We have heard some truly frightening numbers this week about the health of the economy, which contracted 2 per cent in the first three months of the year, the worst performance since the 2008 financial crisis. The government’s furlough scheme now extends to 7.5m workers and will cost £14bn a month until October. Along with other emergency spending plans, that will expand the deficit to exceed £300bn this year – six times the original estimate. Someone must pay for this at some point – tax rises seem inevitable, but will also inevitably choke demand.
Attempting to square this circle perhaps explains the government’s seemingly confused first steps towards ending this limbo. In telling us to ‘Stay Alert’ there is acknowledgement of ongoing risks, but suggesting they are low enough that it is no longer necessary to ‘Stay at Home’. What I suspect they really wanted to say is ‘Get Back to Work’. Cleaners, nannies and estate agents will now be able to come into my house, even if my family can’t – the strongest and clearest message coming out of Number 10 is that the resumption of economic activity matters more than the resumption of family life.
Switching an economy back on may not, though, be as easy as switching it off has proved. One school of thought suggests that weeks of lockdown and unspent salaries or furlough payments will unleash a tidal wave of spending and a rapid recovery once the world reopens. Others look at continuing restrictions and struggle to see how even if resurgent demand comes it can be satisfied, given the brutality of the supply shock. Then there is the possibility that exposure to sudden and deep uncertainty ushers in a new-found and lasting caution among households, physically and financially – the ‘just-in-case economy’ could spell bad news for consumer-driven economies such as the UK and US.
Once again nobody really knows, even if the stock market continues to act like Covid-19 has been defeated. Our regular columnists John Baron and John Rosier have both seen their portfolios bounce back strongly from March lows, a lesson in the merits of holding firm in the face of fear, and in having exposure to the themes that mattered even before C-19 – healthcare and technology notable among them. But although natural investing optimists, both are building other insurance into their portfolios, chiefly cash and gold. Indeed, for every tech or healthcare business having a good crisis there are a dozen companies suffering terribly, from retail to real estate. The market’s strength may come from a few key sectors – but an economy requires much more than that.
