Sunday, January 31, 2021
Can this stuttering recovery still pick up the pace?
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.

The International Monetary Fund’s January world economic outlook is always interesting. It normally coincides with the annual Davos jamboree in the Swiss mountains. This year, like many things, Davos took place virtually. But, having not been invited to attend the real thing for a while – it is a long story – I did not take part in the online version either, but I did devour the IMF’s new assessment.

It provides an interesting update on how the world’s economies fared during the pandemic last year, and how they are expected to do this year and next. The big picture is that the world economy shrank by 3.5 per cent last year, which means it was a big recession. It compares with a fall of just 0.1 per cent in 2009, the big negative year during the global financial crisis.

This year, according to the IMF, the global economy will grow by 5.5 per cent. You do not need a calculator to tell you that this means that the world economy will get back above its pre-pandemic level this year, implying a deep but short-lived world recession.

I have mentioned before the performance of China, the world’s second largest economy, which grew by 2.3 per cent last year, is expected to expand by 8.1 per cent this year, before settling down to a more normal (these days) 5.6 percent in 2022.

America, the world’s biggest economy, did not have a bad year in 2020, its economy contracting by “only” 3.5 per cent, despite Donald Trump’s mishandling of the coronavirus crisis, or maybe because of it. Joe Biden’s first year should see 5.1 per cent growth the IMF says, followed by 2.5 per cent next year.

China and America, in fact, will see much less economic “scarring” than other countries, the IMF believes, with GDP next year in these countries only a little bit below where it would have been in the absence of the coronavirus crisis.

The world economy’s other two big players, Japan and Germany, suffered falls of 5.1 and 5.3 per cent in 2020, the IMF says. They will recover but will not get back to pre-pandemic levels until next year.

Now let me bring it right back to home. The IMF thinks the UK economy contracted by 10 per cent last year. This matters for those interested in historical parallels. If the economy shrank by less than 9.7 per cent, it would merely be the worst since 1921. If it is more than that, it takes us back to 1709, and the Great Frost.

If you think that the IMF is being unduly gloomy, the latest assessment of independent forecasts from the Treasury has a fall last year of 10.6 per cent.

One of the big debates at the moment is whether the statisticians at the Office for National Statistics (ONS) have made the UK GDP figures look worse by applying a “gold standard” of measurement to the output of the public sector, which other countries do not.

I hesitate to remind parents who are tearing their hair out at this very moment, but unpaid home tutoring, like housework, does not count towards gross domestic product (GDP), though online teaching by teachers does. Measured activity in the National Health Service is suffering, despite the extraordinary pressure created by the coronavirus crisis, because of all those cancelled operations and non-Covid treatments.

That the UK had a big recession last year is not, however, in doubt. Even in the third quarter of last year, when the economy enjoyed a strong but short-lived bounce, consumer spending was 10 per cent down on pre-pandemic levels, while business investment showed a 19 per cent fall.

The safest thing to say is that the UK was among a clutch of poorly performing European countries, along with France, Italy and Spain.

What goes down, should of course go up, and some favour the trampoline theory of economic recoveries. All of which makes the UK’s projected recovery, 4.5 per cent this year and 5 per cent next – not quite making it back to where we were on a calendar year basis – disappointing. It is in line with independent forecasts.

Why so disappointing, particularly in comparison with Spain and France, which are projected to grow more strongly, in spite of the EU’s terrible vaccination imbroglio?

One reason, as we are discovering, is that the UK’s successful vaccine programme is not, yet, delivering liberty, and will not for a while. The current lockdown is turning into the longest of the three and, though it will not have anything like as big an impact as the first, which started in March last year, it has clearly scuppered the first quarter.

Another factor is Brexit, which I will not dwell on today, but which is creating serious trade frictions that are providing an additional dampener on growth.

There is another reason, and it carries echoes of the financial crisis. Then, you recall, the government spent a lot of money bailing out the banks and had little left over to provide a fiscal stimulus to help the economy on its recovery path.

This time the government has spent hugely – at least £280 billion – fighting the pandemic and supporting the economy and employment through it, and there is little official talk of providing a post-pandemic fiscal boost. In fact, the thoughts of the chancellor and his Treasury officials are turning to how to raise taxes to reduce the budget deficit, as discussed last week.

This is in contrast to America, where the new president is trying to push through a $1.9 trillion (£1.4 trillion) stimulus plan, and the EU, where the main debate about its €750 billion (£665 billion) recovery fund is whether it is big enough. The evidence is that fiscal boosts are most effective when, as now, interest rates are close to zero.

Rishi Sunak would o doubt say that the best stimulus any government can offer now is an easing of Covid-19 restrictions and it is correct to say that this provides the best hope of a return to strong growth in coming months. Other countries are adopting a belt and braces approach, giving their economies an additional shove to help them on their way. Time will tell which approach is best.