In November last year, the UK’s total GDP output finally regained its pre-pandemic level. But although the economic recovery is on an upward trajectory, there is a disconcerting stop-start hesitancy to it.
A reasonable indicator of where the economy stands in any given month is the purchasing managers’ index which shows the prevailing direction of economic trends in the manufacturing and service sectors. Both sectors in January had an index above 50 – the level that indicates growth. They were at 57.3 and 53.3 respectively, but both of these had fallen from the previous month.
The key factor holding things back is a lack of confidence.
Consumers accumulated large amounts of savings during the pandemic but are reluctant to spend. Many companies are awash with cash, but are not investing.
Keynes regarded confidence as being absolutely critical to whether or not the economy expanded. “The state of confidence”, he wrote in his major work The General Theory, “is a matter to which practical men always pay the closest and most anxious attention”.
There are just too many uncertainties for either consumers or company boards to feel confident.
Although we have made it through the winter and the government has promised not to introduce further restrictions, the Prime Minister has caved in to health bureaucrats too often in the past. His fickle promises are still ringing in the ears of business owners and employers up and down the country.
According to the King’s College London ZOE data, the total number of people with Covid peaked on 9 January and the current Omicron wave started to quickly fall away. But in the past week, Covid cases have started to rise again. An obvious culprit is the new “variant” of Omicron. Virologists are not concerned, but there are early reports of more transmissibility, creating an aura of angst around its potential.
The impending threat of a cost of living crisis is also ensuring people keep their wallets closed. Energy prices have soared, with natural gas more than 80 per cent higher than a year ago. And the unfolding tensions in Ukraine have only spurred fears there will be a rush on gas.
Hanging over all of this is the massive debt which the government accumulated during the pandemic. The December public sector borrowing figures were indeed lower than expected. But the amount is a drop in the ocean compared to the £500bn which the government will have run up in the financial years 2020/21 and 2021/22.
At some point, this has to be paid back. In the meantime, there is a stream of interest payment associated with servicing the debt, a problem intensified at a time of high inflation by the fact that around a quarter of all UK public debt has payments index-linked to the Retail Prices Index.
This creates a huge uncertainty around both the scale and the timing of future tax increases. Boris Johnson has already refused to delay or scrap the April National Insurance rise. But, again, this is just a small fraction of the rises in tax which are needed.
The overall level of uncertainty is high. As Keynes argued many years ago, this means that the state of confidence of the private sector, both households and firms, is low.
In other words, unless the government lays out its plans, and sticks to them, our economic prosperity will continue to waver.