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The latest brief from the bank’s chief economist
There’s no doubt the lockdown has taken a significant toll on the UK economy. Added to that, Brexit effects are showing up in the form of higher costs and disruptions at the border. But the pace of vaccination remains very impressive, and with it, a build-up of confidence in a strong recovery, an outlook echoed by the International Monetary Fund.
Bad, but could get worse
The UK labour market is in distress. The number of payroll employees has decreased by more than 800,0000 since February 2020. The unemployment rate, in the three months to November 2020, was estimated at 5%, 1.2 percentage points higher than a year earlier. The redundancy rate during the same period reached a record high of 14.2 per thousand. However, in the context of the most dire recession in 300 years, it could be a lot worse. Policy support has been immensely helpful, and expectations are that unemployment will rise further once it’s wound down. So the race is on – not just vaccine versus virus but vaccine versus unemployment. Unleashing the recovery in the quickest time possible will be its salvation.
Trouble with a capital T
In the space of just three months, unemployment in London has jumped by almost two percentage points, hitting 6.9% in November. The capital, with its higher proportion of service sector jobs (92% of the total), has leapfrogged the North East to become the region with the UK’s highest unemployment rate. By December, the number of workers on the payroll in London had fallen almost 250,000 below pre-pandemic levels. At the other end of the spectrum lies Northern Ireland, where service industries account for fewer jobs than other parts of the UK and unemployment stands at just 3.2%.
The days may be lengthening, but it rarely feels like it. Time often drags, with Christmas long gone and spring hard to spot. Now coronavirus-related data seems the same. A little over two thirds of firms remain trading (with a mere 34% of firms in the accommodation and foodservice sector doing so). Card spending is still 35% below last year’s levels. Meanwhile, more of us are furloughed (17%, up from 14%), and there are worrying indications of dwindling cash reserves amongst some firms. And then there are Brexit effects! One in four firms reported a change in transportation costs and a fifth faced disruptions at the border when exporting.
There are more jobs advertised across all parts of the UK (except the East of England). And infections are falling (one in 55, down from one in 45 post-Christmas). New coronavirus cases are also falling sharply, and 9.5m doses of the vaccine have been distributed. Look closely and early buds are emerging.
In decent shape
US GDP recorded annualised growth of 4% in Q4, a tad lower than the consensus estimate of 4.2%. Consumer spending grew just 2.5%. But other parts of the economy performed better – non-residential fixed-investment grew 13.8%, reflecting optimism in parts of the business landscape at least. Overall, US GDP fell by 3.5% in 2020 compared to the previous year (compare that with the UK’s estimated 10% figure!) and remained only 2.5% below pre-Covid levels. With the vaccination programme picking up pace and the latest batch of $600 stimulus payments being distributed, there are hopes that the US economy can be in full swing in Q2.
Despite the fortunes of the US economy relative to the UK’s, the tone of Federal Reserve chairman Jerome Powell’s latest monthly press conference was clearly more downbeat than at the end of 2020, noting the US is a long way off from being healed. As expected, rates were left unchanged at 0% to 0.25%; so, too, was the QE programme. The Fed’s statement warned that “the pace of the recovery in economic activity and employment has moderated in recent months”. In particular, the health crisis poses “considerable risks to the economic outlook”. All this suggests an unwinding of the Fed’s current accommodating policy is not on the agenda anytime soon.
Jab and go
The global economy is gearing up for a “vaccine-powered strengthening of activity later in the year”, according to the latest International Monetary Fund World Economic Outlook. Advanced economies are collectively expected to grow 4.3% this year, with the UK in line at a 4.5% pace. But given the UK’s decline of about 10% in 2020 (worst amongst its peers, bar Spain), that still leaves a lot of catching-up to do. So the IMF has pencilled in growth of 5% next year – well ahead of the advanced economy pack. In developing nations, the 2021 recovery will be spearheaded by a forecast 8% expansion in China and a 11.5% rise in India.