HAMISH MCRAE: Hunker down for a long economic slog

It is a glum autumn and it is going to get glummer. The second wave of the virus may not turn out to be as savage as the first, but quite aside from its human costs, our response to it will hold back the economic recovery and maybe even reverse it for a month or two. 

That is not necessarily to say the Government’s response will be wrong; simply that even partial lockdowns impose huge costs that cannot be recouped. 

Service industries suffer more than manufacturing. If you have to halt a production line you can bump up your output when you start up again. If you have to shut a restaurant or a theatre for a few months you never recover the business you have lost. 

So where are we now? The third quarter of the year actually does not look too bad. The August GDP figures were met with disappointment because growth was less than expected. But less attention was paid to the fact that previous months were revised upwards. 

If you look at real-time data, things such as traffic congestion, Google searches for cars to buy, hiring platforms and so on, the picture is one of a steady climb out of the trough in April. It would be nicer if we were climbing even faster, but at least the numbers have so far been going up. My worry is that the second wave will start to push them down again. 

We can say three things about that. The first is the Government will throw everything it can to keep the recovery moving. We had the jobs support package from Rishi Sunak on Friday, although it will not save every job. 

If there really is a jobs catastrophe in the winter, we’ll get more Government action. This is wartime finance to counter a peacetime catastrophe. In the short run, money is not the problem. How we pay back comes later. 

Second, the Bank of England will throw everything it can too. The may include negative interest rates, as we report on Page 125. The European Central Bank has imposed these, so were we to do so we would not be flying blind. Since banks can’t charge people negative rates – we would take the cash out and stick it into something else – this is a device to bump banks into lending more to customers rather than depositing their funds with the central bank. 

It sort of seems to work a bit, though whether it’s worth the bother is debatable. But this shows the willingness of the Bank of England to keep the monetary accelerator pedal on the floor. Do not be surprised house prices are at an all-time high. The money has to go somewhere. 

Third, Britons like spending money. Look what happened to Eat Out to Help Out. We did our national duty and that alone bumped up August GDP by a full percentage point. 

The coming weeks will be difficult, particularly for people in less secure jobs in the private sector. But recessions, whatever their cause, always feel pretty dreadful. So far the long slog out of this one is still intact.

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If you can’t beat ’em, join ’em. Central banks are looking at ways to set up digital currencies. A group that includes the US Federal Reserve, European Central Bank, Bank of England and the central banks of Japan and Switzerland have unveiled a project with the Bank for International Settlements to see how they may do this. 

This follows initiatives by the People’s Bank of China and private sector firms led by Facebook. Beijing wants to make the renminbi a more effective rival to the dollar in global transactions, and see a digital version as an option. Facebook et al want to launch Libra, made up of a basket of national currencies in digital form. 

Will digital currencies take off? We cannot know, but we do know three classic things a currency has to do. It must be a unit of account, a medium of exchange and a store of value. 

Crypto-currencies such as Bitcoin don’t do any of these very well. A digital dollar might on the other hand be rather attractive.