At the beginning of each year The Financial Times conducts a survey among UK based economists. One of the main stories in today’s FT is about this survey, “UK economy set to become one of the last to recover from pandemic” and, online, the paper also has a link to all the replies.
One of the main takeaways is that the vast majority of economists do not expect the UK economy to recover to its pre-crisis level until the second half of 2022, or later. The survey was conducted in mid-December. Here are my replies to the questions:
Question 1: UK economy: Do you expect the economy to regain its pre-pandemic size in 2021? How will the UK’s recovery compare with its peers?
I expect the UK economy to return to its pre-crisis level during the first quarter of 2022. This is likely to be in line with other major economies in Western Europe, with the euro area back to pre-crisis levels by mid-2022. I expect Asia to lead the global recovery and the US to recover solidly, too.
Question 2: Fiscal policy: Do you expect the Chancellor of the Exchequer to announce higher taxes or lower public spending in 2021? When and to what extent do you think fiscal consolidation will be needed?
I am not expecting the chancellor to announce a policy shift to higher taxes or lower public spending in 2021. Of course, as in any year, there may be individual taxes that rise or fall.
The key is that there is not premature fiscal tightening and that policy helps support the economy over the next year.
Although I am not expecting imminent fiscal tightening, I would expect the chancellor to reaffirm his commitment to lower the budget deficit and to reduce the ratio of debt to GDP, steadily, over time. I think his message will be that once the economy has started to recover, then we should expect to see a shift from a proactive to a more prudent fiscal policy from 2022.
In my view, there is no need to panic about the fiscal outlook. In an environment of low inflation, rates and yields, a policy of reducing the ratio of debt to GDP over time makes sense.
Question 3: Workers: How do you expect the UK labour market to perform in 2021?
I expect unemployment to peak in the second quarter, at over 7 per cent. One of the hallmarks of the UK economy has been its ability to cope with shocks.
It is hard to tell how much scarring there will be as a result of this crisis. There are some important sectors of the economy — large parts of the creative sector, for instance — that would in normal times be thriving, but which may suffer significant job losses and take time to recover fully. Ahead of the pandemic, jobs in the creative sector, for instance, were growing at twice the pace of the whole economy.
Also, a focus in 2021 has to be on helping young people find their footing in the labour market, equipping them with skills for future growth sectors.
In the wake of the pandemic, one should expect an increased focus on the future of work and this will further cloud the jobs outlook.
Question 4: Levelling up: With respect to regional inequalities, will 2021 be a year of levelling up or levelling down?
The economy will emerge from the pandemic with some significant challenges, including higher unemployment and some small firms nursing high debts. In contrast, many people have emerged from the crisis with high savings and many firms with balance sheets in good shape. It is a mixed picture.
Despite this, I certainly do not think 2021 will be a year of levelling down. Instead, I expect 2021 to set in motion the move towards levelling up the economy, in the wake of the pandemic. It would be premature to call it the year of levelling up, but it should be the year levelling up starts.
Although levelling up is the phrase used, I think it better to think of it in terms of the need to rebalance the economy. The UK’s imbalances can be seen in terms of place, such as London versus the rest, urban-rural, coastal-inland and in other areas such as skilled versus unskilled, home owners versus renters plus social imbalances and, now, in terms of those who emerge from the crisis with secure jobs and high savings versus those who have been hit hard by the pandemic.
On top of these there are macroeconomic imbalances, too, such as the trade and budget deficits. An important part of the 2021 levelling up agenda will be addressing the aftermath of the pandemic as well as starting the long path towards addressing deep-rooted economic imbalances.
Question 5: Monetary policy: How much scope does the Bank of England have to loosen monetary policy again in 2021? Would it make any difference?
The Bank of England still has many policy options. It could cut policy rates, expand its balance sheet, widen the assets it buys, engage in yield curve control or even change its remit, to a different inflation target or a nominal GDP target. In addition, it could engage more in forward guidance. So, in answer to your question, it still has plenty of scope.
Whether it should, or will, adopt any of these measures is a different issue.
In the wake of the 2008 global financial crisis, monetary policy was the shock absorber for the UK and global economy. During this crisis, fiscal policy has, sensibly, carried out more of the policy heavy lifting. That being said, as we saw over the last year, monetary policy has played an important supportive role, particularly in terms of interventions in the gilt market.
During 2021, I would expect the Bank to expand its balance sheet and I would not be surprised if it cut policy rates. My own preference is for the Bank to avoid negative rates and for it to consider, as part of a reassessment of its remit, a move towards a nominal GDP target and, depending upon economic and financial conditions, a move to yield curve control. But I am not expecting these.
The annual rates of inflation may be volatile during 2021 because of the comparisons with the crisis, but despite this, inflation pressures should remain subdued, allowing the Bank scope to do more if it feels inclined to act. Would it make any difference? Yes. I would expect the Bank to only engage in such easing measures if it felt the recovery was fragile, or deflationary measures were prominent, and in these circumstances, such easing would likely be effective.
While this question was on monetary policy, the significance of micro- and macroprudential and wider financial stability policy measures in supporting monetary policy will also be important in 2021.
Question 6: Is there anything else you would like to tell us?
I believe Brexit will be positive for the UK economy, but it is not just leaving the EU, but the policies we adopt once we have left that are key. The UK, like much of Western Europe, needs to reposition itself post the pandemic, in a changing and growing global economy.
In the wake of the pandemic and Brexit there is a case for a strong, pro-growth economic strategy. Ideally, this should form the centrepiece of any post-crisis policy reset. Although the UK has many world-class sectors and firms, it is a low productivity and low wage economy.
Ideally, what is needed in 2021 is a three-arrowed policy of: continued fiscal activism, supportive monetary and financial policy, and an increased focus on a supply-side agenda of boosting infrastructure, investment and innovation, and a focus on getting the incentives right, through taxes and regulation, thereby reducing inequality.
Please note, the value of your investments can go down as well as up.