The three lucky breaks that Boris Johnson needs before Christmas

The Prime Minister’s success is sometimes mistakenly put down to luck, but only by people who have not worked alongside him. I had the privilege of doing so in a former life, during my political campaigning days, and I can remember train journeys back to London from a long day on the campaign trail, where many of us would be lightly dozing whilst Boris Johnson booted up his laptop to work on his next book. And he was the one who had done all the hard work – the stump speeches, glad-handing voters and, on one occasion, auctioning a cow.

Whilst hard work and tenacity are the key reasons for the Prime Minister’s success, he will also though undoubtedly need a dash of luck when it comes to the challenges facing him this autumn, because whilst we all make our own fortunes to some extent, even hard work is not enough to overcome certain obstacles.

In this political look ahead to the rest of the year, I consider three areas where Boris Johnson – and the country – need a lucky break this autumn. They are:

  • The threat of a second wave/second spike of Covid;
  • The possibility that inflation might derail plans for a growth-boosting Budget; and
  • The complexity of concluding a smooth end to the Brexit transition period.

The outcome in these three areas will define whether the Prime Minister ends 2020 on a high, picking up where he had hoped to be before Covid-19 struck, or whether he faces another challenging year in 2021. I know he and his team will put in the hours to rise to these challenges. The question is whether fortune will favour the brave.

1. A second wave of Covid

The first threat facing us in the autumn – that of a second wave of Covid-19 – is self-explanatory. I am not going to dwell on it because epidemiology is not my area of expertise, but I do recommend the reports written by my colleague at Shore Capital, Dr Adam Barker, who is a leading resource on this.

It is uncertain whether there will be a second wave of Covid-19 or not, or how virulent it could be. At the time of writing, the PM is signalling rising concerns about the virus, and current experience indicates that we are unlikely to avoid it fully, but with our increased knowledge and capacity, we can certainly hope to deal with it far better than the first wave, particularly from a mortality perspective.

Obviously we need to protect against a second wave overwhelming us, but going into full lockdown again would cripple the country. The economy cannot afford to endure a continuance of the remaining restrictions – they must continue to be lifted at the earliest possible opportunity.

The crucial remaining element is for schools to reopen in September, as the Government has mandated them to do. This is both important for the generation of children currently at school and – just as important – for the parents who have had to home school for the past four months. As a father of two little ones, I know how difficult this lockdown has been for parents, and the impact it has had on productivity.

The attitude of the teaching unions is notable here and one senses frustration from the parents and public as to a seemingly ‘can’t do, won’t do’ attitude. We must respect teachers and the authorities have a duty of care, but just look at how other key workers put themselves on the line in deep lockdown through duty at immense risk and compare that to the low-risk environment of a school, and senses of priority and responsibility are brought into the spotlight.

The threat of a second wave is to some extent within the Government’s control, and it is certainly processing the lessons from the first wave to better cope with the potential second wave. It will also need to work on regaining the trust of the public, which has been undermined by the at times chaotic and confusing lifting of the lockdown. But there will also be a certain amount of luck in avoiding it, both for the UK and the rest of the world.

2. An end to QE

In my last note (Restoring the UK’s economic health post-Covid, 11th June 2020) I made the case with Dr Clive Black for a summer statement focused on boosting the economy to protect jobs. The Chancellor’s statement made some important steps in this direction, but overall, it felt like an appetiser to the main course of the forthcoming Budget, pencilled in for November. We expect Rishi Sunak to introduce further and more substantial measures in the autumn, to provide a much-needed supply-side boost to the economy as the furlough scheme ends and the winter flu season begins. Indeed, we see the Chancellor as possessing a once-in-a-lifetime opportunity to make supply-side changes that can genuinely turn rhetorical political statement into reality.

The question is, how long can the Government continue to borrow money at the current low interest rate? As we discussed in June, the Bank of England’s continued commitment to Quantitative Easing is essential. But having introduced the biggest and fastest QE purchase programme of all time – £200bn, buying at the rate of about £14bn a week – how long can the Bank continue to buy government bonds at this rate?

The working assumption of Andrew Bailey is that the country’s big problem is not inflation, but deflation – the Bank of England’s forecasts have inflation going down to zero in the early part of 2021. His challenge therefore is not to stop inflation, it is to prevent deflation. In which case, it makes sense for the Bank to continue to inject money into the economy to expand economic activity. This would suggest that the Governor will likely stand by the Chancellor, allowing him to present an expansionary Autumn Budget; and we would not be surprised to see further ‘mini’ statements from the Chancellor and others before November arrives.

But what happens if inflation rears its head again? A recent paper by Xavier Jaravel and Martin O’Connell on ‘Inflation Spike and Falling Product Variety during the Great Lockdown’ (June 2020) concluded that, “Now is the time to monitor and prepare for a possible return to stagflation.” Using detailed scanner data, covering millions of transactions in the UK’s fast-moving consumer goods sector, they provided a portrait of inflation during lockdown. “The widespread nature of the inflationary spike we document points towards a risk of higher inflation in the Covid-19 induced recession. Stagflation cannot be ruled out”, they warned.

If inflation does indeed return, the working assumption that virtually unlimited amounts of money can be borrowed by the Government at negative interest rates is blown away. The Bank of England will have to end its QE programme, interest payments by the Government on existing borrowing will rise rapidly, and hopes for further injections of ‘Boosterism’ (which we share) will recede quickly.

The threat of stagflation is within the Bank of England’s control, and its working assumption that QE can continue does fit with the received data. But the Government – and the country – need to stay lucky on this. Our hopes for economic recovery rely on it.

3. Brexit negotiations, part two

As the former CEO of Vote Leave, I was and remain optimistic about Brexit. But just as the final stages of last year’s Brexit negotiations required the Government to be prepared to walk away with a no-deal Brexit, a smooth ride into 2021, with a comprehensive EU-UK free trade agreement, requires the Government to hold its nerve on a no-trade deal end to the transition period. Preparing for all eventualities makes a deal more likely.

Before the final week of pre-holiday formal negotiations, No10 was optimistic that it was on track to unveil a mini document detailing the landing zone for the final deal in either late July or early August. This would have covered most but not all policy areas, with the detail being fleshed out into either a treaty (the EU’s preference), or a series of agreements (the UK’s preference), to be signed off at the European Council meeting in October (15th/16th).

The fifth round of negotiations concluded without enough progress to enable this mini document to be published, but some progress had been made. The EU appears to have conceded ground on the role of the ECJ in monitoring the new relationship (crucial from a sovereignty/Take Back Control perspective), and the UK seems willing to consider something simpler than a series of agreements (not a huge concession, seeing as most trade deals are contained in one document). But fishing and – in particular – state aid are still sticking points.

There have been more informal discussions this week, and the formal negotiations will resume on 17th August. The looming deadline, along with the possibility of a no-trade deal Brexit, will then hopefully concentrate minds, as it did last year. But whilst this goes on, I am particularly sympathetic to the plight of the business community in Northern Ireland, which faces immense uncertainty and potentially huge bureaucratic upheaval; we should not be blind to the worries of our Northern Irish friends. That said, whilst an end to the transition period without an agreement in place is still a distinct possibility (and, for what it’s worth, the betting markets have viewed a no-deal outcome as being the most likely scenario since the beginning of March), I am optimistic about the chances for a deal.

Putting to one side the chest thumping from both sides, they both want a deal, and they are both willing to give up political capital to make it happen. But keeping to the strict deadline and firmly maintaining the walk away position in the face of an inevitable increase in pressure will be the only way to unlock a deal. As was the case last autumn, both sides need to look over the abyss to make it happen. And the Prime Minister needs to hope he has the political capital to do so. He has a strong team in place to conduct the negotiations, he has his majority of 78 (post-Julian Lewis’s expulsion), but the Conservative Party can be a strange beast when it comes to Brexit. Nothing is certain, and a smooth end to the transition period will certainly require a dollop of luck.


2020 is not going to be a year we forget in a hurry. It opened with great optimism. In the UK, the Government had just been elected with a ‘stonking’ majority, and certainty had been restored with a definitive Brexit Day of 31st January. And globally, ‘Phase One’ of the US-China trade deal provided optimism that a trade war was going to be avoided. All this seemed to justify predictions (including from me) that the 2020s would be a decade of prosperity, and that the UK would be second only to the US for growth in 2020 in the G7.

But the brakes were quickly slammed on with the geopolitical dynamite of Qasem Soleimani’s assassination, the Saudi-Russia oil price war, and the biggest curve ball for decades – Covid-19. A pandemic which has killed 650,000 people (and counting), plunged the world economy into recession and triggered changes in the geopolitical and economic landscape that will resonate for years to come. All of which goes to perhaps prove the point that “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”

And the situation could get even worse in the autumn. Domestically, for the reasons explained above. And globally, with the final, bitter wrangling of the US presidential election; the tapering away of pandemic-support programmes across the world; and – above all – the ever-present danger (until we have a vaccine) of a second wave of Covid-19 as the weather gets colder.

That said, I am still fundamentally optimistic about the UK’s prospects for the 2020s. When assessing international investments, positive signs are a country with a government with a strong majority, that is pro-business and pro-enterprise, and which has a global, outward-looking mindset. We have all of these and more in the UK – most notably tremendous young people with amazing creative juices fit for the digital world and superb supporting academic institutions – which is why I believe we are still on course for a prosperous decade.

But this will only happen if the Government supports the heroes for the next phase of the crisis – the economic recovery phase. Just as NHS staff, care workers and delivery men were essential during lockdown (a dedication we should repay by reforming Britain’s social care system, to ensure it is fit for purpose for everyone), we should also recognise that Britain’s entrepreneurs and job creators are essential now to avert a depression.

As I argue above, both Boris Johnson and the country need some luck to see us through the coming months. But it is hard work and persistence that will see us out of this economic crisis, especially the hard work and persistence of entrepreneurs and business leaders.

Matthew Elliott tweets @matthew_elliott.