Dangers await the exit from the Covid recession

While browsing Airbnb this week I found a tent to rent in the Lake District next month for £ 163 a day. Before I figured out what it would be like for a week (£ 1,141) it had gone, presumably, to someone even more willing than me to pay more than me for seven nights under canvas in the place. rainiest in England.

As we emerge from containment, the demand for domestic vacations is so great that almost anything is allowed, at any cost. I don’t blame the accommodation companies – campsites are a business operation, not a public service. They can charge what they think the market will bear and there are clearly a lot of people willing to pay.

It is appropriate for the government to go out and spend. After all, there is an economic recovery to be fueled, and nothing fuels a UK recovery better than consumer spending, typically boosted by consumer credit. If the money goes to sectors devastated by the pandemic, such as the hotel industry (camping included), so much the better. The Last Bank of England quarterly credit report, released this week, shows that loans are pouring in quickly, whether for mortgages or consumer purchases.

Soaring spending is already pushing up prices, and not just for the holidays. As was also reported this week, inflation for June jumped to an annual rate of 2.5 percent. February’s 0.4 percent rise now looks a long way off.

But the official line from the Bank of England remains unchanged: don’t worry, it’s a temporary hang-up that will fade once the post-Covid recovery takes hold. Interest rates will remain ultra-low.

If the Bank is right, we should see the price hikes take hold. But there are worrying signs that they might not be, especially in the job market. Employers in some industries face localized labor shortages. Transportation companies are raising wages by up to 25 percent to try to retain and recruit staff while the government relaxes working time rules to allow drivers to spend more time behind the wheel.

Particular factors are involved, in particular a post-Brexit exodus of workers from the EU, including drivers. But with bars, farms and construction companies also reporting recruiting issues, it wouldn’t take much for these special factors to become more general. And wage increases are what economists call sticky – they aren’t often reversed.

Among those worried about inflation risks is Michael Saunders, who this week became the second member of the B0E’s monetary policy committee to go public. He called for “a modest tightening [monetary policy] position”.

It will be months before we know for sure whether the inflationary surge is a blow or something more dangerous. And there are compensatory forces involved. Importantly, the government is withdrawing its pandemic support programs, including holidays and the temporary lifting of universal credit which both end in September.

When job subsidies disappear, struggling businesses are expected to accelerate job cuts, especially in industries where the pandemic has exacerbated disruptive technological changes, such as retail. If employers swing the ax, wage increases can also be limited, and with that comes the risk of widespread inflation.

But in the meantime, the price increases are already causing tensions. Clearly, a 2.5% annual price increase isn’t much of a concern for those camping at £ 163 a night. But not everyone is so lucky. Some people will think twice before using the car given the 20% increase in gasoline prices recorded in June.

It is well known that the impact of the Covid recession has been very uneven. While the better-off have generally been successful financially, the poorest have suffered. Not only have they endured the disease itself worse than the wealthy, but they are also much more likely to have lost their jobs and suffer wage cuts.

While the better-off have generally increased household savings, mainly by spending less on leisure, and thus lowered national levels of consumer credit, the poorest families have had to draw on their cash reserves and / or get into debt. The Resolution Foundation, a think tank focused on the disadvantaged, found in a June poll that people with the lowest incomes were much more likely to have seen their savings plummet from pre-crisis levels (32%) than ” increase (12%). Among high income earners, only 10% saw their savings decrease, while 46% saw their savings increase.

It goes beyond a simple belt tightening. StepChange, a debt support organization, says the number of people seeking its services increased from 15,000 new clients per month in January to 19,000 in June. And this is only a small sample, as other groups offer similar services, such as Citizens Advice.

There are, unfortunately, all signs that this inequality will spread to the post-Covid recovery. Not only does inflation bite the poor more than the rich, so too do the disruptive effects of job cuts and the end of pandemic support. Pablo Shah, Chief Economist at the Economic and Commercial Research Center, says: “There is a difficult period approaching.

This is bad news for those struggling with debt. StepChange urges people in distress to contact support groups and, with their help, develop affordable repayment plans. Creditors, including finance companies, are normally required by regulators to abide by these agreements – and not to take legal action while they are in place.

But if life gets really tough for people with debt, the effects could hurt even those who don’t yet feel pressured. A Bank of England study last month notes that the Covid recession was unusual in that the “unprecedented” level of government assistance had stabilized most household budgets. However, he warns that there are still many “uncertain” things, including the course of the pandemic, the pace of the economic recovery and potential government responses. “Household debt could still play a bigger role in the Covid crisis. “

In past crises, household credit problems have often spilled over to indebted households throughout the financial sector, triggering instability. If inflation forces the authorities to raise interest rates as soon as possible, then even people who might be happy to increase their credit card loans or mortgages today might feel less comfortable. tomorrow.

And remember that upcoming job cuts may not be limited to low wages. In retail, they not only hit salespeople, but also middle and senior managers. John Lewis confirmed this week that he is cutting 1,000 executive positions in addition to 2,500 last year. There will be others. The recession of the poor can still affect the better off.

Stefan Wagstyl is editor-in-chief of FT Money and FT Wealth. E-mail: [email protected]. Twitter: @stefanwagstyl

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