Economic costs

“Big Risk” of Inflation Spiralling Out of Control as Government Borrows Another £24 Billion in May

Government borrowing came in lower than estimated in May, but there is little else in the state of the country’s economy to be cheery about. Following more than a year of lockdowns and heavy borrowing, the national debt stands at £2.2 trillion and a former Chancellor has warned there is a big risk of inflation spiralling out of control. The MailOnline has the story.

The Government was in the red by £24.3 billion last month, down from £43.8 billion a year earlier at the height of the pandemic – and crucially below the Office for Budget Responsibility’s forecasts.

However, the figure was still the second highest on record for the month and £18.9 billion more than in May 2019 before the pandemic struck, while national debt now stands at a staggering £2.2 trillion.

The grim fiscal backdrop was highlighted as former Chancellor Ken Clarke warned that there is a “big risk” of inflation running out of control – and urged Mr Sunak to raise more revenue now to make the Government less vulnerable to a resulting spike in interest payments.  

Responding to the figures, Mr Sunak reiterated his pledge to “get the public finances on a sustainable footing”.

“That’s why at the Budget in March I set out the difficult but necessary steps we are taking to keep debt under control in the years to come,” he added.

Concerns over the rebounding economy overheating and causing an inflation spike have been intensifying after the headline rate surged ahead of expectations to hit 2.1% last month.

Graphic from the MailOnline.

In the U.S. it is also at worryingly high levels, as Joe Biden pours money into stimulating the economy. 

Mr Sunak has been wrestling with Boris Johnson over how to fund ambitious “levelling up” spending commitments and a new social care plan.

Downing Street has insisted that the “triple lock” on the state pension will stay in place, even though the warping effects of furlough could mean it rises by 6% this year.  

Number 10 also says the manifesto commitment not to raise income tax, national insurance or VAT in this parliament stands – even though the respected IFS think-tank says that makes it “extremely difficult” for the Chancellor to find ways of raising money.    

Worth reading in full.

Lockdowns Had a Large Negative Impact on Economic Activity in Chile

Some commentators maintain that lockdowns have little or no impact on the economy. They argue it is fear of the virus, rather than government restrictions per se, that causes people to stay at home and stop spending money.

Such commentators tend to rely on studies from the first half of 2020. Because there was a dramatic decline in mobility at the start of the pandemic – when people everywhere stayed at home out of fear – these studies typically find that lockdowns had a small effect on the economy. 

However, once the characteristics of the virus became better understood (e.g. that the death rate for those younger than 40 is extremely low), people in jurisdictions not under lockdown began venturing out again. As a result, the damaging effects of lockdown on the economy are only apparent when you examine several months of data.

In a study published in the Journal of Global Health, Chilean researchers examined the economic impact of localised lockdowns in Chile. They exploited variation in the timing and duration of lockdowns across 170 municipalities, comprising 89% of the country’s population.

As a measure of economic activity, the authors used the year-on-year change in monthly VAT receipts, which previous research has shown is strongly related to GDP. 

They began by plotting monthly VAT receipts in municipalities that were and were not under lockdown in May of 2020 (see chart below). The blue line corresponds to those that were, and the red line to those that were not.

The two series follow similar paths between 2014 and 2019. However, in 2020, the blue line falls substantially further than the red, indicating that lockdowns reduced economic activity over and above the effect of voluntary behavioural change. 

To gauge the impact of lockdowns more precisely, the authors ran a statistical model of year-on-year change in monthly VAT receipts, with days under lockdown as a predictor. The model controlled for a variety of factors, including both case and death numbers. 

They found that one month of lockdown reduced VAT receipts by 12.5%. Since municipalities without a lockdown saw VAT receipts fall by 15%, this means that lockdowns explain almost half the decline in economic activity. 

“Our estimates”, the authors note, “suggest that a three-to-four-month lockdown would reduce economic activity by approximately the same amount” as one year of the 2009 Great Recession. So much for the claim that lockdowns don’t harm the economy.

M&S’s Annual Profit Slumps 88% During Lockdowns and the Retailer Plans to Close More Stores

The economic disruption caused by numerous lockdowns has been deeply felt by Marks & Spencer (M&S), with the retailer’s full-year profit having slumped by 88%. This is largely due to a collapse in clothing sales, the recovery of which is likely to be hampered by the post-lockdown shift to “hybrid working“, where staff only visit the office some of the time. Despite this, the company says it has traded well in the early weeks of the 2021-22 year and that it believes profits will recover. Reuters has more.

M&S, which also sells upmarket food, made a pretax profit before one-off items of £50.3 million… in the year to April 3rd, down from the £403.1 million made in 2019-20.

The 137-year old group, one of the best-known names in British retail, said like-for-like clothing and homeware sales plunged 31.5%, damaged by multiple coronavirus lockdowns which shuttered stores.

Clothing and homeware sales in stores crashed 56.2%, partly offset by online growth of 53.9%.

In food, where space remained open during the crisis, like-for-like sales rose 1.3%.

On a statutory basis, M&S sank to a pretax loss of £209.4 million, versus a profit of £67.2 million in 2019-20.

All U.K. clothing retailers have been hit hard by the pandemic. Last month Primark… which does not trade online, reported a drop in annual profit of 90%. Next, … which has a huge online business, has shown greater resilience but its full-year profit still fell 53%.

Worth reading in full.

The damage to its profits has forced the retailer to commit to closing another 30 stores over the next 10 years. BBC News has the story.

M&S has already closed or relocated 59 main stores, as well as cutting 7,000 jobs across stores and management.

The chain has reported big losses for last year as the pandemic took its toll on clothing sales.

But food sales were up thanks to its Ocado tie-up, contributing to “a resilient financial performance in a year of disruption”…

The High Street stalwart currently has 254 full-line stores… It says that a number of them are in long-term decline and cannot justify future investment. 

About 30 stores will gradually close over the next decade, while another 80 will be moved to better locations or merged with nearby shops. 

The group will open 17 new or expanded main stores over the next two years, including a number of former Debenhams sites.

Also worth reading in full.

Productivity Losses Caused by School Closures in the U.S. Will Lead to a 3.6% Decrease in GDP by 2050, According to a New Study

A new U.S. study provides insight into the long-term economic effects of school closures, showing that the costs of lockdowns will be felt long after they’ve ended. Researchers at the University of Pennsylvania’s Wharton School believe that productivity losses caused by school closures during lockdowns will lead to a 3.6% decrease in GDP and a 3.5% decrease in hourly wages by 2050, “relative to the counterfactual where there had been no disruption to learning”. Here are the key findings.

Studies have found that remote education reduces learning outcomes for students and infer that current students are likely to earn less in future wages as a result of lower labour productivity. Labour productivity is an integral component of the production of goods, services, and wealth in an economy. Current cohorts of students with reduced education and lower productivity will be a drag on the future GDP of the United States for decades in the future…

Table 1 shows projected economic effects of school closures relative to a counterfactual where learning was never disrupted by the pandemic. As the cohorts of affected students enter the workforce, average labour productivity decreases relative to the counterfactual. However, less productive workers are a small proportion of the economy’s labour supply and younger workers tend to be less productive, so the aggregate effect is muted initially, with labour productivity decreasing by 0.6% in 2030 relative to the counterfactual scenario. As the affected cohorts age, making up a larger proportion of the workforce and approaching their peak earning years, the relative drop in labour productivity increases to 2.4% in 2040 and 3.3% in 2050.

…Note that current primary schoolers will be aged 34 to 40 in 2050, so the drop in their productivity will continue to affect the economy for many years afterwards.

In an effort to stave off the damage caused by the loss of education, the researchers recommend that the next school year should be extended by one month. They project that this would lower the reduction in GDP from 3.6% to 3.1%.

Extending the 2021-22 school year by one month would cost about $75 billion nationally but would limit the reduction in GDP to 3.1%. This smaller reduction in GDP produces a net present value gain of $1.2 trillion over the next three decades, equal to about a $16 return for each $1 invested in extending the 2021-22 school year.

In Britain, where the impact of school closures is likely to be just as bad for the economy, the Chair of the Education Select Committee says that extending school days is “a serious solution for the Government to consider“. Others, including the Education Policy Institute, have proposed that some pupils should repeat the last school year completely.

The Wharton School study is worth reading in full.

Six Pubs Have Closed Every Week during Lockdowns

The reopening of indoor hospitality earlier this week came too late for many businesses as data reveals that six pubs have closed every week during Government-imposed lockdowns. Most have either been demolished or converted into homes and offices. The MailOnline has the story.

Figures released today showed 384 pubs have closed permanently during the national and tiered local restrictions over the past 14 months.

The number of locals is down by one per cent from 40,886 to 40,502, according to research by consultants Altus Group…

West Northamptonshire Council granted permission to turn The Romany in Kingsley, Northampton, into 11 flats after its closure during the first lockdown last year.

And The Majors Arms in Widnes, Cheshire, was sold last October, with its new owners requesting permission from Halton Council to turn it into a shop.

The Crobar in Soho, central London, previously said it would be unable to reopen after struggling to pay rent during the pandemic, but is now planning to resume business at a new venue after fundraising over £100,000. 

The study found more pubs were lost in the South East than other parts of the U.K., with 62 demolished or converted for alternative use during the pandemic.

The West Midlands, Wales, North West and East of England each saw more than 40 pubs closed during the same 14-month spell.

Pubs that disappeared have either been demolished or converted into other uses such as homes or offices, said Altus.

Worth reading in full.

Estimated Cost of Government Spending on Covid Rises to £372 Billion

The Government is expected to spend £372 billion in its response to Covid, according to the National Audit Office (NAO), with the estimated cost having risen by £100 billion since January. Almost half of this total will be given to furlough and to other business support schemes. The MailOnline has the story.

The NAO Covid cost tracker now captures a full year of predicted costs since the pandemic began, with £172 billion already spent.

It includes £26 billion worth of guaranteed loans which are expected to be written off.

Support for businesses such as the Coronavirus Job Retention Scheme and the Bounce Back Loan Scheme had the highest estimated cost, at £151 billion.

This was followed by help for the health and social care sector at £97 billion.

Programmes such as the Self Employment Support Scheme, under help for individuals, came to £55 billion.

And there was an additional £65 billion estimated to be spent on support for other public services and emergency responses.

Chairwoman of the Public Accounts Committee Meg Hillier said it showed how public accountability “has never been more important”.

“The NAO’s cost-tracker tool is vital as the primary public data source on Covid spending across Government,” she said.

“With such huge sums going out the door, and Government guaranteeing loans worth over £90 billion, Government faces a long road to recovery ahead.”

The figures were released as question marks remained over whether the public would be freed from working-from-home guidance in June.

Hopes are high that under Step Four of Boris Johnson’s roadmap out of lockdown staff will be encouraged to return to city centers to provide a much-needed boost for local service businesses.

But the new Indian variant that is prevalent in some Northern towns is giving scientists pause over whether the lockdown lifting should be slowed down.

Worth reading in full.

Stop Press: According to a Sky News report, more people were furloughed at the height of the pandemic than were working from home (WFH), despite the number of people WFH more than doubling in 2020.

It is clear that so-called hybrid working is now on the up – mixing WFH and time in the office – allowing staff greater flexibility on how they manage their time, in many cases, and further savings from commuting every day.

But Sarah Loates, Founder of Loates HR Consultancy, warned that the trend was not always in the best interests of employees.

She said…: “While finance directors are rubbing their hands with glee at the cost savings from dispensing with expensive serviced offices, hybrid working comes at a price, both social and economic.”

More Than 500 U.K. Bank Branches Have Closed during Lockdown

More than 500 bank branches have permanently shut in the U.K. during lockdown, according to a report by Which?, despite calls for branches to remain open for those who rely on in-person banking. MailOnline has the story.

Repeated national lockdowns appear to have accelerated a shift to online banking for many customers. 

But there are growing concerns over the impact the closure of branches in towns could have on vulnerable customers who rely on in-person banking. 

The Financial Conduct Authority (FCA) had urged banks to delay branch closures during the pandemic where possible to do so. 

But Which? found that some 529 branches have closed since March 23rd last year when the first national lockdown was imposed, according to numbers reported by the Telegraph.

Barclays, NatWest, Lloyds, HSBC, Co-op Bank and TSB are among those said to have made cuts.

Gareth Shaw, Head of Money at Which?, told the newspaper he believes bank closures will now “ramp up” as life returns to something closer to normal. 

He said the coronavirus crisis had “put the proverbial foot down” on the ongoing move away from in-person banking to online. 

The FCA’s plea to keep branches open is thought to have delayed some closures but Mr Shaw said the “case for keeping those branches open is not as strong” now as it was last year. 

This report presents another example of lockdown accelerating a pre-established trend with more than 4,000 bank branches having now closed in the U.K. since 2015.

Worth reading in full.

A Tenth of Britain’s Restaurants Lost During Lockdown

Restaurants will be able to reopen for indoor service from Monday, but only if lockdown hasn’t already forced them to close for good. There are now 9.7% fewer restaurants – and 19.% fewer “casual dining venues” – across Britain than in March 2020, according to new research. BBC News has the story.

The data in the latest Market Recovery Monitor from CGA and AlixPartners suggests that while many pubs and bars have also struggled to survive the pandemic, it is restaurants that have fared worst…

CGA and AlixPartners measured the impact of the last 13 months on pubs and restaurants that hold a licence to serve alcohol. 

Looking at the net number of venues, once all closures and new openings were taken into account, they found pubs across Britain fared slightly better than the restaurant sector.

The number of pubs serving food has fallen by 4.2%. Bars and pubs that only serve drinks fell by 5.2%. 

But on top of the near-20% fall in casual dining outlets, bar-restaurants, which make up a smaller part of the overall dining market, fell by 9.6%. 

General restaurants, which are the largest dining out category, are down 10.2%.

While restaurants that belong to larger chains were sometimes able to fall back on the group financially, or negotiate agreements with landlords across the business, independent operators have found it harder to survive.

The restaurant sector was already shrinking before the pandemic, but the net losses between 2017 and 2019 were between 0.9% and 2.2% a year, according to CGA AlixPartners data.

Many of those earlier losses were in crowded sectors such as burger bars. But losses over the past year have included businesses with otherwise promising futures.

Worth reading in full.

Stop Press: The “BBC [is] doing its usual conflation trick” in reporting that restaurants were lost because of the pandemic rather than because of lockdowns, says Luke Johnson.

Debenhams Forced to Close All Its Stores as Lockdown Deals Final Blow to More Than 240 Years of Retail History

Debenhams will close the doors of its remaining U.K. stores for the final time this weekend because of lockdown, bringing more than 240 years of retail history to an end. Sky News has the story.

The department store chain, a staple of high streets since 1778, will close its remaining 28 stores for good on Saturday after the company collapsed amid the fallout of the Covid pandemic.

It closed 21 of its sites across the U.K. for the final time on Thursday.

The retailer was already struggling before the coronavirus outbreak, as shoppers moved away from traditional department store models and moved online.

But it could not cope with the enforced closure of sites during lockdown and quickly went into administration within weeks of the virus fully hitting the U.K..

The company, which began life as a high end draper in London’s West End, started its liquidation process at the start of this year after failing to secure a rescue sale.

Debenhams employed more than 20,000 people before lockdown struck. The closure of its stores is just the tip of the iceberg for the high street. Over 11,000 retail outlets permanently closed in 2020, and the Local Data Company expects this will be followed by 18,000 more closures in 2021.

Image from the Guardian.

The Sky News report is worth reading in full.

Stop Press: Arthur Beale, a 500 year-old yacht chandler in London, has closed its doors for the last time. The Wall St Journal has the story.

Telegraph’s Global Security Correspondents Claim No Trade Off Between Lockdowns and the Economy

The Telegraph‘s Global Health Security correspondents Paul Nuki and Sarah Newey claimed this morning that there is “no trade off” between the economy and public health when it comes to COVID-19 and lockdowns.

Writing in the newspaper, the correspondents (whose coverage is partly funded by the Bill and Melinda Gates Foundation) write that the “‘health v economy’ trade-off” is “false” because “countries where the virus was swiftly contained – such as Vietnam – have seen less economic damage, plus far fewer deaths”.

This claim, based on one country, fails to acknowledge that the entire South East Asian region, regardless of the measures taken, has had a much milder experience of COVID-19 than some other parts of the world, particularly Europe and the Americas. Furthermore, while it may be true that Vietnam’s early border closures produced better outcomes (there is some evidence of this), that bird has well and truly flown for most of the world so the example of Vietnam is now irrelevant as far as this pandemic is concerned.

Perhaps, though, they have a future pandemic in mind. In fact, the peer-reviewed evidence is that lockdowns have no impact on the epidemic death toll (although it’s worth noting that Vietnam, which Nuki and Newey hold up as an example we should follow in future, has never imposed a full, country-wide lockdown). It’s also not clear how countries which close their borders to an endemic virus can ever hope to open them again – a problem Vietnam is currently experiencing. Vietnam is also not exactly an international global hub.

The article is part of the Global Health Security team’s promotion of an agenda to give the World Health Organisation more funding and more power to declare pandemics faster and be more proactive in ensuring compliance amongst states with public health edicts. They note approvingly that the pandemic has “thrust health to the centre stage, and may be an opportunity to promote a ‘green and healthy recovery'”. They appear to like the idea of a fast-acting global government imposing lockdowns so we can all be like Vietnam and “contain” the virus quickly, supposedly without suffering economic damage despite the vast disruption to the global economy this would bring.

Nuki and Newey highlight the problem of “viral misinformation” as one of 13 “mistakes” made early in the pandemic, though they blame the internet and social media rather than the WHO, despite its part in promoting myths about the virus such as that it doesn’t spread between humans and it doesn’t spread via aerosols.

But are Nuki and Newey engaging in disseminating misinformation of their own, making the bizarre claim that public health containment strategies have no trade-off with the economy based on a single unrepresentative country? When the U.K. economy shrank by a record 9.9% in 2020, this claim is frankly ridiculous and such claims are at odds with the Telegraph‘s overall coverage of the way different countries have managed the pandemic, which has been quite balanced. Should the paper really be allowing a team of journalists whose work is partly funded by the Bill and Melinda Gates Foundation to use its platform to promote an agenda of enhanced global control in the name of public health?