BBritain is on the brink of a historic moment. More than a year since the Covid-19 pandemic began, the end point of all social restrictions is at hand as spring turns into summer. An announcement from Boris Johnson is expected on Monday.
The delay rather than a 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 “day of freedom” that we expected, we find ourselves in another moment in which the prime minister has built hope and then disappointed.
Despite this critical juncture, economists have focused little on economic consequences. Far from worrying about the cost of the delay or a new Covid-19 crash, more attention is being paid to the dangers of the economy overheating. We are being warned not that growth is at risk, but that a dangerous inflationary beast is stalking the earth once again.
It’s a time in stark contrast to last fall, when, despite red-hot economic growth coming out of the summer lockdown, many economists remained concerned about downside risks. Andy Haldane, chief economist at the Bank of England, warned at the time that there was “chicken hen” pessimism on the pages of national newspapers, embedding a self-fulfilling prophecy of weaker growth by encouraging undue caution among consumers and Business.
Haldane, who is leaving the Bank later this month to head the Royal Society of Arts think tank, is now among the most prominent economists warning of the risks of an overheating economy, using a column in the New Statesman to to say that Great Britain is in the most dangerous moment. for inflation since the exit of the European exchange rate mechanism in 1992.
There are good reasons to focus on these upside risks. The signs are promising that Britain’s economic recovery from Covid-19 is finally underway. Growth has returned with enthusiasm – GDP rose a whopping 2.3% in April alone when lockdown measures were relaxed – fueled by rising business confidence and consumer spending as restrictions were relaxed.
Allowing the economy to overheat would jeopardize the purchasing power of struggling families, while beginning a new period of boom and bust. Interest rates would have to rise, financial markets would plummet.
But just as there were warnings of undue pessimism last fall, there are risks of overemphasizing the strength of the economy and the dangers to inflation. It could be said that this is not the time to count the chickens, when the story of the Covid-19 pandemic is far from over.
There are doubts as to whether the current inflationary burst is simply a bottleneck moment or the first signs of lasting upward pressure. After shutting down much of the economy last year, growth was always likely to accelerate once activity was allowed to resume.
In the short term, demand is driven by £ 200bn in savings accumulated mainly by wealthy households that had limited ability to spend their income during the lockdown and are now looking to make up for lost time. It is billed as a trickle down profit for shops, pubs, restaurants and cafes that were forced to close. But questions remain about how much will be spent and how quickly. Nor is it a permanent feature of the new post-Covid economy.
On the supply side, companies are scrambling to find staff, raw material prices are skyrocketing, while shipping costs have skyrocketed. Some of this is due to issues related to the pandemic: international travel restrictions, disruption of global cargo movements, and the need to implement safe environments for Covid. Although they are likely to fade over time, legitimate doubts remain about how much pressure will remain, especially as Brexit begins to kick in. But in the short term, a few restaurants offering one-time bonuses for new staff are not enough evidence of a permanently tighter job market.
Among inflationists there are those who would argue that the best approach to curbing spiraling prices would be to downsize the state, after a record expansion in fiscal activism during the pandemic. This, they argue, has fueled demand vastly out of proportion to supply, into a frenzy of permissionless cash, tax cuts, and cheap, easily accessible business loans.
However, this intentionally ignores that the government already plans to close the licensing scheme and end its emergency tax breaks. Public sector pay is being frozen, corporate tax will be raised, while greater restrictions on state spending should not be ruled out under a conservative party that is uncomfortable with the government’s huge debt figures.
There are dangers in taking this path to combat 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.
It is a warning voiced by economists at the Institute for Public Policy Research and the New Economics Foundation. Carsten Jung, Senior Economist at IPPR’s Center for Economic Justice, says: “If we withdraw support measures and the economy never fully recovers, companies would be scarred, the job market would never fully heal, and as a result, the economy would be worse in the medium and long term. That is the risk of doing too little. “
The New Economics Foundation will highlight this week the risks of a broken social security system in Britain that traps millions in poverty. Tackling inflation by sapping demand in the economy would hurt the poor the most. Alfie Stirling, research director and chief economist of the think tank, said: “If we can’t keep the economy warm enough, we know very clearly that long-term costs are permanent scars. It is about repressed wages and higher unemployment, precisely because we have designed a lower equilibrium than would be the case. “
Given the heightened economic risks of a delay on June 21, this is a time for caution rather than inflationary scaremongering. The costs of acting to puncture a short-term inflationary bubble, which may not fully materialize, would be too high.
George is Digismak’s reported cum editor with 13 years of experience in Journalism