The Economy Summary is part of our Weekly COVID-19 Bulletin, sent every Thursday. You can sign up to receive your copy here.
Office for National Statistics (ONS) data for January suggests that the economy was hit less by the renewed lockdown than expected. UK GDP is estimated to have fallen by 2.9% in January 2021 compared to the predicted 5%. The output approach to GDP shows that January’s level was 9% below that seen in February 2020 and was 4% below levels seen in October 2020 – the initial recovery peak.
The National Institute of Economic and Social Research (NIESR) said that January’s smaller than expected fall in GDP means that it now estimates a contraction of 2.4% in the first quarter of 2021. This would leave GDP in the first quarter of 2021 around 9% lower than its level in the last quarter of 2019, before the pandemic struck.
Real-time data and NIESR analysis imply that GDP is likely to resume its growth in February and March, by 0.3% and 1.1% respectively, on the back of higher contribution from Government services and improving consumer confidence as infection rates come down. As a result, the first quarter of 2021 is likely to see a smaller contraction than widely anticipated. However, the pace of recovery from the second quarter will crucially depend on how the opposing effects of the vaccine roll-out and lifting lockdown affect the path of Covid-19, as well as how consumers and businesses react.
Bank of England governor Andrew Bailey said that the UK economy should recover to its pre-pandemic size by the end of this year. Speaking in an interview with BBC Radio 4’s Today Programme on Monday morning, Mr Bailey said the Bank was ‘not out of firepower’ in defending the economy as it recovers from the pandemic, adding that it was looking at ‘new tools’ which could include negative interest rates. However, he warned that new variants of the virus could still pose a risk to the economic recovery. The Bank of England governor also remarked that the economic effects of the pandemic had been ‘very unequal’, with women, ethnic minorities and the low-paid all disproportionately impacted.
OBR committee member and former Bank of England deputy governor Sir Charlie Bean said last week to the Commons Treasury Committee that he does ‘not expect households to go out and blow [their savings] all within the next quarter or two’ but it will be ‘spread out over several years’. According to a recent report by the Centre for Economics and Business Research, UK households will go on an estimated £50bn spending spree once lockdown restrictions are lifted. It warned that ‘if interest rates are kept low, there is a real threat that inflation could rise rapidly above the Bank of England’s 2% target and be difficult to control.’