Our Opinion: 2021
The UK’s Recovery
The British economy is quickly recovering from its steepest drop in three centuries. Labour-market statistics show a fall in unemployment and a rise in wage growth. At the same time, the UK has reported the largest monthly rise in the annual rate of consumer price inflation in over a decade.
The recession of 2020 was not only the steepest for centuries but one of the oddest. The government absorbed much more of the economic hit than in a typical downturn through its furlough scheme, tax cuts and loans. Despite the fall in GDP, unemployment never rose above 5.1%. Business insolvencies were rarer than the year before.
Household balance sheets have seldom been healthier. Last year the household savings ratio—the percentage of disposable income that people save rather than consume—leapt to its highest level on record. Office workers found themselves saving on commuting costs and lunches, whilst they also had fewer opportunities to spend the extra money. Around £145bn was added to household bank accounts in 2020, driven mostly by the highest earners.
How quickly the economy recovers will depend on what households choose to do with this hoard. Although overall consumption fell sharply in 2020, transport and recreation activities accounted for most of the drop. Measures of consumer confidence point to a large bounce in spending. Services are likely to benefit from that.
Healthier bank balances should support higher spending this year even if the cash is not withdrawn. Consumers with higher than usual deposits feel more comfortable to spend money. The National Institute for Economic and Social Affairs forecasts GDP growth of 5.7% for 2021, assuming that the savings ratio falls to more normal levels. If households choose to spend the accumulated cash balances, growth could be around 3% higher still.
The British economy is bouncing back as the government loosens restrictions. But for all the optimism, most analysts still expect the economy to be smaller at the end of the year than it was on the eve of the pandemic.
27th May 2021
