Captain’s Blog – Post-COVID economy

Several months ago in a piece for Property Week about what the year ahead would look like we discussed inflation and the problems it would cause for developers looking to get things built. We knew it would be a problem but none of us could foresee just how much of a problem it would become. Getting a good price from a contractor is difficult now and getting a fixed price is a distant dream. Of course the war has impacted hugely but it isn’t the only driver. The downside of the Governments QE (or quantitative easing) programme has been much discussed but in essence it’s impossible to inject so much money into the economy by way of stimulus without risking inflation. Too much money chasing too few goods is the classic definition so what did we expect given that output hasn’t increased accordingly. Also worthy of note is the huge amount of waste which accompanied the government’s attempt to control COVID. We have all read of the billions of pounds worth of useless PPE being burned or otherwise disposed of and throughout the pandemic huge amounts of money have been thrown at the problem often in a scattergun approach without proper rigorous thought being applied. Remarkably the recent reversal in economic growth was blamed partly on the withdrawal of COVID testing. What sort of economy relies on that?

Billions of pounds have been poured into the system and we are now facing the inflationary consequences. The Government has now jerked into action again – by handing out money to households by way of grants. Even to the rich ones! It often seems that their only response to a problem is to throw money at it. Once inflation gets hold it’s difficult to shift. I don’t expect to get to Weimar levels where bank notes are carried in wheelbarrows but it will be a problem for some time. A leading economist predicted recently that the current double digit rates will subside to around 4% which would be a result. He was less certain about when.

My own view is that it will take 18 months for this to happen by which time the economy will be in a damaged state and life will look very different for a lot of people. Current unemployment is low – in fact technically we have full employment where the number of vacancies is greater than number of unemployed. A fall in economic output and investment along with falling purchasing power will alter that I think. In the end we have to trust in the laws of supply and demand which, without outside influence, tend to iron things out. It’s the outside influence bit which is worrying here.

All in all the economy now feels unnatural. High inflation with zero unemployment is explained by Economists using the Philips Curve which tells us that inflation tends to be high when unemployment is low as wages are driven upwards. What we have seen so far however is inflation being driven upwards by other external factors. It only takes unemployment to creep up which is highly likely and we have the dreaded stagflation where inflation is high, economic growth is low or negative and unemployment is rising. This is the worst of all worlds to Economists.

Further evidence of this unnatural feeling includes people resorting to food banks whilst even cheap second hand cars increase in value because of demand. House prices are still rising (albeit more slowly) even whilst mortgage rates rise. Demand for foreign holidays and staycations is at an all time high despite high prices but supermarket bosses record massively changed spending patterns. Malcolm Walker boss of Iceland Stores reports that it is not unusual for shoppers to ask assistants to ‘stop scanning when I reach £40’. Something odd is at work where certain sectors are booming whilst many people can’t afford to eat. 

Strange times indeed.