Economic Update: Recovery gathering pace

The economy is showing signs of recovery as pandemic-related restrictions are easing. Forecasts for growth this year have been raised and confidence in the economy among households and businesses has improved.

This Insight summarises the latest economic data and analyses what it means for growth in the coming months.

Economy resilient during recent lockdown

The early 2021 lockdown contributed to a fall in GDP. Monthly GDP fell by 2.2% in January, with a small 0.4% increase in February.

Overall, these figures were better than most economists expected. Many noted that businesses and consumers have adapted reasonably well to lockdowns over the past year. During the first lockdown, GDP fell by 7.2% in March 2020 and by a further 18.7% in April.

Nevertheless, economic output remains well below its pre-pandemic level. GDP in February 2021 was 7.8% below what it was a year before.

Reopening on track, so far

To date, each stage of the Government’s ‘roadmap’ for easing restrictions has been met.

The most recent step was on 12 April, when non-essential shops in England opened. The next stage in England is set for 17 May when indoor hospitality can reopen. The UK’s devolved nations  have also been reopening. Non-essential retail stores in Scotland opened on 26 April.

Early evidence suggests reopening has spurred an increase in consumer demand. Retail footfall and payments made by debit and credit cards rose in the week after non-essential stores and outdoor hospitality opened in England.

Consumer confidence is rising

Bolstered by the vaccine rollout and large reduction in Covid-19 cases, consumer confidence has risen sharply in recent months. The GfK index reported that consumers in the first half of April were at their most upbeat since the pandemic began.

Even prior to the 12 April, a recovery in consumer spending – which accounts for nearly two-thirds of GDP – appears to have been underway.

Following a steep fall in January, indicators such as transport usage, card payments data and retail sales suggest a recovery is building. For instance, retail sales dropped by 8.1% in January, but rose by 2.2% in February and 5.4% in March. While still around 1% below December’s level, the trend is clear and April’s figures are likely to show strong growth.

Strong short-term recovery likely

There is likely to be a recovery in economic activity as restrictions are eased. But how quickly will lost ground be made up?

Economists have been revising up their expectations for growth in 2021. In the first half of April, a Treasury survey of economic forecasters found that the average forecast for GDP growth was 5.7% in 2021. This was up from 4.8% in the previous month.

The upgraded forecasts are mainly due to the economy’s resilience shown during the winter lockdown and the plan for reopening the economy staying on track. Other factors that suggest that we could see a strong recovery in the coming months include:

• The unemployment rate is now forecast to peak at a lower level than was previously expected. Job vacancies appear to now be close to pre-pandemic levels as well.
• Consumers, in aggregate, have accumulated a substantial amount of savings during the pandemic (the OBR estimates this to total around £180 billion) and may spend some of this on top of ‘regular’ spending.
• The March Budget extended a number of support schemes to continue after the economy is expected to fully reopen.
• Businesses are becoming more confident. A number of surveys suggest improved expectations for economic conditions.

Longer-term outlook less clear

In the words of Ben Broadbent, a Bank of England Deputy Governor, we can expect to see, “very rapid growth at least over the next couple of quarters.” If this turns out to be the case, some of the economic output ‘lost’ during the pandemic will be made up.

Beyond this initial short-term recovery, there is more uncertainty. The path of the pandemic is still the most important factor. While the rapid vaccine rollout raises expectations, there is still debate over whether public health restrictions are needed in the future.

In addition, we don’t know how economic conditions will look once the initial recovery ends and government support schemes expire. Many businesses have had to borrow money during the pandemic and there’s a risk that business failures will rise, once repayments are expected.

All of this will contribute to the longer-term economic impact of the pandemic. In the near-term, however, the economy looks set for a fast recovery over the coming months.

Further reading

Government borrowing: Peacetime record confirmed, House of Commons Library.

Coronavirus: Economic impact, House of Commons Library.

Economic Indicators, House of Commons Library.

About the author: Daniel Harari is a researcher at the House of Commons Library, specialising in UK and international economies.

Photo by Dan Burton on Unsplash