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Chancellor likes to pull a rabbit from a hat but he’s not a miracle worker

Sky News
Sky News

There’s a line in Spectre, James Bond’s last cinematic outing, which rather nicely sums up the UK’s economic position. Mr White offers a warning: “You’re a kite dancing in a hurricane, Mr Bond. So long.” White promptly shoots himself, leaving Bond and White’s daughter, Madeleine Swann, to hunt down Ernst Stavro Blofeld, the ultimate Bond villain.

The UK may also be a kite dancing in a hurricane. For all of Rishi Sunak’s deft handling of the crisis so far, his powers are ultimately limited.

Early-week restaurant discounts , cuts in VAT for the hospitality industry, financial support for companies who choose to hang on to furloughed workers as the Job Retention Scheme fades from view, some extra loft insulation and a stamp duty holiday will all help to shore up the UK economy in the short term. Yet, despite the positive headlines, the UK is facing threats that cannot be solved by a “two for the price of one” Monday night meal deal at Wagamama.

True, there have been encouraging signs of late, so much so that Andy Haldane, the Bank of England’s chief economist, declared last week that while “there is a debate about which letter of the alphabet will best describe the path of the economy…my reading of the evidence is so far, so V.” And what is true of the UK is also true of much of Europe — and, at least within its labour market, much of the United States too.

Some of this renewed confidence in the UK is based on “real-time” Google community mobility reports, in effect a “Big Brother” approach to analysing the economy using phone tracking. We know, for example, that the number of people at the beginning of May indulging in “retail and recreation” in Greater London was down around 80 per cent compared with the pre-lockdown era but had fallen “only” 58 per cent at the beginning of July. Those numbers are sure to improve further in coming days.

Stephen King (Alamy Stock Photo)
Stephen King (Alamy Stock Photo)

Knowing what is happening now, however, says little about what will be happening in the months ahead. Leicester is in lockdown again. So, too, are Galicia in Spain and Victoria in Australia. Many American states may have to do the same, given the increases in Covid infections. The governor of Texas has ordered the closure of bars, saying: “If I could redo anything, it probably would have been to slow down the reopening of bars.”

The “V” story suffers on a number of levels. First, in the absence of a vaccine or effective cures for Covid, local lockdowns may be with us for some time. Businesses will not be willing to invest — or hire. Some will doubtless fail. Unemployment will rise. Second, the attempt to keep as many companies as possible alive is admirable but the danger is that those that ought to be failing — through, say, their own inefficiency — are kept alive, creating layers of impenetrable economic weeds that prevent potentially successful businesses from blooming. Productivity growth may slow, lowering future tax revenues.

The UK is facing threats that cannot be solved by a two for the price of one Monday meal deal at Wagamama

Third, the UK economy is, of course, a remarkably open economy. As those with a patriotic bent are fond of reminding us, we are a “great trading nation”. Yet, even as Europe has got to grips with Covid-19, huge swathes of the world have not. The combination of rising infection rates and mounting fiscal costs could leave parts of the emerging world economically and financially stranded, reducing the size of our export markets for years to come.

Fourth, our diplomatic relations with other parts of the world are in danger of becoming a little less diplomatic: a no-deal Brexit is not out of the question, while what was once a thawing relationship with China is threatening to freeze over again. Choosing to abandon relationships that once underpinned our economy will not be helpful if, as is likely, we’re in danger of suffering from renewed economic subsidence.

Like previous chancellors, Rishi Sunak likes to pull a rabbit or two out of the hat. But he’s ultimately only a finance minister, not a miracle worker. He has certainly choreographed his steps well but, unless he helps solve the UK’s international problems, he could end up like Bond’s kite, dancing in a hurricane.

Stephen King (@kingeconomist) is HSBC’s senior economic adviser and author of Grave New World (Yale)