By Samuel Indyk
Investing.com – UK GDP fell almost 10% in 2020 as the coronavirus pandemic forced the government into putting the country into numerous lockdowns and place other restrictions on numerous parts of our day to day lives. In the fourth quarter, GDP grew by 1%, eking out a slight gain, which should see the UK avoid a double dip recession. However, Q1 of 2021 is still likely to see negative growth given the strict national lockdown. Throw the new Brexit trade deal in the mix and there are clear headwinds affecting the economy in the early part of the year. But what happens for the rest of 2021?
Cautious Optimism?
There is a cause for optimism about the UK economy despite the subdued end to Q4 and likely contraction in Q1 of this year. Current measures to curb the virus appear to be working; hospitalisations are lower and deaths from the virus and case numbers are falling. The strict lockdowns and the speed of the vaccine rollout are playing a part. The UK has one of the highest vaccination rates in the world with over 20 doses given per 100 people and reports suggest some within the government are hopeful that all UK adults will have at least one jab by May of this year.
The government has not confirmed this target but has aimed to provide jabs to members of the population in the four must vulnerable groups by the middle of this month. It will be touch and go whether that target is reached but the numbers appear impressive at first glance.
With that in mind, the UK government will be hoping they can reopen the economy sooner rather than later. An update on the road map for leaving lockdown is due to be announced on February 22nd.
“At the current trend, daily cases are likely to be in the low thousands by the end of March,” ING analysts said in a research note. “Assuming all priority groups receive their first vaccine dose by Easter-time, then most sectors are likely to have largely reopened by May.”
If the majority of sectors do, in fact, reopen by the middle of the year then growth should start picking up again. ING forecasts second quarter growth in the region of 4-5%.
But what about Brexit?
The hit from the Brexit trade deal announced at the end of last year has been clouded by the Covid lockdowns across the continent and it is unclear whether the hit to the UK will be harder over the coming months or whether the current issues are just teething problems from the agreed deal.
What is true is that the UK has lost some share trading, mostly to Amsterdam, but is this as big a deal as some had made out? The FT first reported that Amsterdam has now overtaken the London as the biggest centre for equities trading in Europe. As some have pointed out, the location of where the trading is conducted is all that has moved, not the traders, nor the hedge funds, nor the asset management companies. Some jobs may have moved but the industry has not upped sticks from London and planted itself in the Netherlands. The loss of share trading may end up being seen as more a symbol that the City is losing its lustre, rather than a large economic shock.
Other areas of the economy impacted by Brexit include the fishing, farming and fashion industries. A number of businesses in the fashion industry recently clubbed together to push the government into making changes after warning that gaps in the new trade deal would be devastating for business.
The Budget
UK Chancellor Rishi Sunak said the latest GDP figures show the economy experienced a “serious shock” last year. He is due to announce his new budget on March 3rd which will detail his plan for the next stage of the UK’s response to the crisis. Various measures have been touted on changes to income tax, fuel duty as he looks to lower the ballooning deficit. One of the first measures people will be looking out for will be regarding the furlough scheme which has supported millions and is due to end in April. An abrupt end could cause a spike in unemployment which currently has stayed relatively due to the government schemes.
2021
So, what about 2021? There is confidence that growth is going to start picking up in the future.
“A decisive corner is about to be turned for the economy,” the Bank of England’s chief economist Andy Haldane writes in the Daily Mail. “Come the Spring, we can expect the UK economy to be firing on all three cylinders – households, companies and government.”