As we struggle back towards a new, socially distant normal, among economists the letter debate continues. Will the recovery be a V or a U or a W in shape? My favourite is a Q, where we go round in circles for a while before breaking out.
Andy Haldane of the Bank of England, who monitors real-time indicators assiduously, has ruled that it is “so far so V”, as there has been a fairly robust recovery in some types of spending.
Spending on staples has remained strong throughout, and so-called delayable expenditure has risen rapidly, so that by the end of June that was back to the level of early March. But, unsurprisingly, social spending is still very depressed, albeit showing signs of recovery as the lockdown eases.
So where do we go from here? Will the recovery continue at a respectable pace, or are there other factors that will hold us back?
Banking data can shed some light on those questions. Household borrowing is, in aggregate, down. There has been a drop of £18bn in unsecured lending. The other side of the coin is that household deposits rose by £56bn in the three months to the end of May (corporate deposits are up by even more). So there is spending power available to individuals, if they choose to deploy it.
To some degree, that is happening. Car dealers and estate agents are reporting healthy levels of inquiries, anecdotal proof that delayable spending continues to come through, though it will be some time before we see solid proof that the car market has recovered.
There are signs across the banking industry that a higher-than-usual proportion of mortgage applications are going through to completion. There are people who want and need to move. The DIY market is strong too, though I have declined several invitations to put up shelves.
But there are two problems that may darken the rosy tint of these banking spectacles. First, there is a distributional skew in the data. Households with incomes above £35,000 have benefited more from lower costs – as their spending has been constrained – than they have lost from lower income. So on average their savings have risen.
Indeed the top fifth of earners will have saved seven times as much during the lockdown as those in the bottom fifth. At the same time, a quarter of those earning less than £35,000 a year have no savings at all to draw on. Many of that group have suffered unemployment, or underemployment, already.
Since wealthier people have a lower propensity to spend up to their income, that means that some of this higher saving is unlikely to be drawn down. The boost to the economy will be lower than if it were more evenly distributed.
The second problem is that some of this savings boost is, in effect, money borrowed in the second quarter from the third quarter. That is most obviously true in the case of mortgage interest holidays, from which about one in six mortgage holders have benefited. Those holidays are coming to an end and interest payments will restart. We can add this to the furlough scheme, and see that the cashflow impact of the crisis has in effect been deferred from the second quarter of the year to the third.
Those are both reasons why we cannot assume that the spending recovery we have seen so far will persist into the autumn. There is a risk that the prospect of job losses will dampen spending. We know from previous recessions that for every person who loses a job, there are two or three others who fear it might be them next. Will that fear factor outweigh the impact of the ending of lockdown on the recovery? (I am assuming here that there will not be a second generalised lockdown.)
My hunch is that these factors, together with the psychological resistance of many people to a full resumption of social and employment activity will make this an unusually shaped V, at best. Polling suggests that UK citizens, especially Londoners, are the most nervous in the world about returning to public transport and to work. So although the most recent retail sales figures are encouraging, we could well see the up-stroke of the V flattening out as we proceed. The alphabet may acquire a few new, misshaped letters before we are through.