Life After Lockdown – A Basic Economic Analysis

There’s three things everyone was worried about when we first found out about the significance of Covid-19: 

  1. Impact to our own health
  2. Impact on the economy
  3. How much loo roll is enough when you’re on the precipice of a once-in-a-century global pandemic.
A concerned shopper using a fairly-convincing disguise to get around supermarket loo roll limits.

While we’ve understood how it’ll affect our health a little more, things are less clear about the economy.

It’s difficult to plan ahead financially when there are so many uncertain variables.

Below is a brief outline of how I’ll break this down:

  • Unemployment rate
  • Consumer spending (aggregate demand) 
  • Inflation 
  • Monetary & Fiscal policy measures 
  • Second lockdown 

You don’t need a PhD in economic entanglement to know these aren’t good times for the jobs market.

The winding down of the government furlough scheme has confirmed it’s merely delayed job losses, not saved them. 

The logical reaction to fearing for your job, at the start of a once-in-a-century global pandemic, is to reduce spending as much as you can in order to build up your soon-to-be-needed rainy-day fund. 

In other words, consumer spending (aggregate demand) falls.

Yet, people are not logical (see the dastardly dalgona coffee fad, tres leches cake, banana bread, driving 30 miles to a tourist attraction to test your eyesight, shaking patient’s hands in a hospital for a photo op before contracting covid-19, stocking up on 4 months of loo roll). 

Takeaway businesses enjoyed unprecedented demand at the start of lockdown as people decided to order in rather than to cook.

Consumers also flocked to supermarkets to stock up on essential and luxury items alike. 

But now it’s a different story. We’re in the midst of a slowdown in consumer spending.

Consumers are, finally, worried about the future, especially with the furlough scheme being wound down. 

This should mean inflation, the rate at which general prices rise, will fall. In other words, the cost of loo roll should still rise but at a smaller rate (by 50p instead of £1 for example).

Shoppers taking advantage of slowing inflation by stocking up on cake.

If you’re thinking a fall in inflation should mean falling prices, what you’re thinking about is deflation. 

Companies need consumers to spend and for prices to rise gradually so their revenues grow (and in turn gross profit). 

As a business owner, if customers aren’t buying my products and my revenue isn’t rising, then I wouldn’t risk investing in my business.

What I’d do is reduce costs as much as I can or raise productivity.

Guess which is easier to do. 

Tangent alert: deflation is a continued fall in prices. Consumers don’t go out to buy goods and services today because they know it’ll be cheaper tomorrow. You’ll put your blood sweat and tears into running your business only to be rewarded with ever falling revenues. The only thing that won’t fall are the bills you need to pay. Great.

There’s two policies that could be changed to counter a lack of consumer spending:

  1. Monetary policy – Bank of England base rate of interest and the supply of money
  2. Fiscal policy – Government spending and taxation

The Bank of England have already reduced the base rate of interest. This would encourage businesses to invest by making it cheaper to borrow.

However, a cut from 0.75% pre-lockdown to 0.1% would have little effect especially in the short-term. Changes in monetary policy typically take 18-24 months to take effect anyway.

Last month, the bank of England announced they’re pumping £750bn into the UK economy through a programme called Quantitative Easing.

The intention is to increase the supply of money so that it’s easier for consumers to spend.

They do this by buying government bonds at a massive scale. This purchase then reduces the interest on these bonds (yields).

Cheaper bonds should translate into cheaper loans offered by financial companies. Cheaper loans means it’s easier for consumers and businesses to borrow money.

This encourages spending.

Meanwhile the Government are:

  • Handing out money to businesses 
  • Cutting VAT to 5% for the hospitality sector 
  • Announcing the Eat Out to Help Out scheme to support dine-in businesses
  • Temporarily reducing Stamp Duty to 0% for homes below £500,000
  • Paying businesses to take back employees placed on furlough 

The government have been handing out grants to businesses and guaranteeing “Bounce Back” loans for all businesses.

Both of these measures are designed to smooth cash flow problems and to help businesses to pay their employees and suppliers. 

The VAT cut to 5% for the hospitality sector sounds like good news at first but, after drilling into the fine print, it seems it’s effect would be more limited. 

A lot of restaurants and takeaways rely on online food order and delivery firms like Just Eat and Uber Eats. The commission they charge means a lot of businesses barely make a profit from these sales as it is. 

With the way the VAT cut to 5% has been announced, orders placed via these apps would still attract 20% VAT.

Whereas, placing an order directly with the restaurant/takeaway would only incur 5% in VAT (and save them from paying commission to these vultures innovative industry disrupters [hint hint]). 

An image of innovative industry disrupters in their natural habitat.

Eat Out To Help Out, 50% discount for eating out during Monday to Wednesday, is an original way to encourage consumer spending.

Although, I suspect a lack of capacity is more of a hindrance for dine-in businesses than a lack of demand.

It would definitely be popular in focus groups. *Coughs*

The cut in stamp duty sounds awesome. It would greatly help first time buyers, if they can get a mortgage. Banks are increasingly refusing to lend to first time buyers.

But say it wasn’t so difficult to get a mortgage in this economic climate, how would a cut in stamp duty affect the housing market?

Well, the last time a temporary stamp duty cut was introduced (in 2008), only 60% of buyers benefited from that cut with sellers pushing up prices to take advantage.

While volumes of sales rose by 8% during that period, it was countered by a collapse in sales once the temporary stamp duty cut was withdrawn.

Who cares about helping those struggling to pay their rent and existing mortgages when you can solidify your base of voters.

Consider you’re an employer and are considering laying off your furloughed employees. They earn the UK average salary of £30,000 each. You’re offered £1,000 per head to bring furloughed employees back to work until the end of January 2021. Would you take it? 

You would take it if you were going to bring your employees back again. Otherwise, it makes little sense to pay their wages for 6 months at least to get the £1,000 bonus next year. 

TL;DR – The UK economy is going down the drain. Leave the loo roll and stock up your cash.

2 Thoughts on “Life After Lockdown – A Basic Economic Analysis

  1. Great read, easy to follow and concise. And the lighthearted humour makes our impending doom seem bearable 😊 nice one

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