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Andy Haldane was the only member of the Bank of England Monetary Policy Committee to vote against expansion of quantitative easing in June. His reasoning was that the glass was half full, in the sense that the economy was on track to recover about half of the lost output.
He had been gathering real time data on economic activity, such as credit card use, footfall and internet search terms, which led him to conclude that people were increasingly Google-searching for restaurants and spending more on credit cards. Also the Purchasing Managers indices were improving. And so we need to wait and see if the economy bounce back significantly before rushing into more money creation.
He gave his thoughts on the economic recovery in a speech at the end of June. The press reported that he spoke about the “V-shaped bounceback”, which gave the impression to many that we’re nearly back to normal “on track for a quick recovery”.
His actual comments are more nuanced that newspaper headlines.
Saying that the economy had grown by 1% in some weeks is not the same as saying we’ve experienced a V-shaped recovery.
Economic output fell by around 25% in March and April. Growth meant that by July only half of the fall in activity had been clawed back. So, we have data on the down part of the V. And we have data on the start of the upward part of the V, but half of the upward part of the V was still missing in July. Now, in September, we are probably a little further along. But it is the final part of the V that will be the most difficult to achieve (perhaps 10% of our economy – think airlines, Rolls-Royce, travel firms, pubs, hotels, and the despondent, depressed, running-out-of-cash-and-hope and the bust in many other business sectors).
In August, Haldane says, unemployment had probably already hit 6% (the numbers are not compiled yet). And he has a fear that unemployment could move to its highest level since the 1980s as the long-term effects of Covid-19 set in.
He expects unemployment to go to 9%, but then fall back quickly, But that assumes only a small risk of workers not being re-hired after furlough. That is considered optimistic by many other economists.
The Speech
In his 30 June speech Haldane say that “it is early days, but my reading of the evidence is so far, so V.”
But he cautions those who would extrapolate from that by referring to the unknowns:
- the virus’ on-going impact
- government and BoE policy responses
- the behaviour of households and businesses
- economic growth in other countries
The recovery Andy Haldane has seen leads him to think that by the end of September spending is likely to be only around 10% below that at the start of the year.
The two paths from here
Haldane says that he does not know which of the following two feedbacks will be the most potent:
- A negative feedback loop from higher unemployment to lower spending. If large numbers of furloughed staff are made redundant then household savings – precautionary savings to protect the family in hard times – will rise. This will lower demand. Company revenues fall, which creates yet more unemployment. A vicious cycle. “These dynamics might be particularly potent at present because households face double jeopardy – risks to their lives and their livelihoods.”
- A positive feedback loop from higher spending to lower unemployment. If companies have reasonably positive expectations regarding future demand for their goods and services they will re-absorb furloughed workers. This raises household incomes, confidence and spending. which encourages firms to produce and take on workers. A virtu………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
