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HAMISH MCRAE: Government and bank cannot trigger economic recovery by having us spend our money

HAMISH MCRAE: Government and bank cannot kick-start economic recovery by letting us spend money that we no longer have or don’t want to do away with after the health crisis is over

Humanly, the coming weeks will remain completely uncertain as this disaster continues to unfold.

But on a financial and economic level, we may begin to understand what can happen in the spring and summer. Some parts of our economy can get through in reasonable shape.

Others will struggle to get their pace back even if the threat of the virus subsides. We saw the markets looking forward to this last week. It was a rollercoaster ride for stocks.

Stocking up: Food suppliers and drug manufacturers do better than tourism and travel

Stocking up: Food suppliers and drug manufacturers do better than tourism and travel

They went from desperation to the realization that there would still be a functioning global economy in the fall – and then back to desperation. People should buy the products and services from companies.

It was also recognized that some companies would do better than others.

Clearly, food suppliers and drug manufacturers would outperform tourism and travel, but those with hefty cash balances would outperform those with huge loans, too. The rule applies to everyone. T

Now is a good time to have cash in the bank. But what if you are (still) rich in assets but feel the pressure? It is a practical question for many companies. For example, Tata announced on Friday that it will split off Jaguar Land Rover from its Indian truck operations so that the UK car side can seek ‘strategic alliances’ with other companies.

It is also a practical question for many households. You were thinking of selling and moving the house, maybe to get some money. Well, that’s not going to happen for the time being. The government has acknowledged that lenders face many requests to suspend mortgage payments from borrowers under stress, and to ease the pressure on them, buyers have been ordered to wait. The market is frozen in practice.

Living itself is a huge sector and this also has a knock-on effect for house sales. As everyone who has moved home knows, you end up spending money on a range of other things, from furniture to kitchens to the children’s trampoline. So another part of the economic activity, besides pubs, restaurants, many retailers and so on, goes into the freezer.

If markets cannot function properly, it is better to close them. But it is also important to get them working again as soon as possible. There is the challenge. We need to get things going again as soon as possible. Some sectors will bounce back.

Just because someone has to postpone a move doesn’t mean they don’t want to move at all.

They will want to have new things in their home when they do that. So I expect the housing market to recover quite soon. But other sectors will struggle to regain control. I expect airlines to suffer for a long time as people realize they don’t have to travel as much for business and don’t want to travel as much for their free time.

The government and the Bank of England are doing the right thing and are pumping up the economy in many ways. But they cannot kick-start the economic recovery by having us spend our money that we no longer have or want to do away with after the health crisis has passed.

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The damage is particularly serious for small businesses and the self-employed and is the beating heart of the economy.

So Rishi Sunak’s initiative to target support for this sector is really welcome. But it is not easy. As the Chancellor has pointed out, the government cannot save every company.

It cannot pretend that the closure will have no effect, and even the companies scrambling through it may not return to where they were for a few years. Companies fail even in the best of times.

The plan isn’t perfect, but we shouldn’t let the good get in the way of the good.

After the 2008-9 financial crash and subsequent bank rescues, a senior Bank of England official said to me, “We didn’t do it right, Hamish, but we did it just enough.” Fingers crossed, the government is doing this just enough.

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I was relieved to see off-licenses considered essential retail services.

One of the ways we stay healthy in our self-isolation is to keep chatting with our friends and families every night.

I think they work much better with a glass in hand.

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