Our economy continues upon its uncertain path. The end last week of the furlough scheme and the termination this month of the extra £20 Universal Credit payments each add an extra dimension to those uncertainties. At times like these there is an especial need for well thought through and flexible macro policies. If only….

The end of furlough, affecting some 900,000 people across the UK, comes at a time when the labour market is extraordinarily difficult to read with clarity. Unemployment has stayed lower than expected, while vacancies have soared. But those vacancies appear to be concentrated on a relatively limited number of occupations – very different from the occupations of those for whom furlough is ending. There are also major geographical variations. It is nigh on impossible to predict accurately how many of those furloughed will be kept on by their employers; likewise to guestimate how many of those released into redundancy will readily find new jobs in a reasonable timeframe and providing an acceptable level of pay.

This uncertain labour market influences the broader economy in more ways than one. First there is the question of the apparently high level of vacancies in driving, other transport and storage sectors. Will these continue and will they cause further disruption across key sectors due to problems with the supply chain, not least for petrol? Will these vacancies result in significant upward pressure on wages, initially in the key sectors concerned, but then feeding through to generate another upward jerk in the consumer price index? Then there is the potential impact of a relatively high level of redundancies and higher levels of unemployment as a result of the end of furlough. This impact, combined with the reduced Universal Credit payments and the escalating level of inflation – not least in the cost of heating homes as winter beckons – could seriously reduce real disposable incomes and hence dampen consumer confidence and constrain consumption.

The latest forecasts for gross domestic product growth in Scotland from the highly respected Fraser of Allander Institute show an increase on their predecessors. The FAI now expects GDP growth of 6.5% this year and 4.8% next. This would result in GDP returning to pre-pandemic levels by April 2022, a bare two years after that previous peak. That would be good news indeed, especially at a time when the forward-looking indicators such as the purchasing managers’ index have been trending downwards.

The FAI forecasts are reasonable central estimates, but subject to considerable downside risks. If unemployment rises further than expected; if vacancies in key sectors continue to bite hard; if inflation reaches 4% by year-end and continues on an upward trend; and if (a big if this one) the Monetary Policy Committee at the Bank of England decides to be inflation risk averse and raises rates early next year, then these latest forecasts may need downward revision.

The MPC is inevitably holding its cards close to its chest. In the report of the MPC’s latest deliberations the committee is shown to be keeping all options open. But some of the hardliners will be feeling very anxious and twitchy about how to keep inflation over the medium term down to around the 2% target set by the Government. Inflation in August shot up to 3.2%, from 2% in July; and is expected to reach around 4% by the end of the year.

Raising rates early in 2022 would be deeply damaging to our still nascent and precarious post-pandemic recovery. I expect a majority of committee members to continue in the view that this inflation spike is temporary. High inflation is unlikely to become embedded into consumer behaviour or labour market negotiations outwith those sectors facing labour supply issues. After all the UK has become accustomed to low inflation for many years, so expectations should not change rapidly. But other MPC members will voice real concerns, so expect some votes for a rate hike in the forthcoming MPC meetings. We will be better able to predict where the majority lies as the minutes of the next couple of MPC meetings are published.

Already higher inflation is raising the cost of borrowing for all those with index-linked debt. That includes Her Majesty’s Government. Public sector borrowing shot up in August, despite tax receipts outperforming expectations and government expenditure being muted. This increase in borrowing was because interest payments on UK Government debt (some one-quarter of which is indexed to inflation) nearly doubled their level from a year back. The perversity of macroeconomic policy is that an increase in interest rates – a tightening of monetary policy – would result in greater pressure to reduce Government debt more rapidly – i.e. would lead to a tightening of fiscal policy. The double whammy of tighter monetary and fiscal policy coupled with unexpectedly higher unemployment and consumer confidence also dampened by price rises could stop GDP growth in its tracks.

This examination of the latest state of play all points to the complexity of policy-making amidst uncertainties. We need a thoughtful, flexible and highly rational Government in Whitehall rather than the ramshackle bunch surrounding the Prime Minister. Errors on UK macro policies would hit Scotland directly and also make the First Minister’s options on the devolved policy fronts more complex and challenging.