It will take at least 18 months for the UK economy to return to its pre-pandemic size and its recovery will lag behind that of its peers, according to a poll of more than 90 leading economists.
The vast majority of those responding to the FT’s annual survey said UK GDP would not regain its previous level until the second half of 2022, or later. Many said political mismanagement of both the Covid-19 crisis and of Brexit had ensured the UK would underperform other richer countries — and that the biggest risk to the economy in 2021 was that an over-thrifty chancellor would damage the recovery by tightening fiscal policy too early.
“The UK will be among the last, if not the last, of the high-income economies to regain its pre-pandemic size,” said Adam Posen, president of the Peterson Institute for International Economics and a former member of the Bank of England’s monetary policy committee.
“We will have the groaning twenties, not the roaring twenties,” said Nick Bosquanet, professor of health policy at Imperial College.
Britain has a bigger hill to climb than others because its economy suffered more in the early stages of the pandemic — a fact that Diane Coyle, professor at Cambridge university, ascribed partly to “indecisive or inadequate policy responses”, while Vicky Pryce, at the Centre for Economics and Business Research, blamed “the lateness of the lockdown measures and an appalling communications strategy”.
A more optimistic minority argues that Britain’s lower starting point means it will enjoy a faster bounceback — with consumer-led growth propelled by the early rollout of vaccines.
Bronwyn Curtis, chair of JPMorgan Asian Growth and Income, said the head start with vaccinations could mean “the UK economy would open up earlier and therefore recover more quickly than other G7 countries”, while David Innes, head of economics at the Joseph Rowntree Foundation, a charity, noted that the recovery could be “relatively quick” partially thanks to “the huge savings many households have built up”.
However, many respondents said the UK recovery would be held back this year and longer-term by a lasting rise in unemployment, weak business investment and the creeping after-effects of Brexit.
Swati Dhingra, associate professor at the London School of Economics, predicted “an initial optimistic uptick from a Brexit deal and then a longer period over which reduced market access starts to come into play”. Hande Kucuk, at the National Institute of Economic and Social Research, said the end of the transition period would “broaden” the economic shock, as it would hit sectors less affected by Covid-19.
“The Covid-19 vaccine(s) will prove a shot in the arm for both the UK economy and its peers. But Brexit will be a shot in the foot,” said John Philpott, an independent consultant.
Monetary policymakers can do little to speed the recovery, according to a large majority of respondents. More than four-fifths expected UK interest rates to remain unchanged in 2021, although some saw a chance of rates being cut below zero.
The Bank of England could extend its special lending facilities, if needed to prevent a credit squeeze, and it could expand quantitative easing to stem any market panic, according to Kallum Pickering at Berenberg. Others shared this view, but said that while there was scope to ease policy further, it would have little effect on growth.
However, several respondents said the BoE was playing a crucial role in supporting fiscal policy, with its QE programme helping to keep the costs of government borrowing low.
“It has been highly convenient that the BoE was willing to buy gilts while the government was engaging in a fiscal splurge . . . that policy weapon remains potent,” said Sushil Wadhwani, a former MPC member and asset manager.
Rupert Harrison, portfolio manager at BlackRock, and a former Treasury adviser, described the combination of policies as “a form of co-ordination between monetary and fiscal policy, allowing the government to continue to support the economy . . . for longer than it otherwise could.”
The near-consensus among respondents was that fiscal stimulus will remain essential in 2021, to underpin the recovery in overall GDP and to address the inequalities the pandemic has created or exacerbated.
“The current UK debt burden is the highest seen during peacetime, but fiscal austerity in 2021 would be a big mistake,” said Jumana Saleheen of research group CRU. Neville Hill of Credit Suisse said that with the cost of government debt at record lows: “There is absolutely no urgency for fiscal consolidation.”
Many feared that chancellor Rishi Sunak’s political instincts — or pressure from backbench MPs — might nonetheless lead him to cut the deficit too quickly, damaging the recovery.
“A policy error of this kind is currently one of the most likely causes of future long-term scarring — which would see permanently higher unemployment and lower standards of living for millions of people,” said Alfie Stirling, chief economist at the New Economics Foundation.
But others think the chancellor will content himself with signalling his commitment to fiscal discipline, announcing measures that will take effect only in later years. “I think he will announce virtue tomorrow,” predicted John Gieve, a former BoE deputy governor and chairman of Nesta, the innovation foundation.
The biggest fiscal question in 2021 will be when and how the furlough scheme is unwound, with jobs at stake “if wage subsidies are prematurely withdrawn” noted James Smith at ING.
In contrast with the austerity drive of the past decade, most respondents said that when fiscal consolidation did begin, it would largely take the form of tax rises, focused on wealthier people relatively unscathed by the pandemic, rather than cuts in public spending.
Higher taxes on corporate profits, capital gains and pension contributions could all be in the chancellor’s sights, along with new environmental levies and an overhaul of property taxation — especially if he chose to use fiscal policy to address the inequalities exposed by Covid-19.
Jonathan Portes, professor of economics at King’s College, London, said previous cuts to welfare and local services had “meant that the most disadvantaged were also the most vulnerable to both the health and the economic impacts of Covid-19”. “Tackling this legacy should be the government’s first priority,” he added.
Yet the majority of respondents did not expect the prime minister to make any real progress in his mission of “levelling up” the UK’s underperforming regions over the next year.
Aveek Bhattacharya, chief economist at the Social Market Foundation, and Nina Skero, chief executive of the consultancy CEBR, saw longer term gains for smaller towns and cities that could attract homeworking professionals. But many economists warned of “levelling down” — with London hit by the continued absence of office workers, Brexit damaging manufacturing areas and the pandemic still ravaging disadvantaged communities.
“Genuine ‘levelling up’ requires money, a strategy and time — there appear to be acute post-Brexit shortages in all of these,” said Ross Walker, economist at NatWest Markets.
If these forecasts for the UK in 2021 seem unremittingly gloomy, there is one reason for optimism: they come with a strong health warning.
A year ago, economists polled by the FT said UK growth would be all but unchanged in 2020 — a set of predictions that could hardly have been further off the mark.
This year, many underlined the extreme uncertainty around their predictions — and Costas Milas, professor at the University of Liverpool, said economists could learn from Daniel Defoe’s account of the 1665 plague in London, when people hung on the doom-laden words of “predictors, astrologers, fortune-tellers, and what they called cunning-men”, who later disappeared from the streets.
“Our forecasts, for 2020, were really poor,” Prof Milas said. “The pandemic should force us to rethink on our economic models and perhaps consider the issue of collaborating in our work with other scientists. Epidemiologists, for a start.”