I often think my fellow economists are a miserable bunch. Survey after survey has predicted that the UK economy will take years to recover even to pre-Covid levels, with unemployment set to spiral and the fallout from Brexit only getting worse. But as we know, the consensus among followers of the ‘dismal science’ has often been wrong in the past. I’m confident it is far too pessimistic today as well.
To be fair, 2021 has begun with the economy back in lockdown. This could be the final straw for many businesses which have only just survived the crisis until now, especially in hospitality and retail. Nonetheless, two factors have surely tipped the balance in favour of the renewed tightening of restrictions.
The first, of course, is the far more rapid transmission of the new Covid variant, which has increased the benefits of locking down. The threat of the NHS being overwhelmed by Covid patients is now much greater, and the argument that it is ‘only’ the elderly or already infirm who are at serious risk is even weaker.
More positively, though, the second gamechanger is the rollout of the new vaccines, which has reduced at least some of the economic costs of locking down. In particular, the light at the end of the tunnel means that households and businesses can be far more confident that this is the final push.
What’s more, the ONS’s latest Opinions and Lifestyle Survey suggests that 85% of UK adults would be likely to have a Covid vaccine if they were offered one. This is a far higher proportion than in most other countries, especially in the EU where the recovery will also be hampered by the slower rollout of the vaccines themselves.
In the meantime, the second (English) lockdown in November appears to have been much less damaging than the first, supporting hopes that the economy will also weather a third lockdown relatively well.
My own view is that there are now far more good reasons for optimism about the UK economy, despite what will inevitably be a rocky start.
The household sector has built up substantial savings during the pandemic that could be used to fuel a strong recovery in consumer spending. Obviously, the distribution is uneven and much still depends on the national mood, but consumer confidence jumped by the most in eight years in December on the good news on the vaccine. Even in November, households were the least pessimistic about job security since March, despite the grim headlines.
In reality, unemployment remains relatively low and is roughly half where some feared it might be, reducing the risk of long-term scarring to the economy. The fall in employment in the UK has also been proportionately smaller than in most EU countries, despite the much larger decline reported in the official GDP data.
That’s partly a reflection of the UK’s relatively flexible labour market, which is good at creating new jobs to replace those that are lost. Admittedly, UK unemployment would also be much higher if the government were not shielding millions of jobs via the furlough scheme. But it’s clearly better to have a 5% unemployment rate with furlough, than 10% without. As the Covid restrictions are lifted and the economy rebounds, the furlough scheme can (and should) be wound down.
The reduction in Brexit uncertainty should also help to drive a resurgence in business investment. Many surveys have shown that the UK’s long-term attractiveness remains high, and that projects have typically been postponed rather than cancelled.
Consistent with this, London has cemented its dominance as Europe’s top financial centre, with far fewer City jobs relocating to the EU than had been predicted (and even some of these may well come back). Indeed, Edinburgh ranks higher (for competitiveness) than Frankfurt or Paris.
The sharp deterioration in the government’s finances is not as big a constraint as many seem to think, either. Despite the jump in public debt, government borrowing costs remain very low. In effect, we have already ‘paid for Covid’ by financing the deficit at negative real interest rates (a ‘wealth tax’ in all but name).
Indeed, I often think we should pay more attention to the signals from financial markets too. Despite the renewed Covid restrictions, equity prices have continued their recovery since early November, when it was first revealed that the Pfizer–BioNTech Covid vaccine could be 90% effective. (Even if you don’t hold equities yourself, it is encouraging that forward-looking investors are increasingly confident about the prospects for the economy.)
Above all, we have already seen how quickly the economy can bounce back when the brakes are taken off: activity was recovering more strongly than most had anticipated last summer, at least before the second wave of Covid struck. And even while restrictions are in place, the ability of many people to work from home and the migration of so much of retail spending online are just two examples of how markets can adapt.
Overall, 2021 will be another tough year for many people and the government may still have to do more to support those being left behind. But we will hopefully be pleasantly surprised at how well the UK economy performs. Fingers crossed.
This piece was first published by Reaction on 8th January