Britain is at the dawn of a historic moment. More than a year since the start of the Covid-19 pandemic, the end point of all social restrictions is at hand as spring slides into summer. An announcement is expected from Boris Johnson on Monday.
Delaying rather than reopening on June 21 is the most likely decision, as the spread of the Delta variant fuels a third wave of coronavirus infections in the UK. Far from the “freedom day” we were hoping for, we are at another time when the Prime Minister built hopes and then disappointed.
Despite this critical juncture, economists have paid very little attention to the economic consequences. Far from worrying about the cost of a delay or a new Covid-19 slump, more attention is being paid to the dangers of the economy overheating. We are not being warned that growth is in danger, but that a dangerous inflationary beast lurks once more.
It’s a moment of stark contrast to last fall, when, despite skyrocketing economic growth coming out of the summer shutdown, many economists remained concerned about downside risks. Andy Haldane, the chief economist of the Bank of England, warned at the time that there was pessimism in the national newspapers, incorporating a self-fulfilling prophecy of lower growth by encouraging excessive caution among consumers and businesses.
Haldane, who is leaving the Bank later this month to lead the Royal Society of Arts think tank, is now among the most prominent economists warning of the risks of an overheating economy, using a New Statesman column to say that Britain is at its most dangerous time. for inflation since the exit from the European exchange rate mechanism in 1992.
There are good reasons to focus on these upside risks. Signs are promising that Britain’s economic recovery from Covid-19 is finally underway. Growth has returned with enthusiasm – GDP rose a record 2.3% in April alone as lockdowns were relaxed – fueled by growing business confidence and consumer spending as the restrictions were relaxed.
Allowing the economy to overheat would jeopardize the purchasing power of hard-pressed families as a new period of boom and bust begins. Interest rates would rise, financial markets would fall into a free fall.
But just as there were warnings of excessive pessimism last fall, there are risks of overstating the strength of the economy and the dangers to inflation. You could say that now is not the time to count your chickens, while the story of the Covid-19 pandemic is far from over.
There are doubts as to whether the current inflationary surge is simply a bottleneck moment or the first signs of sustained upward pressure. After shutting down much of the economy last year, growth was still likely to pick up speed once activity could pick up.
In the near term, demand is being driven by £ 200bn in savings made up mostly by wealthy households who had limited ability to spend their income during the lockdown and are now looking to make up for lost time. It is presented as an indirect economic benefit for stores, pubs, restaurants and cafes which have been forced to close. But questions remain as to how much will be spent and how quickly. It is also not a permanent feature of the new post-Covid economy.
On the supply side, companies are struggling to find staff, commodity prices are soaring, while shipping costs have soared. This is in part due to issues related to the pandemic: international travel restrictions, disruption of global freight movements, and the need to implement safe environments for Covid. While these are likely to fade over time, legitimate questions remain about how much pressure will remain, especially as Brexit begins to bite. But in the short term, a few restaurants offering one-off bonuses for new employees are not sufficient proof of an increasingly tight labor market.
Among inflationists, there are those who would argue that the best approach to curb the price spike would be to downsize the state, after a record expansion in fiscal activism during the pandemic. This, they say, has fueled demand well out of proportion with supply, in a frenzy of cash on leave, tax cuts and cheap, easy-to-access commercial loans.
However, this willfully ignores that the government is already considering shutting down the leave scheme and ending its emergency tax breaks. Public sector wages frozen, corporate taxes will be raised, while further constraints on state spending must not be ruled out under a conservative party uncomfortable with gaping government borrowing figures .
There are dangers in taking this route to fight inflation, at a time when the pandemic remains a risk to growth and jobs. It would also undermine any attempt to “build back better” from the crisis.
This is a warning from economists at the Institute for Public Policy Research and the New Economics Foundation. Carsten Jung, senior economist at IPPR’s Center for Economic Justice, said: “If we take back the support measures and the economy never fully bounces back, businesses would have scars, the job market would never heal. completely and, therefore, the economy would do worse in the medium to long term. It is the risk of doing too little.
The New Economics Foundation will this week highlight the risks of a broken social security system in Britain, trapping millions of people in poverty. Tackling inflation by undermining demand in the economy would hurt the poor the most.
Alfie Stirling, research director and chief economist of the think tank, said: “If we fail to maintain sufficient heat in the economy, we know very clearly that the long-term costs are permanent scars. It is suppressed wages and higher unemployment, precisely because we have designed a lower equilibrium than would otherwise be the case. “
Given the heightened economic risks of the postponement of June 21, this is a time of caution rather than inflation alarm. The cost of taking action to shoot a short-term inflationary bubble, which may not fully materialize, would be too high.