suggesting that the recovery in the UK and globally had come “sooner and faster” than expected.
The furlough scheme has shielded people from the impact of lockdown. A Treasury analysis suggests that without it, working families could have seen their incomes fall by 30 per cent. With it, the hit has been 10 per cent. But, employers are still feeling a lot of pain. Our view is that the real economy always lags the statistical economy and that unemployment will inevitably increase over the coming months. As investors, this doesn’t concern us, economic shock has a cleansing effect in businesses as surplus costs are trimmed and perimeter activities are mothballed to allow renewed focus on core and usually the most profitable activities.
So, are things as bad as we may think?
During May, UK households squirrelled away a record £25.7bn in bank deposits, five times more than a typical pre-COVID month. The government know that to get the economy moving, that money needs to be withdrawn and spent. Andy Haldane highlighted the perfect storm on the horizon; the opportunity of a virtuous cycle as consumers go out and spend, easing unemployment. Or, the alternative scenario of a vicious cycle, where households worried about unemployment continue to save, thus increasing the threat of the very thing they are worried about. At this stage, it is unclear if vicious or virtuous will win.
The government will be keen to demonstrate that it has ‘a plan’, although we suspect with a backdrop of some positive economic news that next week will only see a limited package of measures, as the Chancellor, having already spent £133bn, may push back any dramatic aspects of a stimulus package until the Autumn budget statement; buying himself time to take stock, observe and make sense of what happens over the summer.
We won’t be betting the house on any prediction, but we wouldn’t be surprised to see ‘big infrastructure’ spending brought forward, nor would we be surprised to see a temporary targeted reduction in excise duties or value-added taxes to encourage spending in particular sectors, such as hospitality.
Looking further ahead we wonder how the promised ‘rebalancing’ might manifest. It is a matter of fact that the young, particularly young women, those who work part-time and those on the lower end of the pay spectrum are the most at risk of unemployment and are most likely to be economically disadvantaged. It seems logical that ‘rebalancing’ will focus on their inverse. So, over the next 18 months or so we wouldn’t be surprised to see the government bring about changes to the triple-lock state pension arrangement, introduce a levy on personal wealth particularly on bricks-and-mortar wealth and impose a reduction or removal in higher rates of tax relief on pension contributions.
Only time will tell how far off the mark our ponderings are. The only thing we know with certainty is that our clients will continue to need our support, guidance and advice over the coming years and that our whole team will do our very best to be there with you every step of the way.