UK Economic Outlook Gloomy As Covid Surges

Unprecedented numbers of coronavirus infections and more stringent restrictions mean the UK economy begins 2021 in a weak position.

As unemployment rises, new lockdown rules impact the economic outlook, reducing the chances of a rapid recovery from the country’s worst recession in 300 years and limiting the prospect of growth. There had been hopes that the advent of effective Covid vaccines could encourage a bounce-back in economic activity.

But the economic outlook is deteriorating as new Government controls to combat the rising infection rate are implemented.

The latest forecasts for the UK’s economic prospects are as follows:

Gross domestic product (GDP)

GDP was expected to increase by 5.5pc, according to the Office for Budget Responsibility (OBR) forecasts in November, which would have signified the strongest growth rate since the late 1980s. However, the depth of the Covid recession means the economy would not return to its pre-pandemic peak until late 2022.

While many countries around the world struggle to contain the second wave of the virus, forecasts by the Organisation for Economic Co-operation and Development (OECD) published in early December ranked the UK lagging behind every major economy except for Argentina.

Disruption, despite a last-minute trade deal, is still expected as businesses adjust to the new EU arrangements. Economists regard Boris Johnson’s deal as a ‘hard Brexit’, because it creates more barriers to trade than EU membership and other credible alternatives.

Consequently, the OBR estimates the economic outlook to be a long-term loss of output of around 4pc compared with staying in the EU.

Public finances

The UK Government is set to record a budget deficit, the gap between public spending and income from taxes, of £394bn for the financial year to March 2021, the result of emergency expenditure and shrinking tax receipts during the pandemic.

As a result, the national debt, the combined total of all deficits, has risen to more than £2tn, equivalent to more than 100pc of GDP, and is expected to remain at around that level for the next five years. Sunak has stated ‘hard choices’ (tax increases) need to be taken to balance the books, and the deficit will likely occupy much of the UK’s political discourse during 2021.

As the economy recovers and emergency support is reduced, the record levels of public borrowing are expected to fall, yet a deficit of about £164bn is still expected in the year ending March 2022.

Unemployment

Once the furlough scheme is closed, scheduled for the end of April after several extensions, unemployment is set to surge in 2021 and become one of the greatest challenges facing the Government.

Towards the end of 2020, redundancies were rising at the fastest rate on record as businesses fought to stay afloat during the pandemic. But furlough has prevented unemployment from climbing to even greater heights, despite efforts by the chancellor, Rishi Sunak, to end the scheme and replace it with a less generous system of wage subsidies.

The OBR estimates the jobless rate will peak at around 7.5pc in the middle of the year, representing about 2.6m out of work, and almost doubling from around 4pc before the pandemic outbreak. But the forecast was made before more restrictive rules were brought in.

Economic outlook for inflation

Inflation, the measure of annual average growth in consumer prices, dropped to one of the lowest levels on record in 2020. The consumer price index (CPI) fell to 0.3pc in the UK, driven by plummeting global oil prices and companies lowering their prices in response to a sharp drop in demand.

Although economists worry that a rapid economic recovery could unleash a burst of inflation that would make households poorer, it could also lead to the Bank of England raising interest rates and higher borrowing costs for the Government.

However, the OBR forecasts inflation to remain below the Bank’s target rate of 2pc until at least 2025. The Bank has already said it does not intend to raise rates until there is ‘clear evidence’ of a stronger economic outlook emerging.

Some economists think the Bank is more likely to cut interest rates from the current level of 0.1pc, the lowest rate in its 326-year history, to below zero. Negative rates would involve charging commercial banks to deposit funds with the central bank, in order to encourage lending to boost the economy.

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