As the world entered the Covid-19 crisis, we all knew the massive economic damage that would follow. Many no doubt well-meaning people predicted a rapid bounce back in the autumn of 2020. They even talked of a V-shaped model of economic activity. We at LSS are never certain; but over the next few weeks we shall try to find evidence to support that-and evidence against.
Larry Elliott of the Guardian has always been a reliable guru on the doings and don’tings of the UK Economy. His sharp analysis of the UK property market (real estate to US Readers) is a good jumping off place to give us some pointers to how things might turn out in general.
People in England are now talking about a bounce back in the UK housing market as demand, pent up by the lockdown, is released. There is even talk of a mini boom. Elliott is rather more circumspect. He points out that rising unemployment (currently 2.1 million) is often a harbinger of falling house sales to come. There’s more. A lot of UK employment is backed up by the Chancellor’s furlough scheme. This starts to tail off in August, and formally ends in September, at which point quite a large number of decisions will have to be made about which jobs are economically viable. And, to quote Shakespeare, here’s the rub: the government’s mortgage support scheme ends in October. People worried about their jobs will have to start thinking again about where their next mortgage payment is coming.
Elliott’s discussion is restricted to the UK property market alone. What follows next is our own take. Property-the decision to buy a house- is a classic “big ticket” item in a household budget. But there are others, in roughly this order-home improvements, cars, holidays, and eating out. All of them supporting thousands of jobs, and all intensely vulnerable to decisions on discretionary spending that all households make. As these jobs are lost, indicators of things like unemployment, consumer spending and purchasing fall faster, further depressing confidence. Demand and supply uncouple like the two sides of a DNA molecule, and the economy starts to die. Some foreign readers may smile at this point, because Britain is a service based, highly financialised economy, particularly vulnerable to shocks of this kind. That may be; but the same laws of economics apply in all economies to a greater or lesser extent. In a capitalist economy, confidence is the key, and we think it has taken a very hard knock everywhere.
Elliott notes that the last nail in the UK property market is usually rising interest rates-and at the moment all policy is geared in the opposite direction. But he closes with a sombre warning from Professor Tim Congdon, no less: all this printed money will one day generate inflation. And the way you deal with that is interest rates. That’s where Friedman displaces Keynes. Those of us who remember the boom and crash of the nineteen seventies remember Friedman well indeed.
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