Saturday, June 3, 2023

Dangers lurk in exit from Covid recession


Browsing on Airbnb this week I found a tent to rent in the Lake District next month for £163 a day. Before I had worked out what this would be for a week (£1,141), it had gone, presumably to someone even readier than I was to pay over the odds for seven nights under canvas in England’s rainiest spot.

As we emerge from lockdown, the demand for domestic holidays is so strong that almost anything goes, at any price. I don’t blame the accommodation companies — campsites are a commercial operation not a public service. They can charge what they think the market will bear and there are clearly plenty of people willing to pay.

It suits the government for us to go out and spend. After all, there is an economic recovery to be fuelled, and nothing fuels a British recovery better than consumer spending, usually boosted by consumer credit. If the money goes into sectors trashed by the pandemic, such as hospitality (camping included), so much the better. The latest Bank of England quarterly credit report, published this week, shows loans flowing thick and fast, whether for mortgages or consumer purchases.

Already the spending surge is pushing up prices, and not just for holidays. As was also reported this week, inflation for June leapt to an annual rate of 2.5 per cent. February’s 0.4 per cent rise now seems very distant.

But the Bank of England’s official line is unchanged: don’t worry, it’s a temporary blip that will fade once the post-Covid recovery settles down. Interest rates will stay ultra-low.

If the Bank is right, we should see price increases settle down. But there are some worrying signs that they may not, notably in the jobs market. Employers in some sectors face localised labour shortages. Haulage companies are raising wages by up to 25 per cent to try to retain and recruit staff while the government is easing working time rules to allow drivers more time at the wheel. 

Special factors are involved — particularly a post-Brexit exodus of EU workers including drivers. But with bars, farms and building companies also reporting recruitment challenges, it would not take much for these special factors to become more general. And wage increases are what economists call sticky — they aren’t often reversed.

Among those expressing concern about the inflation risks is Michael Saunders, who this week became the second member of the B0E’s nine-person monetary policy committee to go public. He called for “a modestly tighter [monetary policy] stance”.

It will be months before we know for sure whether the inflationary surge is a blip or something more dangerous. And there are countervailing forces involved. Crucially, the government is withdrawing its pandemic support schemes, notably furlough and the temporary lift in universal credit which both end in September.

When employment subsidies go, struggling companies are expected to accelerate job cuts, especially in sectors where the pandemic has compounded disruptive technology-driven shifts, as in retail. If employers swing the axe, pay increases too may be limited, and with that comes the risk of generalised inflation.

But in the meantime, price rises are already causing strains. Clearly a 2.5 per cent annual price rise isn’t much of a worry for those camping at £163 a night. But not everybody is so fortunate. Some people will be thinking twice about using the car given the 20 per cent increase in petrol prices recorded in June.

It’s well known that the impact of the Covid recession has been very unequal. While the better-off have, by and large, done well financially, poorer people have suffered. Not only have they endured worse from the disease itself than the rich, they are also much more likely to have lost their jobs and seen pay cuts.

While the well-off have generally increased their household savings, mainly through spending less on leisure, and so driven down national levels of consumer credit, poorer families have had to dig into their cash reserves and/or increase their debts. The Resolution Foundation, a think-tank focused on the disadvantaged, found in a poll carried out in June that individuals with the lowest incomes were much more likely to have seen savings fall from pre-crisis levels (32 per cent) than rise (12 per cent). Among higher-income individuals, only 10 per cent saw a savings fall, whereas 46 per cent saw their savings rise. 

It goes beyond a bit of belt-tightening. StepChange, a support organisation for those struggling with debt, says that the number of people seeking its services jumped from 15,000 new clients per month in January to 19,000 in June. And this is only a small sample, as other groups offer similar services, such as Citizens Advice.

There is, sadly, every sign this inequality will extend into the post-Covid recovery. Not only does inflation bite the poor harder than the rich, so do the disruptive effects of job cuts and the end of pandemic support. Pablo Shah, managing economist at the Centre for Economics and Business Research, says: “There’s a difficult period approaching.”

This is bad news for those struggling with debt. StepChange urges those in distress to contact support groups and, with their help, work out affordable repayment plans. Creditors, including finance companies, are normally required by regulators to respect these arrangements — and not pursue legal action while they are in place.

But if life really gets tough for the debt-burdened, the effects could hurt even those who don’t yet feel under much pressure. A Bank of England study last month notes that the Covid recession has been unusual in that the “unprecedented” level of government support had stabilised most household budgets. However, it warns that there is still a lot that’s “uncertain”, including the evolution of the pandemic, the pace of economic recovery and potential government responses. “Household debt may yet play a bigger role in the Covid crisis.”

In past crises, household credit problems have often rippled out from debt-laden homes across the financial sector, triggering instability. If inflation forces the authorities to raise interest rates sooner rather than later, then even people who may be happy about increasing their credit card borrowings or mortgages today may feel less comfortable about it tomorrow.

And remember that the coming job cuts may not be limited to the low paid. In retail they aren’t just hitting the shop assistants but middle and senior managers. John Lewis confirmed this week it was cutting 1,000 executive roles on top of 2,500 last year. There will be others. The poor people’s recession may yet reach the better off.

Stefan Wagstyl is editor of FT Money and FT Wealth. Email: Twitter: @stefanwagstyl

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