UK set for record growth
The gradual lifting of covid restrictions and increasingly good news on the vaccines (both the speed of delivery and efficacy in the face of variants), are fuelling more positivity in the economic outlook too.
Looking back at forecasts for 2021 from the end of 2020, the economy is clearly in better shape than anticipated. The GDP forecast for this year has risen to a current 6.8%, up from the previously forecast 5.8% in December. On these forecasts GDP will be back to its pre-pandemic level in early 2022.
One of the key drivers of the economic recovery is accrued household savings. The Bank of England believes that UK households have accumulated £150bn of ‘Covid-savings’ that will now be injected back into the economy. It has been a very variable picture with savings not distributed evenly across the economy or geographically, these savings are concentrated within affluent neighbourhoods in the south.
The areas that have accrued savings are also most likely to economically bounce back more quickly as these savings translate into spending. On the other hand, there are also areas which are struggling financially as a direct consequence of the pandemic (lost earnings and job redundancies). It is a very mixed picture.
The UK and the US have put more money to work to support their economies through the pandemic and there is a strong view amongst economists that it will help their economies recover more quickly than where fiscal support was less generous, like the EU or Japan.
As the economic rebound gains momentum, attention turns to the inflation rate and the Bank of England’s efforts to keep it within bounds. Monthly CPI figures show the annual inflation rate increased from 0.5% in February to 2.1% in May. While some noise and volatility is to be expected, concern is mounting. The departing Chief Economist from the Bank of England commented that this was the most dangerous time for inflation in almost 30 years. As yet, the 50 or so UK economists polled each month by HM Treasury don’t expect an interest rate rise imminently. Indeed interest rates are forecast to still be at 0.1% at the end of Q4 2022 but expectations could clearly change over the next few months.
Even before the economy started to emerge from lockdown restrictions there were positive signals in the labour market. In London over the first quarter of 2021 there was a rebound in employment (up by 59,000 over the quarter) following on from three quarters of decline.
It is no surprise that the sectors of the London economy which experienced some further job losses in Q1 were: ‘Accommodation, food and services’ alongside ‘Arts, entertainment and recreation.’ But with the reopening of hospitality in May (and the final restrictions hopefully lifted in July) the more positive trends from other sectors should start to be replicated in these sectors too.
London does have one of the highest rates of employees on furlough with 13.6% of its employees still on the scheme putting it in the top 10 cities for furlough. The furlough scheme will support employment until September which gives the economy more time to bounce back as people return to the city. London’s economy was hard hit due to its reliance on international travel and tourism, along with the temporary loss of so much of its daily commuting workforce.
Given the jobs lost through the pandemic, it is ironic that the next problem for London is a labour shortage. As the economy rebounds, labour shortages are expected because workers have moved to a different sector or because so many European workers returned home.
Data gathered from London’s transport network show that usage levels have climbed back to their highest monthly rate since the pandemic impact took hold in March 2020. These figures, which are based on an equivalent typical time period, show that the tube in June 2021 was running at 45% of normal usage and the buses at 63%. Staff returning to their offices will have a significant impact on the London economy, bringing business back to all the restaurants, cafés, gyms and other services that support office-based workers.
With continuing success of the vaccine roll out, and more data supporting its efficacy against variants, then there is a strong case for the number of workers returning to the office to build significant momentum particularly from September.
A number of the large banks have already become more vocal about wanting their staff back in the office. In New York, the CEO of Morgan Stanley announced that if his staff felt confident dining in restaurants, they should also feel confident enough about returning to the office. He highlighted the importance of the office environment for teaching, learning and developing its staff and expressed a dim view of remote working from ‘out of state’.
Alongside the increasing call to get employees back into the office in some form and for at least some of the working week, business confidence in the financial service sector has been rising. The headline summary from the PWC/CBI quarterly released in March 2021 suggested:
‘Financial services organisations are emerging from lockdown in a strong position to support economic recovery and take digital transformation to the next level. As optimism continues to grow, 2021 offers further opportunities to move forward and drive sustainable change.’
Certainly, the forward-looking optimism levels recorded in their quarterly survey have been consistently moving upwards. At the end of Q1 the survey was +52 compared with -3 back in mid-2020.