UK economy forecast to bounce back stronger-than-expected
- UK economy forecast to rebound stronger-than-expected in 2021
- UK gross domestic product (GDP) recorded growth in the final quarter of 2020
- Britain expected to undergo an economic transformation due to COVID-19 and Brexit
- Britain’s carbon-zero ambitions should create jobs
The Office for National Statistics (ONS) has upwardly revised UK economic growth projection for 2021 after Q4 gross domestic product (GDP) data for 2020 revealed that Britain’s COVID-19-battered economy beat forecasts.
While the UK economy remains smaller than its pre-pandemic levels, the hit to output remains smaller than previously expected as the economy recorded growth in the last three months of 2020.
According to ONS data published on Wednesday, UK Q4 GDP increased by 1.3% quarter-on-quarter.
The figures also revealed a sizeable increase in UK household savings, which the Bank of England (BoE) believes will fuel a robust economic recovery as UK Prime Minister Boris Johnson eases lockdown restrictions over the coming months.
While economists are contesting predictions for a robust rebound, BoE Chief Economist Andy Haldane insists that as people are desperate to return to their pre-pandemic lives, a release of pent-up demand will trigger a post-COVID spending boom in 2021.
EY Item Club Chief Economic Adviser Howard Archer now expects the UK economy to contract a little over 1% in three months to April 2021, compared to previous predictions for an economic decline of 3.4%.
Meanwhile, ONS Deputy National Statistician Jonathan Athow said: “Our upgraded quarterly figures reveal the economy shrank a little more than previously estimated in the initial stages of the pandemic, before recovering slightly more strongly in the second half of last year.”
The upgrade to UK GDP data means that Britain’s economy was 7.3% lower year-on-year in the final three months of 2020 against previous expectations for a slump of 7.8%.
Nonetheless, 2020 remains the worst year on record for UK output despite the stronger-than-expected figures recorded between October and December.
Overall, UK GDP slumped by an annualised rate of 9.8%, a fraction lower than preliminary estimates for a 9.9% contraction.
Not only did the UK suffer the worst economic contraction of any G7 nation, but it was among the countries that recorded the steepest losses in the Organisation for Economic Co-operation and Development (OECD).
According to the ONS, Britain recorded the second-largest contraction of the eight leading economies listed by the ONS in terms of inflation-adjusted terms.
A Reuters poll of leading economists also revealed that they expect UK economic output projections to remain at the ONS’ 1% estimate.
However, the BoE expects UK GDP to increase by 5% in 2021, driven by the UK’s rapid vaccine rollout and expectations for a consumer spending boom in the second half of the year.
Business confidence and recovery prospects optimistic
Several business confidence surveys have revealed that sentiment has returned to positive territory, with Britain’s progressive vaccine rollout driving recovery prospects.
According to the Lloyds Bank Business Barometer, UK business confidence jumped by 13% in March to 15% – the highest level since the onset of the pandemic.
Simultaneously, the latest ICAEW Business Confidence Monitor (BCM), which assesses business confidence across various industry sectors, regions and companies, showed that overall sentiment has rebounded from Q4 lows.
After plummeting to -19 in the final three months of 2020, business confidence has surged by 21 points to +10 in Q1 2021.
However, while the UK’s lead in the race to immunisation boosts the country’s recovery outlook, the extent to which households spend any accumulated savings will be crucial to growth.
According to the ONS, the household savings ratio increased by 1.8% in the fourth quarter of 2020, from 14.3% in Q3 to 16.1%, as lockdown restrictions have held back consumer spending.
That translates to approximately GBP 238BN in gross savings – up from GBP 99BN the previous year and the highest level on record.
However, ONS data also revealed that government spending made a significant contribution to economic output.
The news follows Chancellor Rishi Sunak’s March Budget announcement, which takes the British governments overall spend to tackle the pandemic to GBP 350BN.
Meanwhile, separate data showed that Britain’s current account deficit widened to GBP 26.3BN in Q4 2020 due to increased demand for imports ahead of the Brexit transition period deadline and a decline from overseas investments amid the December lockdown.
That said, Britain’s current account deficit came in below preliminary estimates and at 3.5% of GDP remains near levels seen over the past three years.
A team of experts are already engaged in plans to launch a three-year-long economic inquiry project, which will set out a framework for how the economy can successfully navigate the challenges of COVID-19 and Brexit in the years to come.
UK to undergo an economic transformation due to Brexit and COVID-19
The Resolution Foundation and the Centre for Economic Performance at the London School of Economics (LSE) have collaborated on a three-year project, dubbed The Economy Inquiry 2030.
The Economy Inquiry 2030 will seek to examine the nature of economic change for the post-Brexit-post-coronavirus British economy and develop a framework to successfully navigate the challenges and opportunities that await the next decade.
The project will formally launch on May 18th, with a new report from the policy and economic experts’ team unveiling a UK economic transformation plan.
LSE Director of the Centre for Economic Performance Stephen Machin said: “The current crisis has acted to magnify pre-existing economic and social inequalities, and the inquiry will seek to resolve this by proposing solutions that promote inclusivity and fairness.”
A separate report titled ‘Greening the Giants’ from the leading think tank Onward has examined the opportunities that could stem from the British government’s net-zero ambitions, including potential job creation.
In the report, Onward notes that there could be some significant economic benefits if the UK government integrates its policy approach with the Climate Change Committee’s (CCC) Sixth Carbon Budget proposal. Onward believes the CCC’s proposed budget would result in a rapid scale-up of critical sectors and reduce UK emissions decline by 78% before 2036.
The leading think tank also notes that the CCC’s proposal would support job creation by generating some 1.7 million “green-collar” full-time positions by 2030.