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The Outlook for Growth in the UK April 2021

From TCFP’s investment consultants, Cormorant Capital Strategies:

What is the outlook for economic growth in the UK?

On 11 March last year, the Office for Budget Responsibility (OBR) projected growth for 2020 at a rate of 1.1%. 2021 was scheduled to deliver growth in the region of 1.8%. That was just five days before the Prime Minister declared that it was “time for everyone to stop non-essential contact and travel” and just 12 days before the first national ‘lockdown’ order was issued (with the force of law following two days later on 26 March). Of course, the OBR were hesitant in their forecasts, suggesting that the novel coronavirus was ‘likely to effect the economy and public finances in coming quarters’ and cautioning that ‘neither the size nor the duration [of that effect was] possible to predict with any confidence’. We know now that the British economy contracted by a shade less than 10.0% during 2020.

Indeed, even the -9.9% estimate for gross domestic product (GDP), supplied by the Office for National Statistics (ONS), is subject to a significant degree of uncertainty. That is the case even now, a full four months after the year has ended. Even during ordinary times, to say nothing of the extraordinary times in which we find ourselves at present, estimates for GDP are very often revised in the months or years following their release.

So, consume all that I write below with a pinch of salt.

My best guess, given all that I know today, is that the British economy grows at a full year rate of somewhere in the region of 5.8%, give or take a percentage in either direction. The most obvious risk to that outlook are developments in our battle with the virus. I am assuming that the vaccines we have developed are safe and effective (and remain so), that their supply is not limited to the extent that the current pace of immunisation is substantially slowed and that take-up remains close to current high rates, particularly among those most at risk.

Needless to say, the 5.8% I have pencilled has a somewhat jagged, rather than smooth outline. The third national lockdown, most restrictive during the opening quarter (Q1) of 2021, will take its toll, sending output still lower than it was at the close of last year. Early, incomplete, data from the ONS indicate that output fell 2.2% in January before clawing 0.4% back in February. If those numbers are correct, output fell around 1.9% in the first two months of Q1. I haven’t got high hopes for growth in March but my fingers are crossed for a faintly positive print, meaning that the decline during the full quarter is limited to around 1.9%.

Contrast that with my expectations for growth during the second quarter (Q2). By 01 April, 31.3 million Brits had received their first vaccine dose, with 5.0 million among the most vulnerable having received their second dose, and the country’s schools were fully opened. As restrictions are eased, it is not unreasonable to expect spending to begin to build. Perhaps Q2, with growth in the region of 4.0%, will begin what I expect to amount to a full and vigorous recovery. In that regard, I’ve got a feeling that growth during the summer will be unlike any in living memory.
Beyond that, it is not at all inconceivable that we will regain the output lost during the pandemic by this time next year.

The Outlook for Growth Elsewhere

The International Monetary Fund (IMF), in estimating the effects of the pandemic on global output, calculate a fall of 3.3% in the aggregate during 2020. It was a decline which was unevenly distributed. Those nations counted among the developed market economies fell by 4.7%, while those grouped in the developing & emerging market economies fell by 2.2%. The range in the figures is remarkable. It beggars belief, but the data indicates that China’s economy actually expanded by 2.3% in the same year that saw Spanish output decline 11.0%.

Projections for global output growth in 2021 come in at 6.0%, split between the developed nations at 5.1% and the developing nations at 6.7%. After losing 8.0% of output in 2020, India’s expansion is among the most impressive this year, likely hitting double figures.

The IMF expects the US economy, aided by a rapid vaccine rollout, low interest rates and huge federal stimulus measures, to grow by 6.5% – more than enough to make up for the 3.5% lost during 2020. 6.5% seems reasonable to me. It lies comfortably inside the 5.0%-to-7.3% range of the economic projections of Federal Reserve Board members and is just a little higher than the 6.4% which marks the average of economists polled by the Wall Street Journal earlier this month. If the IMF are accurate, the weighted-average increase for the Euro Area will hit 4.4%. For what it’s worth, 4.4% is exactly in line with the consensus that emerges in the European Central Bank’s Survey of Professional Forecasters. Comparatively low growth rates in the EU are reflective of resurgent viral infections and the attendant economic restrictions (worsened by a comparatively slow vaccine rollout) which combine to push a recovery later into the year.

Inside the Euro Area, there is a patchiness to the projected pace of recovery across the member states. The Central Bank of Ireland are predicting growth in the region of 5.9% for our closest neighbour and, across the English Channel, the IMF anticipate a similar increase for the French economy. Meanwhile, in a year that will see Angela Merkel’s 16-year tenure as Chancellor come to an end, Europe’s largest economy is set to grow at 3.6%. With luck, Italy and Spain, stricken with unemployment rates as high as 10.1% and 16.2% respectively, will grow at 4.2% and 6.2%, making up at least some of the 8.9% and 11.0% contractions in 2020.

Japanese economic output declined 4.8% last year. The IMF’s projected increase of 3.3% during this year exceeds, by some margin, the 2.7% projection offered up by the Organisation for Economic Cooperation and Development (OECD). If pushed, I’d plumb for the higher of the two figures.

Finally, China’s return to form is little short of a formality according to the IMF, increasing 8.4% this year. The OECD are a little less optimistic, guessing at 7.8% instead. Worthy of remark, though, is that both institutions are predicting a sharp slowing in China’s growth next year; the IMF are targeting 5.6% and the OECD are aimed at 4.9%.

 

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