A patchy summer

It has been a typically patchy British summer, with markets following suit. One day’s promising rays of economic data are quickly shrouded by news of a spike of COVID somewhere. Then something else encouraging pops through the cover, only to be closely trailed by more shaded worry. And the dance continues, like clouds chasing the sun.

For all the whirlwinds and dislocations caused by the pandemic, stock markets surged in August, before some profit taking cast a bit of a cloud in early September. In another sign of consumer resilience, UK housing has also held up well enough, with interest in gardens spiking (as you would expect following a nationwide lockdown). Lending data released this month showed mortgage approvals rocketed back, helped by the stamp duty holiday. People are warming up the plastic again as well, with consumer credit increasing £1.2 billion after four months of paying down debts. The Chancellor’s inspired Eat Out to Help Out scheme no doubt helping drive this spending. Companies’ borrowing has dropped off too, with just £4 billion of new loans taken out compared with the huge £31 billion of loans in March.

"It has been a typically patchy British summer, with markets following suit."

It feels a little like the UK and the rest of the world took a rest of sorts over the summer. As the leaves start to change colour, we will likely experience the next difficult phase of the pandemic. We keep hearing that the UK’s furlough scheme will end before the leaves drop, yet don’t be surprised if the scheme sticks around for many more moons. The same goes for the ban on rental evictions. The cost of furlough is extraordinary, so you can understand Chancellor Rishi Sunak’s eagerness to shut it down. Yet the human cost of double-digit unemployment and families thrown onto the streets in winter because they can’t make rent would be extraordinarily high too. And prime ministers tend to feel political costs more keenly than pounds and pence. Boris Johnson may win this fight, leaving furlough in place till after Christmas at least.

The financial cost doesn’t go away though. Now, we’re broadly comfortable with the UK’s higher debt burden and greater spending. Governments’ finances are not the same as those of a business or a household, however much the comparisons may be made. And offsetting a huge slump in the economy with government spending is a better option than letting a nation fall into a deflationary spiral.

Yet the government doesn’t appear completely comfortable with the situation. Decidedly Labour-like government responses to the pandemic, and a sharp rise in debt, have created a sort of political dissonance. After a decade of preaching austerity, the Conservatives are finding it hard to change the narrative (and old habits) on a dime. For one, there are the fiscal rules they made law, requiring the government to keep the nation’s day-to-day spending lower than its tax revenues over three years. This doesn’t include investment spending, so Mr Sunak could roll out big-ticket infrastructure boosts to combat the pandemic downturn. However, every month of paying the wages of furloughed Britons makes balancing the books in three years’ time all the harder.

These fiscal rules are now under review, but until that’s done Mr Sunak has to explore all of his options. So we’ve had rumour after rumble about all manner of ways to boost taxes. One of the most eye-catching is the suggestion of charging capital gains at marginal income rates (what were we saying about Labour-like policies?).

Similar political decisions are being made in the US. When Congress failed to come up with a rollover of stimulus measures to help households and states, the White House stepped in to paper over the cracks. It kept some of the extra unemployment benefits in place and extended the moratorium on rental evictions after pictures of piles of dumped belongings went viral on social media. The political calculus is especially heavy in America as the country barrels towards the November election. The race looks terrifyingly even. With riots in the streets, with a deadlocked Congress (once again facing a government shutdown), and with an incumbent whose ability to whip up anger and conspiracy is legendary, the best result would be an emphatic one either way. A closely run election will stress the US, its institutions and its sense of nationhood more than for many, many years.

Eyes on the long term

We are living through a great time of flux. And it’s likely to be this way for some time. It’s best not to get too excited about short-term fluctuations in markets, economic measures or news stories. Instead, you need to try keep an eye out for trends and indications that things have changed direction. That’s everything from company earnings to the recovery of nations and the fight against COVID. At the moment, governments are still supporting people and businesses as they try to get a footing in the post-pandemic world. They are able to borrow to keep people housed and fed and to encourage businesses to weather the storm rather than slash spending and send economies into freefall.

One particularly heartening trend we have noticed is the number of companies that have repaid furlough money taken from the government during the depths of the crisis. After posting strong profits, several companies have returned the unneeded grants to the exchequer with thanks. Businesses are typically characterised as rapacious and single-minded in the pursuit of profit, yet this shows that honour still has a place at the boardroom table. The rise of a more responsible capitalism has no doubt helped engineer this compulsion to do the right thing rather than pocket a windfall at the expense of the people and their government.