A personal view from Ian Stewart, Deloitte’s chief economist in the UK.
Last week the UK chancellor, Rishi Sunak, warned that the UK’s “economic emergency has only just begun”. This struck me as overly pessimistic. While it’s not hard to think of things that could go wrong, some things are going right. Here are three of them, drawing on last week’s spending review and the accompanying report from the Office for Budget Responsibility (OBR).
First, a return to growth is in sight. The OBR forecasts that the economy will expand by a hefty 5.5% in 2021 and 6.6% in 2022. Agreed, it will take almost two years for the economy to return to pre-crisis levels of GDP. But this represents a faster recovery than after the global financial crisis, when it took five years to regain lost ground. There are two obvious risks. A no-deal Brexit would, the OBR estimate, knock 2.0% off growth next year; delays to, or failures in, vaccines could hit growth much harder. But, equally, a successful and swift deployment of vaccines could turbocharge the recovery.
Second, the OBR has cut its forecast for the peak in unemployment from 12%, estimated in July, to 7.5%. This would represent the lowest recessionary peak in unemployment since the 1970s, and far below that seen after the 1990–1991 and 2008–09 recessions. Rising unemployment carries a huge human and economic cost and these are set to mount in 2021 – albeit significantly mitigated by high levels of public support for jobs and household incomes.
Third, low financing costs mean soaring public sector debt is more manageable than it looks. With UK public sector debt likely to run at well over 100% of GDP for several years the UK has only been more indebted in the wake of the first and second world wars and the Napoleonic war. Yet lower interest rates mean that the cost of servicing this debt has declined and next year is likely to hit a new post-war low. UK debt has a long maturity of over 15 years so it would, in any case, take years for higher interest rates to affect the government’s funding costs.
Moreover, there is no clear level at which public debt becomes unmanageable. High though current debt levels are, they have been higher in the past and are higher in some other industrialised countries. Japan’s debt to GDP ratio, for instance, has been higher than 150% for 20 years. In time tax rises and/or reductions in spending will be needed to stabilise the public finances – that is something to tackle once the recovery is entrenched.
Of course, none of this is to say that we are out of the woods. Even so, the fact this recession was caused by a virus offers hope about the coming recovery. Unlike previous post-war downturns, this one emanated from outside the economic system. A successful vaccine deployment would halt the recession in its tracks. That points to an unusually strong rebound in activity in 2021. That remains the most likely outcome.