Economy to rebound strongly due to vaccine

The UK’s rapid Covid-19 vaccination programme will help the economy rebound strongly this year, according to the Bank of England.

The economy is expected to shrink 4.2% in the first three months of 2021, amid tighter lockdown restrictions to slow the spread of the virus.

However, policymakers expect a rebound in the spring as people become more confident about spending.

It came as the Bank held interest rates at 0.1%.

What does this mean for households?

The Bank said economic growth was expected to “recover rapidly” in 2021, with a successful vaccination programme supporting a “material recovery in household spending”.

Its latest Monetary Policy Report said the positive vaccine news had driven an increase in UK holiday bookings later this year, although overseas bookings remained muted.

While government support schemes are expected to limit any immediate increase in unemployment, the jobless rate is still projected to rise to 7.8% later this year as the furlough scheme winds down.

The most recent unemployment rate – for September to November – was 5.0%,

However, policymakers said the outlook for the economy remained “unusually uncertain”.

What problems lie ahead?

The Bank said the rebound in economic activity would depend on controlling any new strains of the virus, as well as households’ willingness to spend.

It said most people now expect “life to return to normal” within a year.

But some voluntary social distancing was likely to persist, as it has done in economies where restrictions have already been eased substantially.

In New Zealand, for example, spending on restaurants and hotels has still not recovered to pre-pandemic levels.

The Bank said: “The Covid vaccination programme would be expected to lead to an easing of social distancing restrictions, reduced economic uncertainty and higher activity, although the timing of those effects is hard to predict.”

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Are people more likely to spend or to save as the economy recovers?

Millions of workers remain on the government’s furlough scheme, while redundancies increased sharply at the end of last year.

However, many high earners working from home have saved more during the pandemic.

The Bank said £125bn more was squirrelled away in UK savings accounts last year.

“That figure is likely to rise substantially further over the first half of 2021,” the Bank said.

Policymakers believe retired households, which have received vaccines sooner, will start spending their savings first.

Greater job security is also expected to lead to higher spending.

However, the Bank noted that 70% of the people it surveyed planned to keep their extra money in savings instead of spending it.

Sales of new cars are also expected to remain subdued, though concerns about using public transport have pushed up sales of second-hand vehicles.

What is the reasoning behind the Bank’s strategy?

The Bank of England is not just counting jobs and prices, but vaccinations too.

On this basis, despite the current three months seeing a lockdown-inflicted fall in the economy, policymakers are more confident about the timing of recovery, in the middle of this year.

Indeed, that recovery will be mathematically sharper than previously predicted, because of the further drop right now. As the Bank concludes in its forecast “GDP picks up strongly” as restrictions are assumed to ease between April and September.

In terms of its decisions, that means the Bank has held fire, leaving interest rates at historic lows. Not one of the nine panel members deciding rates voted for the much-hyped “negative rates” seen in Europe.

Commercial banks will be asked to prepare in the next months, so the lever is an option, but the Bank of England was at pains to say this was not a signal of intentions.

The Bank was also clear that the post-Brexit trading rules will hit the economy, and that there are new “barriers” likely to lower trade between the UK and EU, some which are yet to emerge. This goes beyond the government’s repeated claims that such changes are “teething problems”.

The big message, though, is a more confident assertion that the economy, as well as the people, will be inoculated by the summer.