Forecasts of rapid UK rebound fall foul of lockdown


Economists have torn up their forecasts for a rapid economic rebound at the start of the new year after the imposition of national restrictions in England and Scotland put the UK into a third coronavirus lockdown.

A vaccine-fuelled recovery is still expected later in the year by most economists who have updated their forecasts but it will be delayed and weaker than previously anticipated, raising public borrowing forecasts further.

Others were more bullish, however, predicting that the economy would recover more rapidly from the latest hit with some leaving their longer-term outlooks unchanged.

Even before Monday evening’s announcement of the latest lockdown in England by prime minister Boris Johnson, forecasters have been reviewing their assumptions for growth, unemployment, inflation and the public finances to factor in events over the Christmas period.

The end of the year brought a triple dose of bad economic news. Economists were prompted to slash their forecasts for the first quarter of this year by the explosion of coronavirus cases over the festive period.

Chart showing that real-time indicators fell sharply in December

The impact of the ensuing restrictions were compounded by chaos at the ports after many countries closed their borders to people and truckers from the UK after scientists here identified a more infectious variant of the virus. On top of that slow progress in the rollout of the vaccine also led to some revisions.

Martin Beck, lead UK economist at Oxford Economics, said the restrictions imposed on December 20 across London and large parts of the South East and Wales led to a “steep drop” in people going out with the capital in particular “missing out on a UK-wide uptick in restaurant bookings just before Christmas”.

There is little official economic data so far for last month but what little there is suggests a difficult December all but guarantees that in 2020 the UK will have suffered its worst economic contraction in over 300 years.

Although economists agree that the effects for the UK of the staggered, second lockdown — enforced in England in November — were mild, the economy is still set for a record annual decline in gross domestic product even after some upward revisions to the data published just before Christmas.

And this trend is expected to continue, although not all economists are as gloomy as Philip Rush, founder of the consultancy Heteronomics, who said: “The outlook has deteriorated over the past month to beneath even my already bottom-of-consensus forecast,” said

He expects a dramatic 10 per cent further contraction in GDP in the first quarter because “vaccine distribution is too slow” and the lockdown will have to be extended beyond February, inevitably causing long-term damage. Output will not recover through 2021 and will end this year still 9 per cent below pre-pandemic levels, according to his forecasts.

Most others are relatively more upbeat, although they have also scaled back their expectations from before Christmas. Allan Monks, UK economist at JPMorgan, is close to the consensus, having downgraded his first-quarter growth assumption from 0.1 per cent to a contraction of 2.5 per in anticipation of a hit “harder than seen in November”.

But, along with many of his peers, Mr Monks did not expect anything like a return to the depressed state of April or May last year with “businesses better prepared” and the government allowing sectors such as construction to remain open in contrast to the first lockdown.

Although he expects the vaccine rollout to improve the situation considerably after the first quarter, “the path to recovery has been pushed back further,” he said.

Chart showing that economists differ on the depth of the UK’s double-dip recession

Most economists took a similar view of the likely pace of recovery once vaccinations had a material effect and eased the pressure on the NHS, which would allow the government to relax restrictions progressively.

Some were notably more optimistic, predicting the impact of the third lockdown would be temporary and lead to a faster recovery. Kallum Pickering, UK economist at Berenberg Bank, who slashed his first quarter forecast from 3 per cent GDP growth to a 2 per cent contraction, said he expected the lost ground would be made up later in the year.

“With much less Brexit uncertainty and strong gains in global demand ahead, UK real GDP can still recover to its pre-pandemic level by the end of 2022 as previously expected,” he said.

The rapid change in economists’ forecasts triggered by the latest lockdown underlines how much the UK’s economic fortunes depend on bringing the virus under control. Few economists believe that ministers and central bankers have further fiscal or monetary policy tools they can use in the near term.

Chart showing that a more pessimistic outlook will raise government borrowing and debt

After Rishi Sunak announced a new business support package on Tuesday, having already extended the furlough scheme to the end of April, the chancellor said he would review all the support measures again in the Budget on March 3.

The Treasury said the chancellor would use the Budget to update the longer term fiscal framework although there was no commitment to introducing new fiscal rules, adding that Mr Sunak remained “committed to medium and long term sustainability of the public finances.”

The slow pace of the vaccine rollout and the new lockdown is expected to mean a significantly higher deficit than the Office for Budget Responsibility projected at the time of the November spending review.

On the OBR’s pessimistic Covid-19 assumptions, that would imply borrowing might be another £100bn higher than expected in 2021-22 with debt rising above 120 per cent of national income.

That scale of additional borrowing, combined with a worse outlook, will put pressure on the Bank of England to expand the £150bn of money printing and purchases of government bonds it has already planned in 2021. But this amount already included an element for the risk that the outlook deteriorated and Mr Monks said it was “not clear [the BoE] will want to do more straight away”.

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