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Britain’s economy is starting 2021 on its back as record coronavirus infections and tighter restrictions cloud growth prospects and limit the chances of a rapid recovery from the country’s worst recession in 300 years.
It was hoped that the arrival of effective vaccines against Covid could lead to a resumption of activity. But with new government controls to combat the rising infection rate, the outlook is deteriorating. Here are five charts of the economic outlook for the UK in 2021.
GDP
Rising coronavirus infections and lockdown controls are expected to weigh on the economy in the early months of the year, before enough people can receive the vaccine and restrictions can be relaxed.
Gross domestic product (GDP) is expected to increase by 5.5%, according to a forecast by the Office of Fiscal Responsibility in November. While this would mark the highest growth rate since the late 1980s, the depth of the Covid recession means the economy will not return to its pre-pandemic peak until the end of 2022.
Since the launch of the stricter Covid restrictions, the Resolution Foundation think-tank now expects GDP to be up to 6% lower by Easter compared to forecast, reducing the 2021 growth rate to 4 , 3%. Other countries around the world are also grappling with an upsurge in the virus, but the Organization for Economic Co-operation and Development forecast released in early December ranks the UK behind all major economies except Argentina .
Despite a last-minute Brexit trade deal, disruption is still expected as companies adjust to new EU deals. Economists see Boris Johnson’s deal as a ‘hard Brexit’ because it involves more trade barriers than EU membership and other possible alternatives. As a result, the OBR estimates a long-term production loss of around 4% compared to the rest in the EU.
Unemployment
Unemployment is set to climb in 2021 once the holiday program closes – slated for late April after several extensions – in one of the biggest challenges the government faces.
Layoffs increased at the fastest rate on record towards the end of 2020, as companies struggled to stay afloat during the pandemic. However, despite attempts by Chancellor Rishi Sunak to shut down the regime and replace it with a less generous system of wage subsidies, the holidays have kept unemployment from reaching even higher heights.
The OBR estimates that the unemployment rate will peak at around 7.5% in mid-2021 – which represents around 2.6 million people without jobs – up from around 4% before the outbreak of the pandemic. However, the predictions were made before the introduction of stricter coronavirus restrictions.
Public finances
The UK government is on track to run a budget deficit – the gap between government spending and tax revenue – of £ 394 billion for the year to March 2021, due to emergency spending and slippery tax revenues during the pandemic.
As a result, the national debt – the combined total of each deficit – has exceeded £ 2 billion. Equivalent to more than 100% of GDP, it is expected to stay around that level over the next five years.
Sunak said “tough choices” had to be made to balance the books, and the deficit will color much of the political debate in the UK during 2021.
Record levels of government borrowing are expected to decline as the economy recovers and emergency aid is cut, but a deficit of around £ 164 billion is still expected for the year ending March 2022. While still larger than the deficit resulting from the 2008 financial crisis, most economists agree that a resumption of austerity should be avoided and that Tax increases should be used once a sustainable economic recovery takes hold.
Inflation
Inflation, the measure of average annual growth in consumer prices, has fallen to one of the lowest levels on record in 2020. Driven by falling global oil prices and companies slashing prices in response with a sharp drop in demand, the consumer price index (CPI) fell to 0.3% in the UK.
Some economists fear that a rapid economic recovery could trigger a surge in inflation that erodes household finances. At a time of record debt levels, it could also lead the Bank of England to raise interest rates and increase borrowing costs for the government.
Inflation expectations are gradually increasing. However, the OBR predicts that inflation will remain below the Bank’s 2% target rate until at least 2025. Threadneedle Street has also said it has no plans to hike rates until there is “clear evidence” of a stronger economic picture.
Some analysts believe the bank is more likely to cut interest rates from the current level of 0.1% – already the lowest rate in its 326-year history – into negative territory. Negative rates would involve requiring commercial banks to deposit funds with the central bank, with the aim of encouraging lending to stimulate the economy.
House prices
UK house prices are expected to fall sharply next year, amid rising unemployment and the end of the government’s stamp duty holiday.
Despite the worst recession in three centuries, house prices hit a six-year high at the end of 2020, with people rushing to use the tax break and many reassessing their living conditions during the lockdown. However, mortgage lenders believe a steep drop is coming. Halifax, Britain’s largest mortgage lender, estimates an annual drop of between 2% and 5%, while the OBR is more pessimistic, forecasting an 8% drop in prices.
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