November feels like ancient history, but looking back gives us an insight into how the economy performs as restrictions tighten.
Output fell by 2.6% in November - after six consecutive months of growth - as England went into a second lockdown, Wales emerged from one and activity was curtailed in Northern Ireland and Scotland.
The second lockdown in England was less onerous than the first, and indeed the one we are experiencing now, and it showed.
Manufacturers and construction companies continued to trade, the construction sector returned to its pre-crisis size.
Businesses which were forced to close their premises tried to find ways of serving their customers.
Non essential shops offered click and collect. Restaurants, pubs and bars offered takeaways.
The result was a more resilient performance than most expected but the economy still ended the month 8.5% smaller than it was in February last year before all this began.
And, goodness, a lot has changed since November.We are now in a race against coronavirus.
The new variant, which is thought to have first appeared in Kent in late September and is 50% to 70% more transmissible, has spread like bush fire. The UK economy has been locked down again and will remain so until mid-February at the earliest.Will there now be a “double-dip recession?” Possibly.
If output fell by 1% or more in December it means then growth in the last final quarter of 2020 was negative. But the question is pretty meaningless.
What matters is that activity is, once again, massively depressed, the point of revival has been further delayed and the risk of lasting damage to the economy has increased.
In November, the OBR, the government’s official forecaster, said it did not expect the UK economy to recover to pre-crisis size until end of 2022.
The new variant means that scenario now looks too optimistic.
“Things will get worse before they get better,” says Chancellor Rishi Sunak, and he’s right.
The immediate horizon looks grey but there are many reasons to be optimistic about better times ahead
Vaccines are being rolled out at pace
Three vaccines have been licensed, all appear to be extremely effective and are being delivered at speed.
The government has identified the four groups who are most vulnerable to Covid-19 and plans to vaccinate the bulk of them by mid-February.
That’s around 14 million people. So far 2.9 million have received the first jab - with the UK delivering more than any other European country.
We are not on track to hit the government’s target yet but the process is accelerating. Hitting the target wins the prize of being able to lift restrictions quickly and with confidence.
Households have cash
The lockdown has caused terrible hardship, forcing some into debt. But a larger number of people have been enforced savers.
When restriction lift they will have money to spend and, hopefully, the inclination to spend it.
That said, household balance sheets have been strengthened at the expense of the government’s balance sheet and if the supply side of the economy doesn’t respond to the sudden surge in consumer demand then there’s always the danger that extra spending pushes up prices and inflation.
Companies have cash
Companies have borrowed heavily during this crisis and in many cases the loans have been underwritten by the taxpayer.
But corporate borrowing has been matched by corporate deposits.
In theory, come the recovery, businesses have the means to invest and create jobs. Although, in practice, they may instead use cash to repay debts.
Unemployment should peak at a lower level than feared
In July last year the Office for Budget Responsibility (OBR) published a possible “downside” scenario in which the unemployment rate hit 13.2% in 2021.
The official rate between August and October 2020 was 4.9%. That number will rise but, barring a calamitous turn of events, is unlikely to reach 13%.
The reason mass unemployment has been avoided is the Chancellor decided to extend his furlough scheme, which means the taxpayer continues to pay the wages of millions of people who are at home and unable to work.
The cost of doing this is extraordinary and an unknown number of furloughed workers will find they don’t have jobs to return to.
Around one million people have lost their jobs since the first lockdown began at the end of March last year. The number of people out of work will increase considerably in the months ahead.
Unfortunately, this will happen even as the recovery gets underway, as businesses shake themselves down and restructure.
The bounce back could be big
The economic recovery we experienced in May, June and July surprised and delighted.
We recovered almost two thirds of the economic output we had lost in an impressively short space of time. There is every reason to hope this will happen again.
Of course, it is possible that it won’t. The longer the lockdown restrictions are in place, the greater the number of businesses that go bust, the more long-term economic structural damage is caused.
8.5% of lost output is a very big number. Some of that may take a very long time to claw back.
Brexit is finally done
Uncertainty cripples growth. By sealing a deal and, crucially, avoiding no deal (all the evidence suggested it would have been the opposite of “wonderful”) the government has delivered clarity.
Companies finally know where they stand and can now begin to invest with confidence and exploit new opportunities.
The only issue here is that many businesses currently have their hands full trying to get to grips with a sudden rush of paperwork and new customs rules which are threatening to suffocate the existing trade they do with the European Union.
Brexit has caused significant disruption at the border. Some of this will be temporary, as people adjust to new ways of doing things, but the paperwork is here to stay and with it comes higher prices and the risk of delays.
The Bank of England assumed that a free trade agreement of sort the government secured would reduce our ability to export in the short-term, wiping 1% off GDP in the first three months of this year.
The drag on growth is expected to have eased by the summer as businesses adjust to the new trading arrangements.
What the GDP figures from November really tell you is that the important thing - the thing we must focus everything on now - is getting the vaccines rolled out as quickly as possible so we can get back to come form of normality.
But then you knew that.
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2021-01-15 19:41:00Z
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