The horror! Yesterday we discovered that UK economic output — as measured by GDP — fell by 1.6 per cent in the first quarter of the year, 0.1 per cent worse than the 1.5 per cent originally reported. This is practically a rounding error. To put it in context, as recently as March the Office for Budget Responsibility, which crunches the numbers for the Chancellor, was forecasting that GDP would fall by 3.8 per cent in Q1.
As well as still beating these gloomy expectations, the latest figures are also old news. But if anything, the detail is encouraging. The downward revision to headline GDP was largely due to a bigger decline in consumer spending than first thought, mirrored by an upward revision to household saving. This means that the boost from pent-up demand in the second quarter (and beyond) may prove to be even stronger.
Roll forward a few months and there is already plenty of evidence that the economy is roaring back. The UK was always likely to see relatively rapid rates of growth this year, as activity rebounded from the slump in 2020. Nonetheless, the recovery is shaping up to be much stronger than almost everyone — including the Treasury and the Bank of England — had anticipated.
There are three measures of this. The first is the outlook for GDP itself. At the beginning of the year, the consensus among economists surveyed by the Financial Times was that activity would not return to its pre-pandemic peak until the third quarter of 2022, with the UK lagging behind its peers.
In fact, the latest business surveys suggest that this milestone will be reached at least a year sooner, partly due to the successful rollout of the Covid vaccines and the reduction in Brexit uncertainty. Indeed, I think there is now a good chance that the monthly data for June will already show that UK GDP is back within a whisker of its February 2020 level.
The second measure will rightly matter more to most people: what’s happening to jobs. The recent employment surveys show that the labour market is recovering strongly too, with many businesses actually finding it difficult to find staff. Rather than rising above 10 per cent as some feared, it looks like the unemployment rate will peak below 6 per cent, which is extraordinary given the depth of the recession last year. That’s partly a tribute to the success of the furlough scheme, but also to the relative flexibility of the UK economy.
The third measure is less welcome: the return of inflation. The jury is still out on how long the recent pick up will last, and how far prices will rise in the meantime. But inflation has already risen by more than most had expected and the pipeline pressures are still building. It certainly seems odd that many commentators who insist that public sector workers must be paid another 1 per cent seem relaxed about whether prices they face are rising by 2 or 4 per cent.
This is therefore still a delicate stage in the recovery. It should go without saying that policymakers need to be flexible in withdrawing the emergency support provided during the pandemic. But it would be wrong to assume that this flexibility applies in one direction only.
Take monetary policy. Both economic activity and inflation are likely to remain stronger than anticipated when the Bank of England decided last November to buy another £150 billion of government bonds as part of its QE programme. Despite this, only one member of the Monetary Policy Committee has voted to press a little less firmly on the accelerator.
There is an even bigger battle brewing on fiscal policy, between the PM and the Chancellor. As many of us feared, the apparent ease with which the government borrowed and spent hundreds of billions more during the recession has encouraged some to argue that it can keep going so during a boom. This is likely to distort the recovery and not always in a good way — all while adding more fuel to inflation.
Fortunately, there are at least some areas where state intervention is being scaled back, starting with the gradual winding down of the furlough scheme. This scheme played a vital role in protecting jobs and businesses when the economy was shut down. But with the activity now roaring back, people should be encouraged to return to normal work or find new jobs instead of being locked into their old ones.
In short, don’t worry about the first quarter. Like England’s Euro 2020 clash with Germany, 2021 should get better and better.
This piece was first published by The Spectator on 1st July 2021