Author: johnredwood

Each day we can witness some graphs of the  progress of the virus in the UK. Two of the series of numbers that are produced are likely to  be an important part of the decision this week about whether and to what extent the current strict controls on our work and lives are lifted.

The aim of saving the NHS is embodied in the graph of use of NHS Intensive Care beds and patient numbers. This graph has been coming down for some time, and is now well below NHS enhanced capacity to cope. So much so, we are told the emergency large hospitals built to handle more Covid 19 cases will be put on hold with no patients.  The government should state that short of a major upsurge in  cases way beyond the first surge, the NHS can now cope.

The aim to save lives is charted by the death rate. The graph of this is also now coming down, despite the changes to the numbers that boosted them. Given the decline in patients admitted with the disease to hospitals you would expect a fall in hospital deaths.

This leaves the third uncharted number that Ministers place great stress on – R or the rate of transmission. The absence of a regularly updated graph of R is disappointing, as we need to see how it changes over time. The verbal indications from the advisers is that it has fallen a lot and is now under 1, as it needs to be to slow the spread of the infection. Ministers should ask for more information on how R is calculated and how it has been trending, and tell the rest of us. It seems that much rests on the particular calculation and estimation of R and its trends.

I was pleased to read that they are now going to sample test the population for the presence of the virus, which should give a more reliable figure for R when you have several sampled tests over time. I trust this will help guide future changes to the controls on us but not delay getting  more people back to work safely as soon as possible. Our prosperity and liberty requires us to relax these controls and there is now the opportunity to do so.

I do not think it a good idea to   say only those who can prove they have had the virus can go to work. The government clearly thinks a majority of the population have not had the virus, otherwise they would be relaxing anyway. Limiting going to work to the minority would be unfair and leave the country struggling to pay the bills. The right to work should not depend on  a macabre disease based  lottery.

Nor do I think it a good idea to have outright bans on  people based on  age. Of course all those whose age and other medical conditions puts them  at more risk from the disease should be protected if they wish. Many will want to be helped to stay at home and avoid potentially dangerous contact. The others should not be placed under house arrest against their will.

The country needs to get back to work, accepting that work patterns will be different. Employees will rightly want safer working methods, including protective clothing where needed, new shift patterns, more homeworking and freedom from congested public transport where the disease might circulate more freely.

The UK has a successful aviation industry. Heathrow is one of the great hub airports of the world. Several other leading  airports are substantial generators of jobs and an important part of the connectivity of a trading nation. The UK manufactures smaller planes and wings for large passenger jets.  It has a number of important airlines offering good choice of carrier, route and fares. The large and successful UK service, tourist and leisure  sectors need easy access to the UK for clients and partners.

Today the airline and civil aviation industry is one of the worst hit  by the pandemic and the measures to contain it. There are many bans on flying in various countries around the world, and many people no longer wish to fly to countries that may not welcome visitors for the time being. There are also issues over how social distancing rules can be applied to the tight spaces inside the fuselage of a passenger jet.

So what does the future hold for this group of businesses? Will there be a permanent diminution in people flying around the world, with more virtual conferences and meetings? Will there be more national and less international leisure and tourism? Should the industry be planning for less volume, or will there be the usual bounce back as the virus fades?

During the period of gradual relaxation, what steps could the airline industry take to allow flights with greater social distancing? How practical is it to cut  numbers on a flight, and what will that do to the economics of flying? Can the airlines increase the proportion of a plane given over to  cargo ? What damage is the collapse of passenger numbers doing to the economics of air freight?

It looks likely a larger number of older planes will now be retired. Cash strapped airlines are likely to avoid new commitments to buy new planes and to look for legal ways to cancel planes they had discussed buying. Airports will also struggle financially, as their revenues are badly depressed by the reduction in flight numbers and the small numbers of people using terminals and taking advantage of the shops.  How should the different parts of the industry be financed from here?

Some High Streets were suffering badly  before the anti virus policies closed down most of the shops.  More people were buying more things on line. More were travelling to the best shopping centres to enjoy the choice and facilities they afford. Secondary and tertiary locations and ageing centres were losing custom and losing businesses. There were more empty properties and more rent reductions.

Investment in improving High Streets, relentless promotion of a location with events, discount and loyalty schemes and good restaurant and  café back up were all important ways to retain life and footfall. Some succeeded, others were floundering. There was too much retail space for the customer base overall. As a result retail chains were shedding shops in marginal locations, and at the edges of Town Centres and shopping malls some property was gradually being converted to new uses. The process of conversion was slow because the shops were still expensive and commanding relatively high rents compared to alternative use values.

The damage done to shop retailers by the closures is two fold. There is the lost revenue, making investment in shop improvement and in stock more difficult to afford. There is the diversion of business from shops to on line,  some of which may be difficult to reclaim.  The issue becomes, what are shops now worth?

A simplified way of valuing a shop is to take the rent paid and multiply that by a  number of years purchase to get a capital value of the property. Let’s take a case of two shops with rental income of £25,000 a year. One is in Smart City, the other larger unit is in Troubled Town. The Smart City unit might have been valued in February on a 5% rental income, or 20 years purchase. It would have had a capital value of £500,000. The Troubled Town Unit might have only commanded a 10% income yield or ten years purchase, giving a capital value of £250,000.

Let us suppose that both were independent shops, and  both have now notified their landlords they cannot afford to pay any rent for the time being. At the very least they want a rent holiday for the period of closure, followed by a rent reduction to reflect lower earning potential in a recovery period to follow the end of lock down.

So what are these shops now worth? What discount should you apply to the past rent to allow for the likelihood that a deal has to be done for lower rent? Might it be that the unit in Smart City still has a retail future at a lower rent, but the unit in Troubled Town does not? Do the values of either  now fall to a level where conversion to another use is viable?

And what outcome would you like to see for these two independent traders and two shop units?

In the week ahead Parliament will debate the lock down, and government will determine a back to work policy. To do so, they need to examine some of the  numbers they are using carefully.

1. Comparative deaths globally. It is quite wrong to say the UK after the US will have the most deaths. The government must adjust the death figures for population, which so far shows Belgium heading the lists, and the USA still relatively low
2. The government needs to do more work on trying to get comparable death rates. Some other  countries only list hospital deaths. There are different views on whether dying with Covid 19 is the same as dying of Covid 19. The UK figures for deaths have probably been boosted in recent days and weeks by counting more deaths where the patient died without a Covid 19 test as a Covid death, and by adding in non hospital deaths to the total. It is a  bad idea to change the way you calculate numbers over time for  a series when you are using the curve of that series over time  to determine policy.
3. Now there are so many more tests available the government needs to start testing a sample of the total population to get figures for how  common  this disease is, and to chart that over time.
4. The accuracy of the tests. I have been given widely different figures for how many false negatives the tests might provide. There are apparently issues about how to secure a good sample so any disease does show up.
5. How good are the returns reported centrally from Care Homes, as most of these are privately owned institutions that are not formally part of NHS management and reporting systems.
6. Future capacity of the NHS. The government is right to want reassurance that the NHS can cope in future as it has done so far. There needs to be a rebased figure for Covid care beds and Covid Intensive care beds in the system in a world where there is also  capacity for other serious medical conditions. Will the NHS move to identifying specialist Covid hospitals and units, to free more District General Hospitals to do everything else?
7. The value of R or the reinfection rate. We were told this week it is currently 0.6 to 0.9. That is a very wide range. How can it be more precisely and accurately be discovered, where there are not sampled tests of the whole population over time? Doesn’t it need regular sampled testing to  get it more accurate? As  great stress is placed on R, it is crucial to get it right.
8. Will the government publish the range of forecasts of deaths from the disease their experts have come up with, and show us the trend in these forecasts?  That too is important in making a judgement.

There is a much greater sense of urgency in the USA to offset some of the damage done to the economy by anti CV 19 policies. The Central Bank, the Fed, has ridden to the rescue. It has printed money and bought bonds on a huge scale. It has supplied the world with dollars, driven down rates and stabilised the market for financing companies.

Its balance sheet has soared from $4.3 trillion on March 11th to $6.6bn by mid April, a massive expansion of more than 50%. In contrast the Bank of England has gone from £580 billion in early March to just £647 bn in mid April, an increase of 11%.

The US sent everyone below $75,000 a year   a cheque for $1200 as well as setting up business grant schemes and a furlough scheme. The UK has also set up grant and employment retention schemes.

The US money supply leapt by an annualised 20.9% in the first quarter. The UK’s increased modestly to a 5% rate of growth.  Which of these institutions is right?

In the short term I fear the US is correct. The huge downturns the fashionable anti Covid 19 policies generate are designed to do maximum economic damage to all but  health, food and essentials and the public sectors.  All  out of home entertainment ,tourism, most travel and hospitality and most non food retail are simply shut down. Consumer demand plunges. Many people lose their jobs and can only afford the basics. Those who keep their pay are very restricted in  what they can buy so they  end up saving.

Printing money does not bring the closed businesses back to life, and it cannot in the short term generate more demand where business is banned.It does however make borrowing more affordable for the government and for companies fighting to stay alive. It is better than doing nothing and watching more job losses and bankruptcies.

There are many arguments over the details  and duration of the current health policy. There are no arguments over its economic impact. Everyone agrees it is a disastrous economic policy. The US is right to fling money at people and companies to try to offset some of the damage. You cannot go on doing that for very long. The huge budget deficits, the big expansions of money can only  be short term palliatives. The only sensible economic policy is to get many more people  back to work as soon as possible. The Fed will need to rein in the extra money as the economy starts to recover to prevent inflation.