UK Retail Sales Rise in January, BBC Reports

A recent report from the BBC outlines that UK retail sales have risen in January by 1.9% since December as consumers saw increased confidence after the relaxation of Omicron restrictions.

These relaxations come at a time of Prime Minister Boris Johnson’s new strategy of dealing with the pandemic as if it were, well, endemic, meaning that the current government believes that COVID-19 is here to stay and that we should learn to live with it.

The reasoning behind this argument is that constant restrictions will undermine the confidence of economic agents as the fear of lockdowns make it difficult for consumers to plan their spending habits on big purchases.

The same goes for businesses, who will find it difficult to plan expansions as it is impossible to predict when a new strain of COVID will strike and if new lockdown measures will follow soon after. This pattern of uncertainty means that businesses find it much harder to create forecasts for returns on investment, thus making investment riskier, which stifles business expenditure within the economy.

As such, because both consumer expenditure and business investment are components of aggregate demand - and because consumer expenditure is tightly linked to business spending, a fall in consumption will lead to a fall in profits and a fall in investment - the current attitude to COVID-19 is stifling economic growth.

This is currently not ideal for the UK economy as despite it seeing record growth of 7.5% last year, the economy did suffer a larger shock of 9.4%. This places the economy below pre-pandemic levels meaning that there is still room for recovery.

Another issue is that the UK’s economic recovery is currently unbalanced, business investment and exports as a percentage of aggregate demand are lower than their pre-pandemic levels, meaning that the main driver of growth has been consumer expenditure and large fiscal injections from the UK government.

To rectify this, an increase in business confidence by reducing the chances of future lockdowns will increase business investment, which can also boost export revenue as firms such as Siemens, which specialises in Wind turbine production of the Humber Estuary, can export excess production overseas.

As such, to aid with an economic recovery through boosting confidence, the relaxation of restrictions combined with a successful vaccine rollout may be the recipe for success for a strong economic recovery.

This is partly evident in the fact that Department stores, garden centres and other non-food shops saw strong growth with a 3.4% rise, the Office for National Statistics (ONS) said. Yet, sales still have a long way to go as stores saw a fall below pre-pandemic peaks for the first time in December of 4% due to Omicron restrictions being introduced.

Apart from a more balanced recovery, gains in growth attributed to the relaxation of these restrictions can also provide further benefits to the economy. As business investment rises due to increased sales, higher profits and certainty, businesses will begin to produce more goods and services, increasing derived demand for labour.

This will further reduce the rate of unemployment within the UK economy which has fallen from 4.2% in October and stagnated at 4.1% in November and December. A reduction in the rate of unemployment will lead to increased income tax revenue for the government, as well as reduced spending on automatic stabilisers such as JSA Payments, allowing for more of the government's scarce budget to be allocated towards repaying the national debt that sits at £2.4 trillion.

However, just like everything in economics, the decision to remove restrictions does have an opportunity cost associated with it as it is highly likely that this choice will lead to an increased risk of COVID-19 spread.

This is significant as the NHS is currently facing a waiting list of 6 million patients with a nursing shortage of 49,000 and a Doctors shortage of 10,000. The decision to remove restrictions may place further burdens on the already over-encumbered health service.

This can lead to a negative opportunity cost as ill patients that are not receiving treatment due to longer waiting times take more time off work, leading to reduced output, and, a more long-term opportunity cost in reduced income tax for the government as ill and unproductive employees have lower chances of promotion.

To rectify this, the government will have to allocate more resources towards the NHS, which will not only take away resources from paying back the national debt but will also be classed as spending on a regrettable. As such, the decision could very well worsen the government's fiscal position, especially if interest rates continue to rise above 0.5% as the rate of inflation is predicted to rise to 7.25%, a possibility that will further increase the costs of servicing debt.


Written by Hubert Kucharski


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