Mon, Jan 04, 2021 – 5:50 AM
London
BRITAIN’s independence from the European Union (EU) commences in the gloom of a winter recession. But hopes are high that a sunny spring will soon follow.
Economists contend that the nation has retreated into a double-dip lockdown recession that could last until the end of the first quarter of this year.
The Brexit trade deal with the EU has lifted New Year spirits, but news of the continued spread of Covid-19 is grim. Covid mutations have created record after record of new cases.
Hospitals are in crisis mode and deaths are climbing. As 2021 begins an estimated 2.5 million Britons have caught the virus and deaths are now exceeding 74,000.
The economic result, according to government estimates is that the UK will end 2020 with a contraction of 11 per cent – a mammoth £244 billion (S$437 billion) slide off the nation’s gross domestic product (GDP).
The annual UK Times survey of 73 UK economists shows that 55 per cent of respondents predict growth of between 5.5 per cent and 8 per cent this year. The remainder expect GDP to grow by 1.5 per cent to 5 per cent.
But even if the most optimistic prediction comes to fruition, the economy’s GDP will still be below the 2019 level of £2.2 trillion.
The swift jabs of Pfizer and the Oxford AstraZeneca vaccines should enable the government to begin relaxing lockdowns from the end of January onwards.
Optimistic economists contend that there will be pent up demand because workers with good salaries and furloughs are estimated to have saved around £200 billion.
On the assumption that restrictions of movement will ease from the end of January onwards the government will allow more businesses to open. People will be keen to travel again and once again enjoy sports and other entertainment, pubs and restaurants.
“Of course, the near-term outlook for the economy is grim. But we are optimistic that the distribution of vaccines and removal of Covid-19 restrictions will allow GDP to rebound rapidly in the second half of next year,” says Paul Dales, senior economist at Capital Economics. “We suspect the economy will climb back to its pre-pandemic peak in 2022.”
The firm forecasts that the pound will rise to 1.40 against the US dollar in 2021 and that the FTSE 100 of leading shares will appreciate to 7,500 points.
“There is a high propensity to consume in the UK and spending boosted by £200 billion of savings could lead to growth of around 8 per cent in 2021,” said consultants from CEBR.
“Many of those denied holidays in 2020 and missing out on their skiing and winter breaks at the beginning of 2021 will be desperate to travel, while others will want to visit their loved ones,” CEBR notes.
“It seems likely that flights and hotels will be booked out by the second half of the year,” they added.
Prices will rise partly because costly social distancing precautions are likely to persist, and partly because firms will need to recover losses, CEBR said.
Besides lockdowns, the UK faces a host of other problems. To minimise bankruptcies and to help the unemployed and stricken low paid families the government boosted borrowing to 110 per cent of GDP, estimates Trading Economics. Corporate and household debt is estimated at 232 per cent of GDP.
Brendan Brown of Macro Hedge Advisors fears that the UK-EU trade agrement was “rotten” mainly because there is still no financial services deal.
The UK also failed to take advantage of US President Donald Trump’s enthusiasm for a bilateral trade deal, he said.
Over the years, London became a hub for global financial and other services. Local and international capital poured into commercial and residential real estate and other assets which boosted the pound.
But due to the consequences of the pandemic and former real estate speculation “the UK is suffering irreversible setbacks especially in services”, Mr Brown said.
Growing numbers of employees are likely to spend more time working from home and more financial services business could drift to Paris and Frankfurt. Office blocks in London and Canary Wharf will struggle to let floors. Banks that have loans against this collateral will be at risk, he said.
To help bail out the nation’s “critical” finances, “the Johnson government will administer the drug of sterling devaluation”, Mr Brown said. “The pound is set to win the race to the bottom among advanced economy monies over the next year and beyond.”
