What Setbacks do we Face in the Covid Recovery?

By Jonathan Marshak.


Whilst optimism over a way out of the public health crisis grows in this country and abroad, this article brings to light an emerging disparity between economic indicators and underlying economic data, signalling a bumpy path on our way to a wider economic recovery. A growing house price bubble in the UK and stock price bubble in the US threatens, at the very least, a stagnation, or, at worst, a reversal, of the recovery promised in the months ahead.

When the UK was thrust into the midst of a global pandemic in March 2020, the government took swift action to protect the economy in a number of ways, most notably through the Coronavirus Job Retention Scheme, otherwise known as furlough. One of the measures that perhaps went relatively unnoticed was the stamp duty freeze on the first £500,000 of all residential property sales. Announced in July 2020, the scheme was designed to provide a boost to a housing market that lacked demand after the first lockdown. However, this author argues that this has led to an artificial bubble in the UK housing market.

After a poor 2019 in which the UK saw just 1.3% growth in house prices,[1] the annual growth figure for 2020, a year where people have had hours cut back and pay reduced, was 7.3%. Notably, that large growth figure includes falling prices in April and June, before the stamp duty holiday was brought in.[2] Surely, then, this is not an accurate reflection of overall consumer sentiment but, instead, is indicative of an artificial increase in demand because of the government’s stamp duty policy, resulting in a rush of buyers ready to move forward their plans to buy homes. Whilst the data shows that buyers have been snapping up larger and more rural properties due to the rise in working from home, suggesting that the rise in demand may not all be artificial, other economic trends have led to predictions of a fall in house prices in 2021.

The UK’s unemployment figures have remained remarkably low throughout the pandemic because of the government’s furlough scheme, but the Treasury will not be willing to write blank cheques indefinitely. As the furlough scheme comes to an end, the Bank of England predicts that the unemployment rate could peak at 7.7% in 2021, with a chance that it could rise as high as 10%, creating extra pressure on household finances.

There is also the added effect to consider of buyers no longer placing a premium on the larger, more rural properties which have benefited most during the pandemic, as the vaccine rollout continues and working from home ceases. This could cause a demand shock to the UK housing market which may see 2020’s price rises reversed, with Halifax saying that there will be a 5% fall and the Office for Budget Responsibility forecasting an 8% fall in house prices in 2021, a drop not witnessed since 2009.[3] Such a fall could further dampen consumer confidence, particularly if new buyers see a large reduction in their equity, making for a more protracted economic recovery.

It could be argued that, in the current low-interest climate, it is a better time than most to take out a mortgage, assuming that banks are willing to lend. However, like the furlough scheme, the recent stamp duty holiday extension to July may only delay house price corrections and its associated economic effects.

This points to a wider critique of government policy, which is that excessive intervention may lead to further recession later down the line. Quantitative easing (QE) has, since the Great Recession, become one of the main tools used by central banks to help economies recover from crises. With central banks buying vast quantities of government bonds, interest rates on consumer products should be lower, thereby encouraging spending. The policy also creates an incentive for investors to forgo purchasing government bonds as they are now more expensive. Instead, they turn back to stock markets.

This has provided a cushion to investors who might otherwise have faced the brunt of falling stock prices. Arguably, such policies have led to an artificial surge in the valuations of stocks, particularly in the US, where the Federal Reserve enacted an initial $700bn QE programme in March 2020.[4] Between March 2020 and March 2021, the Fed’s balance sheet grew from $4.2tn to over $7.5tn.[5]

US markets acted in accordance with the Federal Reserve’s asset purchasing programme, which included, for the first time, the purchasing of corporate, rather than government, bonds.[6] Stocks rebounded quickly, with the Dow Jones Industrial Average recovering all losses by mid-November, reaching an all-time high in February 2021.

However, the rapid recovery of the stock market does not correlate with fundamental US economic data, suggesting a market bubble. Moody’s, the well-known American credit ratings agency, created a ‘Back-to-Normal’ index, tracking US economic performance in relation to where the economy was in early March 2020. They estimate, at the time of writing, that the economy is operating at just over 80% of its pre-pandemic level.[7]

While it could be argued that investors are looking ahead to where the US might be after a successful vaccination programme, American unemployment statistics make for grim reading. One of President Trump’s successes was in reducing the unemployment rate to a 50-year low of 3.5% back in 2019. Since the US did not enact a furlough scheme like UK or other European countries, instead relying on more generous unemployment support to help their citizens in addition to direct stimulus payments, joblessness rose at a phenomenal rate. In one week in March, 3.3 million Americans filed for unemployment, vastly greater than the numbers seen during the Great Recession.

We should not underestimate the lasting damage that such a shock will bring, particularly in terms of consumer spending, which made up 70% of the US’ economy before the pandemic. After what looked like a promising recovery during the summer months, with more people moving back into employment, the US has seen an uptick in unemployment over the winter, with nearly 800,000 Americans filing for unemployment benefits in the week before Christmas. Consequently, the Congressional Budget Office does not believe that unemployment will return to 3.5% until at least 2030.[8]

The widening gap between Wall Street and Main Street is simply not sustainable in the long-term. Whilst President Trump praised the recovery of the stock indices in his re-election campaign, anywhere between 6 and 8 million Americans found themselves below the poverty line.[9] To avoid a sizeable market correction in the coming months as investors realise this growing chasm, the Federal Reserve will need to continue its QE programme, just as it did following the financial crisis.

In the UK, the shadow of a housing market bubble looms over the economy. In the US, it is the stock market bubble itself, and its separation from economic data, which is worrisome. The purpose of this article is not to cast a cloud over the covid-19 recovery, especially at a time when people are optimistic about vaccines, but to point out that we are not yet clear of the pandemic and that there are still considerable risks to bear in mind, specifically for investors, which are not being factored into the markets. Ultimately, we may find ourselves in the unfortunate position whereby the population is healthy once more, but the economy is not.

Yet, we simply cannot afford more economic stagnation. In the UK, following the financial crisis, GDP took five years to recover to its pre-recession size. That was after GDP fell by 6% between Q1 2008 and Q2 2009.[10] In 2020 alone, GDP shrank by 9.9%.[11] The size of this recession and the long-term effects may be far greater than the financial crisis which left such a deep scar on our economy and our politics. It will be up to government and the private sector to invest in this country and ensure that we can get our economy up and running again.


[1] HM Land Registry. “UK House Price Index annual review 2019”. 24 February 2020. https://www.gov.uk/government/news/uk-house-price-index-annual-review-2019 (accessed 27 January 2021)

[2] Strauss, Delphine and George Hammond. Financial Times. 30 December 2020. “UK house price growth reaches six-year high”. https://www.ft.com/content/c3950b2b-43a5-43f4-8bb1-2e2a462f04de (accessed 27 January 2021)

[3] Sweney, Mark. The Guardian. 8 January 2021. “UK house prices reach new high but growth is slowing, says Halifax”. https://www.theguardian.com/money/2021/jan/08/uk-house-prices-new-high-growth-slowing-halifax-stamp-duty. (accessed 28 January 2021)

[4] Liesman, Steve. CNBC. 15 March 2020. “Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program”. https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html (accessed 28 January 2021)

[5] Federal Reserve. 4March 2021. “Credit and Liquidity Programs and the Balance Sheet”. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm (accessed 5 March 2021)

[6] Cheng, Jeffrey, Tyler Powell, Dave Skidmore and David Wessel. The Brookings Institution. 25 January 2021. https://www.brookings.edu/research/fed-response-to-covid19/ (accessed 28 January 2021)

[7] CNN. “Tracking America’s recovery”. https://edition.cnn.com/business/us-economic-recovery-coronavirus (accessed 28 January 2021)

[8] Rushe, Dominic and Michael Sainato. The Guardian. 31 December 2020. “Year ends on low note as 787,000 more Americans file for unemployment” https://www.theguardian.com/business/2020/dec/31/us-unemployment-december-coronavirus (accessed 28 January 2021)

[9] Parolin, Curran, Matsudaira, Waldfogel and Christopher Wimer. Columbia University. 15 October 2020. “Monthly Poverty Rates in the United States during the COVID-19 Pandemic”. https://static1.squarespace.com/static/5743308460b5e922a25a6dc7/t/5f87c59e4cd0011fabd38973/1602733471158/COVID-Projecting-Poverty-Monthly-CPSP-2020.pdf (accessed 5 March 2021)

[10] Office for National Statistics. 30 April 2018. “The 2008 recession 10 years on”. https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/the2008recession10yearson/2018-04-30 (accessed 8 March 2021)

[11] Partington, Richard. The Guardian. 12 February 2021. “UK economy hit by record slump in 2020 but double-dip recession avoided”. https://www.theguardian.com/business/2021/feb/12/uk-avoided-double-dip-recession-despite-covid-slump-in-2020-ons-gdp (accessed 8 March 2021)

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