Sunday, January 03, 2021
Five reasons to be cheerful - and two to worry about
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Rarely, as we start a new year, has the gap between hope and reality been so wide. The reality, as far as the economy and business in concerned, is the prospect of weeks, maybe many months, of lockdown or near-lockdown restrictions. It makes it, by my reckoning, the worst start in the very many years I have been following these things.

You may ask, what about the start of 2009, when the economy was reeling from the collapse of Lehman Brothers the previous autumn and the teetering on the edge of much of the banking system? But gross domestic product (GDP) fell by “only” 1.7% in the first quarter of 2009, one of its two biggest quarterly falls during the financial crisis, and we will be lucky to get away with anything as small as that during the coming quarter.

The gap between hope and reality struck me most when looking at some of the absurdly hyperbolic tabloid “boom” headlines which followed the EU-UK trade deal and the rolling over of most of the EU’s trade deals with other countries, the latest big one being Turkey.

But, without going down that daft road, let me offer some reasons for hope. In fact, let me offer you my version of the 5:2 diet, which some people may be needing just now. In my case, it is five reasons to be optimistic, and two to be still concerned.

I shall stick with Brexit for my first. However thin the EU-UK trade deal is, and it is, it is better than the short-term chaos of a no-deal Brexit. There is a view that a deal was done because Boris Johnson convinced the EU that he really was mad enough to contemplate a no-deal Brexit.

But a basic free trade agreement was always on offer, and the EU has many more reasons to be happy with it than Britain. Its comparative advantage is in goods, particularly manufactured products and food, the UK’s in services, particularly business, professional and financial services. The deal preserves that advantage, albeit with a but more friction, while doing nothing for the services that make up the vast bulk of the UK economy.

Alongside that, Liz Truss, the international trade secretary, has got on, quietly for her, in rolling over those EU deals. The Brexit deal will still damage the economy in the medium and long-term but avoiding most of the short-term chaos of a no-deal Brexit and a schism in Britain’s trade relations with other countries has to be better than the alternative.

Second, while Covid-19 still stalks the earth, this will be a good year for the global economy, and when it does well, the UK should not be too far behind. The global economy shrunk by between 4% and 4.5% in 2020 and leading forecasters expect it to grow by 4% or 5% this year, led by China.

We should put that in perspective. 2020 saw the biggest downturn in the global economy in living memory. The 2009 recession saw global GDP drop by 1.7%, on World Bank figures, and that was followed by a brisk 4.3% recovery in 2010, though it did not necessarily feel like it. But a global rebound is better than stagnation, or worse.

Third, there will be no Donald Trump to mess up the global recovery. A bad, protectionist president, who undermined America’s institutions, including the Federal Reserve, its central bank, turned out to be a very bad loser. Joe Biden will approach his presidency as he approached his election campaign – cautiously – but we won’t have to be looking out for disruptive tweets in the early hours.

Fourth, to look at a couple of UK-specific factors. There have been two striking things about the economic numbers in 2020. The first is the build-up of involuntary savings, as restrictions limited people’s spending. The saving ratio – saving as a proportion of disposable income – rose to a record 27.4% in the second quarter and stayed at a high 16.9% in the third, even as the economy recovered.

What this means, according to the Resolution Foundation think tank, is that “social spending” – hospitality, entertainment, travel, physical retailing, etc – will bounce back “very quickly indeed …. once a semblance of normality returns”.

A related development, which also offers reasons for optimism, is that the peak in unemployment will be lower than feared. Government measures, including the extension of the furlough scheme until the end of April, should mean that the jobless total peaks at well below 3m, some 7% of the workforce, lower than after previous milder recessions.

Fifthly, there is the vaccine. The very good news in the past week was regulatory approval for the Oxford-Astrazeneca vaccine. That offers the very real prospect of a sustainable way out of this crisis. And, while everybody is focusing on the spring, it should at least guarantee that the second half of the year is better than the first.

So, five reason to be moderately cheerful. I would not be doing my job, however, if I did not mention a couple of reasons for caution, things that might temper some of that optimism.

One is this pesky virus, the new variant of which is more transmissible than the first, as I know from direct experience in my own family. I, like Rishi Sunak, was too optimistic about the course of the pandemic during 2020. Though I feared a second wave in the winter, its scale surprised me. We don’t how many more surprises it will throw at us.

The other is how the Treasury deals with the fiscal hangover from this crisis. With a budget date set for March 3, quite a few people have got in touch with me to ask whether there will be tax increases then. I have said not, though the chancellor might provide some signposts, but we shall see. We shall also see whether the current very unusual combination of record public borrowing and very low borrowing costs can last. And whether the Bank of England will provide more quantitative easing (QE) and/or negative interest rates. Those are for future columns.

Adding all this up, what kind of growth can we expect for 2021? The Office for Budget Responsibility, in its late-November forecast, had a central forecast of 5.5% growth this year, after last year’s 11%-plus decline. The Resolution Foundation suggests that first quarter restrictions will knock that down to about 4.3%, which seems reasonable. Let us hope so, anyway.