Economic Recovey?

UK retail sales rose by 13.9% in June compared to May, taking them back to near pre-lockdown levels.  In addition UK PMI data for Services rose to 56.6 for July, compared to 47.7 for June, and estimates of 51.5.  It was the fastest pace of expansion in the services sector since July 2015.  Is this evidence that the economic slowdown caused by the Tory lockdown was just a blip, and that the economy has already mostly recovered?  Short answer - no.

Firstly, what all this data indicates, as I forecast some weeks ago is simply that we have moved from a period of economic contraction to one of a reversal of that contraction.  To put it in the context of a car, if its travelling at 100 mph, and the driver slams on the brakes, the car will rapidly slow down, if s a result the car is travelling at 20 mph, and the driver takes their foot off the brake, it stops slowing down so quickly, and if the driver puts their foot on the accelerator, it will speed up, but it will be speeding up from 20 mph, and so will take some time, even to get back to the original speed of 100 mph.  All that has happened is that the Tory government has taken its foot off the brake, and as a result as consumers are free to resume spending, its the equivalent of a slight pressure on the accelerator.

For example, retail sales are back to pre-lockdown levels, but that means that all of the sales that were lost in the months of the Tory lockdown still have not been recovered, and are probably unlikely to be recovered.  The figure for retail sales is also only a partial picture for consumer spending.  In a service based economy, a lot of consumer spending goes on things that are not physical commodities bought from shops.  For example, spending in gyms, and so on.  As most of these things have continued to be closed by the Tory lockdown, no such resumption of spending in those areas has taken place.

The same is true of the PMI number, as I wrote some time ago.  If there had been a real lockdown of production then GDP would have fallen to zero, because GDP is a measure of value added, i.e. of the new value created by labour.  If no labour takes place, no new value is created, so GDP is zero.  But, correspondingly, any resumption of economic activity from such a state represents growth, so all PMI numbers would then show a huge rise above 50 (the point at which growth is represented), even though the actual level of economic activity might be a fraction of what it was previously.

What the economy has faced is a huge supply shock as the Tory lockdown forced businesses to shut their doors, and as this, in some cases, for example car sales, had an inevitable knock-on effect to producers.  At the same time, the government's furlough scheme meant that monetary demand was largely maintained, as the government became employer of last resort, nationalising the economy's variable-capital, and paying the nation's wages.  But, its basic economics to understand that if you maintain the level of monetary demand, whilst reducing supply, the consequence is inevitably inflation.  And that was what was seen as shown by the analysis published by the IFS.  

There has been other consequences.  For some, the maintenance of incomes whilst avenues of consumption were closed led to some debt being paid down.  That was assisted by the mortgage holidays that the government told banks to provide.  But, of course, that debt was not waived simply deferred, and now those that took advantage of the mortgage holiday are finding that it has affected their credit rating.  But, also much of the spending itself was simply deferred, and so the pay down of debt is likely to now see a running up of debt, as some of that deferred spending is made up.  As I noted a while ago, the higher costs now imposed by the requirements for coming out of lockdown, means that prices will rise, and as this spending also meets the consequence of the supply shock, prices will rise even more.  As I reported recently, there are already reports of hairdressers doubling their prices as they have been allowed to reopen.

The retail sales data also shows that a lot of the additional spending is being done on line rather than in the High Street.  That High Street continues its slow death, as more and more retailers close unable to compete with online offerings, and that is spreading to the huge shopping malls and out of town retail parks too, with a consequent cratering of rents and property values, and the bankruptcy of some of the large property companies involved in their provision.

Again, what is being seen is a shift in spending and in the type of labour demanded.  The lockdown has simply speeded up the process of the death of physical retailing, and growth of online shopping an spending.  It means that the type of labour that is going to be in demand is the more high value, skilled labour of the web designer, of the network developer and maintenance engineer, and so on.  But, the shopworker let go, is not going to be able to quickly fill those vacancies without large scale retraining and education.

There has been a similar rebound in the Eurozone PMI data.  So, the data shows that economies are no longer slowing, and beginning to recover.  It does not mean that they are at the levels that preceded government imposed lockdowns, or that they will get back to those levels quickly.  The data indicates combined and uneven development within economies, and shifts that were already beginning to occur in the type of production and employment have been accelerated.  Rapidly rising consumer demand, fuelled by the furlough payments and other money pumped out to consumers by governments at a time when economies are still suffering from a lock down induced supply shock, means that prices will rise, also induced by rising costs, and excesses of liquidity pumped in by central banks.  With even more stimulus to aggregate demand in the pipes as a result of huge fiscal stimulus packages introduced by nearly every government across the planet, expect demand to exceed supply by some margin, leading to rising inflation, in coming weeks and months.

But, that rising demand, and rising money profits resulting from rising inflation, means that businesses will also be rushing to pocket some of that largesse.  To do so, at a time when the profits and income has been decimated as a result of lockdowns and closure, means they will have to borrow on a huge scale, again at a time when governments and households are borrowing on unprecedented levels.  That means that nominal interest rates will rise sharply, but with inflation rising, in order for real interest rates to rise, nominal rates will have to rise by an even greater amount.

So, as set out in previous posts over the last few weeks, these rising rates mean that a huge asset price crash is an inevitability.  Some pundits are looking to gold to save them in this environment, but gold too is a speculative asset whose price has been inflated way beyond its current price of production.  It now stands at nearly $2000 an ounce, as against a price of production of around $1200 an ounce.  When the bubbles burst, so too will the price of gold.  The more these speculative assets crash, the more it will become obvious that the only safe investment is that in actual productive-capital, but in an age of socialised capital,  that is no longer effectively possible for the individual capitalist.  There will be some that will start small to medium sized private businesses, and the odd multi billionaire like Elon Musk, who might put large amounts into actual productive-capital in some new venture such as the hyperloop, but in the main, any such investment can only be undertaken by the socialised capitals, themselves, and to do so means issuing millions of new shares, and new bonds etc.  That huge increase in supply of fictitious capital, will again crater the prices of those assets, adding to the depth of a financial meltdown that will dwarf that of 2008, but will simply be a matter of appearances being brought back into alignment with reality, and the necessary basis for the resumption of real capital accumulation, and real economic growth to resume.