UK Economy: Wait and hope

Figure 1. UK economy fell more than others and is still struggling

I enjoy attending Intelligence Forums and, indeed, this gave me the idea of emphasising ‘hope’ in this piece. I hasten to add that the ‘wait’ aspect (which completes an allusion to an observation from Alexandre Dumas Pére that these two words contain ‘all human wisdom’) is not about sitting on one’s hands. On the contrary, Forum attendees seem ex officio both positive and dynamic with especially hopeful themes that keep coming up: Enterprise, Innovation, Community and the Environment. For me, there is no doubt that economic growth in the UK would be impossible without progress in these areas in a wider global social context. Unfortunately, I fear we shall have to wait 3 years at the very least for an equitable and sustainable recovery, which makes it all the more important that Forum attendees and their like get on and show us that it can be done. 

Economics may be un-fondly called ‘the dismal science’ but it seems more like realism to say things are not going well on many fronts, not least in the UK. The pandemic is still inflicting death and illness but the economic impact is far from determinable. Some governments realised from the outset that there is no trade off between public health and economic growth but others still seem to be in several minds, including our own. Among advanced economies, the UK has performed badly in terms of health outcomes and growth in GDP (Figure 1). Mass vaccination to build herd immunity is welcome and necessary but still an insufficient solution. Some forms of social distancing, mask-wearing and travel restrictions will be in force for at least another year and test and tracing still needs to be fixed to defend herd immunity. 

GDP is still the accepted measure of economic activity but to understand better the dynamics one needs to look at its components, notably Consumption which accounts for two thirds and has been hit hard by the pandemic restrictions on various service sectors. Unemployment has increased through redundancies but the furlough scheme is helping (albeit not the self-employed) and Retail Sales (of stuff) have somehow held up quite well. The key is Consumer Confidence, which has been struggling since April and a dramatic improvement seems unlikely, even if releasing us all from ‘house arrest’ prompts a short flurry of care-free spending. Business Investment was already weak before its plummeting in Q2 last year and the priority for many companies, especially SMEs, will surely be just to stay afloat. Trade is a major concern and not just in the short-term as Brexit is proving as disruptive as was feared by everyone except the UK Government. 

Figure 2. Recovery is underway but may not be completed until 2024 (Q15)

Source: New Economics Foundation (NEF)

Figure 2 shows quite how disruptive the pandemic has been compared to the 4 previous recessions and how far economic activity is below its level at the end of 2019. With other GDP components struggling to varying degrees, the heavy lifting will have to carry on being done by the public sector. For now, this will have to be current expenditure on public health, furlough payments, higher universal credits and various subsidies to keep transport operators, universities, charities, sports and the performing arts afloat. On top of this, long overdue investment will become inevitable, not just in physical infrastructure but in apprenticeships and vocational skills, funding for climate change programmes and risk capital for innovative private sector companies. There is currently much hand-wringing at the level of public borrowing but there really is no alternative to both emergency short-term spending and long-term investment. Conventional policies have run their course and the  Bank of England will have to step up and print as much money as the Government needs without worrying unnecessarily about inflation.

Alas, the pandemic has so far shown the current UK government to be as haphazard as its predecessors in strategic policy-making and operational delivery. The combined shocks of Brexit and the pandemic have further exposed deeper flaws in governance that neglected many parts of the country and the Union itself is under threat from the SNP. Furthermore, we somehow have a situation where more people, for good and bad reasons, are again failing to cope with life in our affluent society while enterprise and innovation remain undervalued. A lot needs to be done and is, thank goodness, being done from the bottom up by Forum attendees and others like them. We may have years to wait for the economy to recover but at least we can hope. 

Alastair Winter advises CEOs and CFOs of international organisations on how developments in Geopolitics, Macroeconomics and Global Financial Markets affect their businesses.