“It’s a bit like a barbell at the gym,” says Gerard Lyons, Chief Economic Strategist at Netwealth. “A barbell has weights at either end, and just a bar in the middle.”
You’d be forgiven for assuming that Lyons is lending his voice to the weightlifting discourse; but he’s really staying slightly truer to form. What he’s actually talking about here is the UK economy.
“The UK is a very imbalanced economy,” he explains. “There is a geographic imbalance: it’s urban versus rural, and it’s coastal versus inland. But there are also imbalances between people who own properties, and those who rent; and between skilled and unskilled workers. At one end, we’ve had some real global industries that are top of the game — the financial sector, pharmaceuticals — but at the other end of the bar, at the other end of the economy, [are the] low-skilled, low-wage, low-productive jobs.”
It’s certainly not hard to believe that the UK is an economy with little balance. And, surely, COVID-19 has exacerbated that imbalance to an alarming degree? After all, some sectors have seen an almighty boom since the pandemic broke, the property market being a key example — but to say other sectors have struggled would be a gross understatement. Hospitality and leisure have had to contend with more than any of us had previously thought possible, not least because of the sheer amount of jobs that have been lost: 368,000 in hotels, restaurants and pubs alone. Lyons spoke, too, of an “age imbalance”: surely that will also have exacerbated, given how many young people work in hospitality or arts-based industries?
The questions are endless. And the biggest question must be: what will happen to the economy now, as we move forward into the ‘new normal’?
1. Uncertainty is rife: but is there cause for cautious optimism?
Lyons is frank about the uncertainty that lies ahead. “It would be wrong to say that we can be certain about anything in the year ahead,” he acknowledges. “Unemployment — while it will not peak at as high a level as once feared — will clearly be higher than it was a year ago, and there are some other legacy issues on the job side that have yet to materialize: we don’t know how many people on furlough will be able to return to full- or part-time work. And then, of course, the other uncertainty is that many small firms will be emerging from this crisis carrying high levels of debt: because the bounceback loans were not grants, they were loans which needed to be repaid.”
It’s safe to say uncertainty abounds: and Lyons is frank about the important part that policy will play, as we move into a post-COVID world. “We have a big policy challenge ahead,” he explains. “That doesn’t mean we should panic: it means we should have a clear vision about the route we plan to take.”
Nevertheless, Lyons’ view is optimistic. “There will be a rebound, as we unlock,” he states. “That rebound is — in my view — likely to be very strong. There’s a lot of pent-up demand; people with the ability to spend are likely to spend a significant part of their pent-up savings.”
This optimistic outlook is one shared by Saftar Sarwar, Chief Investment Officer at Binary Capital Investment Management. “I fully expect the second half of this year to be highly positive for the UK economy,” Sarwar asserts. “The UK government forecasts that the economy will grow by around 4% this year; I expect economic growth to be above this figure (perhaps even 6% growth), with economic growth driven by consumer and government spending.”
2. Consumer activity is central — but there are considerations to bear in mind
Consumer spending is really the key here. After all, surely it makes sense to state that many people have accrued significant savings during a time when they haven’t been able to travel (either recreationally or even just to and from work), or eat out, or simply pop into shops for impulse purchases? And surely it makes further sense to suggest that were people to spend said savings once the country reopens — on restaurant visits, high street retail or arts and entertainment, to list a few — that could give the economy a much-needed boost, bringing money back into those sectors that have been hit the hardest?
Well, there are a few considerations to bear in mind. Firstly, not everyone has been able to accrue major savings over the past year. Many have lost their jobs, or taken pay cuts — or they simply don’t earn enough to have a level of disposable income that will lead to significant savings, lockdown or no lockdown. Even taking these caveats into account, though, savings have been considerable: the Bank of England calculated in February’s Monetary Policy Report that “data on household deposits suggests that between March and November 2020 consumers accumulated a stock of savings of over £125 billion in excess of what might otherwise have been the case.”
3. Inflation: what's the risk?
Household savings have been considerable. But then there’s the big question: if pent-up demand leads to everyone immediately splurging their unexpected, pandemic-bequeathed savings as soon as they’re able (an option termed the “most bullish” of the three scenarios recently suggested by David Smith in The Sunday Times; the other two being households hanging onto their savings and continuing to save at the rate they have been over the past 12 months, or hanging onto their savings but returning to a pre-pandemic savings ratio), could that lead to a risk of inflation?
"The inflation risk needs to be kept in perspective"
“Inflation is always a risk, always a concern,” Sarwar acknowledges. “There may be a temporary rise in inflation as the economy opens up, but I believe that rise will only be temporary. There are persistent imbalances in the UK economy which means that persistent rising inflation will not become a permanent feature.”
Lyons, too, believes that the inflation risk “needs to be kept in perspective”. He asserts that there has been a “big worry” in financial markets about whether the pandemic will leave an inflation legacy in its ugly wake, and he acknowledges the factors that could lead to a rise in inflation. “We don’t know how much of their pent-up savings people will spend — that depends on many factors — but there is a lot of pent-up demand,” Lyons explains. “So the danger of inflation in the near term is that of pent-up demand and supply bottlenecks: that production cannot meet that pent-up demand, or restaurants decide to ramp up their prices because they’re booked out every night.”
But Lyons doesn’t believe that rampant inflation is on the cards for the UK economy. “It’s possible that we could see higher and more volatile inflation in the next year or two; but that does not, in my mind, imply that we should expect to see a return to high and rampant rates of inflation,” he maintains — and he cites longer-term factors over the past three or four decades that have contributed to low inflation, such as the intense global competition resulting from globalisation, and financialisation (which, he explains, is linked to a greater focus on short-term financial performance). “In my mind, many of these longer-term structural factors will continue to prevent inflation from returning to the way in which some people fear,” he clarifies.
4. And what of Brexit?
As far as the impact of Brexit is concerned, it’s safe to say it’s early days: any adverse effects of leaving the EU are likely to be smothered by the adverse effects that the multiple lockdowns — and, indeed, the pandemic in general — have had on the economy. ING Think noted low traffic between the UK and the EU in January, and pointed out that there was clearly a “Brexit effect” impacting UK trade that month; but they also asked “how much of this is temporary teething issues, and how much is going to be longer lasting?”
That’s the big question. Teething issues is Sarwar’s opinion: “We are not even one year into the trade deal with the EU,” he explains; “Naturally such a movement in trade and development has short-term impacts which could be negative for the UK economy, but the longer-term opportunity is real and ever-present if grasped properly” — but when it comes to Brexit, we’ll ultimately have to wait and see.
5. So: what sort of economic future are we heading towards?
In terms of sectors, we know that hospitality and leisure are likely to struggle: at least initially (though the vaccination programme will surely be a help in that regard). Sarwar thinks physical retail will also struggle, as consumers continue to prioritise online models of shopping: but he is optimistic about both the construction and manufacturing sectors, suggesting that manufacturing in particular will “exhibit strong growth this year.”
And Lyons suggests that we’ve got to look back, in order to look forward. “The pandemic caused a deep recession in March and April [of last year]…and how the economy then performed will give us a guide, maybe, to how it might respond and react as we emerge from this lockdown now.” So: how did the economy perform back then? “In some respects, it was a multi-speed economy from May onwards. Parts of the economy rebounded incredibly quickly — online retail is a classic example — and then some parts of the economy effectively were moribund. The creative sector, the comedy sector, the tourism sector…hospitality, more generally. So it was a multi-speed economy, but even for a multi-speed economy, the parts that recovered did recover very quickly and strongly in some areas.”
"We could be back to pre-crisis levels by the start of next year"
And taking that into account, together with the second lockdown — which effectively continued into this year, and which “did not have as devastating an impact as the first lockdown” — Lyons predicts that we’ll be back to pre-crisis levels of economic activity by the beginning of 2022.
Nothing is certain: the past year alone has taught us that. And there’s no doubt that tough times lie ahead. But there is cause for hope, too. Lyons believes that “in all likelihood, the economy will bounce back.” We’ll keep all our fingers crossed.
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