Opinion

UK Economic Bounce Back: Myth or Reality?

UK Economy

Last week the Bank of England predicted that the UK was about to experience an economic boom not seen since the  the Second World War as lockdown restrictions are eased. The Bank raised its estimate for UK GDP growth to 7.25% in 2021, up from a previous forecast in February for growth of 5% this year. Barclays estimate that there is an additional £200bn sat in commercial and private bank accounts that will be unleashed as pent-up customer demand makes the market soar, amid the backdrop of a successful vaccine rollout. It is believed the UK will join the US in a supercharged recovery, while Europe may languish due to its slower than expected vaccine rollout.

On the surface, it is easy to believe this rosy outlook as pubs report selling out of alcohol even with outdoor only capacity, and Boris Johnson outlines the next stage of the return to normality roadmap, with indoor dining, overnight stays, and a limited travel green list all on the cards. The optimistic atmosphere has been bolstered by the news that the UK economy was up 2.1% in March as schools reopened, the fastest growth since August of last year. However, the overall UK economy remains down 8.7% since the onset of the pandemic and was down 1.5% in the first quarter of this year. For many economists, this is not fundamental concern, as it is believed that the losses can be reversed quickly. Tej Parikh the chief economist of the Institute of Directors predicted that economy was on course for a bumper bounce-back, stating that the first quarter of this year was the nadir of UK’s economic woes.

Chancellor Rishi Sunak is echoing this confidence, stating that the “UK economy is back on track.” Yet dark clouds remain on the horizon. The UK has been the slowest growing economy of the G7 for four consecutive quarters. This perhaps reflects remaining uncertainty not only about Covid, but the many impacts of Brexit which have yet to be fully played out. Caution seems to be the watchword of the markets at the minute, as they remain skittish and susceptible to being easily spooked. Murmurs of the Indian variant of the Covid virus creating local lockdown pockets have led some to believe that the pandemic may linger longer than many optimists would like to believe.

This lack of confidence has been reflected in a turbulent week for the stock market, with the FTSE tumbling 2.5% as the US reports the biggest rise in inflation since 2008. Rising inflation could signal higher interest rates, causing concern amongst both investors and consumers at large. This is likely a run-on effect of the $1.9tn economic relief bill that was passed in the US, delivering $1400 stimulus cheques to most Americans. The economic turbulence of the past few days could however be more transitory than expected; it is possible that the rise in inflation has been caused by temporary bottlenecks in supply chains combined with increased demand as pent-up spending is released. This could simply be a small speedbump on the road to recovery, or it could herald a new era of ‘stagflation’. As petrol shortages caused by the Colonial Pipeline cyberattack lead some commentators to compare President Biden to Jimmy Carter and the days of the oil crisis, the administration has sought to downplay the severity of any potential long-term economic fallout.

Federal Reserve Vice Chair Richard Clarida explained “We’ve been saying for some time that reopening the economy would put some upward pressure on the price level. […] We have pent-up demand in the economy. It may take some time for supply to rise to the level of demand.” Russ Mould, a director at UK based investment firm AJ Bell summarised the situation, stating “The world wanted economic recovery, but it appears to be happening too fast and the actions required to cool it down aren’t favourable to stock markets.” All this taken together presents a very mixed bag. The truth may lie somewhere between the two extremes of pessimism and optimism.

Whether the greatest boom since the post war period as forecast by the Bank of England materialises remains to be seen. If it does come along, it is likely to be a much longer-term trend than some investors would like. Yet the doom and gloom of the more pessimistic analysts is likely to be proven unfounded too, though trouble may lie ahead in the short and medium term. It was inevitable that after a year of unprecedented disruption and tragedy, that any recovery would be fragile as we collectively ask, is this finally over? The answer to this much asked question is not immediately forthcoming, but we can only hope that the end of the pandemic is near and sunnier economic times lie ahead.