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As the UK continues to emerge from the worst of the pandemic, senior economist Nick Stamenkovic assesses the road ahead in the latest of our quarterly economic updates.
As we move towards the halfway point of 2021 – and the first anniversary of the Covid-19 pandemic recedes – we checked in with NatWest Group’s eminent economist to discuss the effects so far, and what we can expect from the UK economy in particular in the coming months.
Broadly speaking, the outlook is a more positive one than many might have hoped for. In his presentation for the latest RBS International economic update webinar, Nick Stamenkovic, senior economist at NatWest Group, demonstrated that, despite some headwinds that remain clear and present, the UK in mid-2021 has reason to be optimistic about its short- and medium-term prospects. He laid out three clear factors that businesses should be aware of as they plan for 2021 and beyond.
“First, the UK economy is in the early stages of recovery – it will pick up steam, and we could see growth pick up sharply later this year,” he began. “Second, the government response has been significant indeed. And third, we still have significant medium- and short-term hurdles to overcome.
“The vaccine has proved to be even more successful than most had hoped [for],” he added, “and that has had a positive impact on the UK economy.”
After an exceptionally challenging 12 months, that positivity is especially welcome. “In 2020, UK GDP dropped by 9.9%, the biggest fall across the G7. But as we go through 2021, things are definitely turning for the better,” Stamenkovic said.
Indeed, in February, UK GDP grew by 0.4% as firms prepared for the phased lifting of lockdown restrictions. However, there’s no doubt that sectoral differences are marked. As expected, hospitality and travel continue to flounder, while manufacturing and logistics are holding steady and professional services are thriving, in large part thanks to the ability of many in that sector to work from home without causing disruption to business.
And Stamenkovic observed: “Retail sales, meanwhile, which account for around 40% of consumer spending, have now recovered to pre-Covid levels, which is encouraging.”
Allied to this, several other signals are pointing towards sustained recovery. Initial estimates of unemployment spikes have not come to fruition, with the Office for Budget Responsibility now expecting unemployment to peak at 7.5% instead of 6.5%. Meanwhile, the number of workers on furlough continues to fall, pointing to a growing appetite to invest and reopen among many businesses. Finally, there has been an increase in household savings, a key metric that suggests for many people the pandemic has been an opportune time to cut spending and boost bank balances. “What that shows is that there's scope for the economy to recover quite quickly,” said Stamenkovic
“Without the swift fiscal and monetary responses that have been extremely supportive of the UK economy, the recovery we’re beginning to see wouldn’t be forthcoming”
Nick Stamenkovic, senior economist
So what happens next? Will the green shoots glimpsed in Q1 and Q2 continue to flourish and grow? In Stamenkovic’s view, the answer is a cautious yes. “What’s interesting is in March 2021 we saw an upgrade of the government’s growth forecast, with the expectation that we will return to pre-pandemic levels of growth earlier than expected – possibly early 2022,” he said.
And, of course, there are some significant levers at the authorities’ disposal, should they be needed. Stamenkovic highlighted the speed and effectiveness of the initial economic response to the pandemic, from the Bank of England cutting rates to their lowest possible level (0.1%), to the government’s decisive introduction of the Coronavirus Job Retention Scheme (also known as the furlough scheme), Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS). Adding in £995bn of quantitative easing (QE) has combined to protect much of the UK economy from some of the worst effects of the crisis.
“Bottom line: without the swift fiscal and monetary responses that have been extremely supportive of the UK economy, the recovery we’re beginning to see wouldn’t be forthcoming,” Stamenkovic explained.
Healing the scars
[copy] But there’s no doubt that some of this comes at a cost. In the medium term, the UK’s budget deficit has risen sharply to just over £303bn (its highest level since the Second World War), driven by greater spending and slower growth. This raises the very real question of how to address a growing deficit.
“There are three ways to do that,” Stamenkovic explained. “You can raise taxes, cut spending or allow inflation to creep a little higher.” However, none of those measures, he continued, are likely to go down well with an electorate in need of some feel good factor post-pandemic. “The most obvious way to address the deficit in that case is by pushing for further growth in the economy.”
So what of the longer term? One of the biggest concerns is the so-called scarring effect of Covid-19, with falls in investment and higher long-term unemployment among the potential issues. But the International Monetary Fund’s latest forecast makes for encouraging reading, soothing fears that thousands will be shut out of the labour market, with the attendant negative impact on productivity. “The forecast is that the effects won’t be as bad as first feared,” Stamenkovic said.
And it’s not just the economic fallout that has come into focus in the past year. The climate crisis has reached the top of the agenda for corporates, governments, regulators and others. So will the pandemic accelerate or derail efforts to reach net zero? “The two biggest economies, and emitters – China and the US – are both making strides in this area, and President [Joe] Biden’s recent pledge to bring forward the US’s net zero targets has to be encouraging.
“The UK is part of that, and the pledge by the UK government to set in law the world’s most ambitious climate change target – cutting emissions by 78% by 2035 compared to 1990 levels – is also welcome.”
But while things appear to be looking up, Stamenkovic emphasised that it’s worth remembering not everything will go back to normal once the pandemic is over. Working patterns and consumer behaviour will almost certainly look different, post-Covid. “There will be more flexibility for people and a lot of structural changes,” he said. “We’re not going back to pre-pandemic status quo anytime soon.”