Sunday, August 15, 2021
A V-shaped recovery - but not yet a Heineken one
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. Not to be reproduced without permission.

It is not every Sunday that I get to comment on figures which show that the economy grew by 4.8 per cent in a single quarter and was more than 22 per cent bigger than a year earlier. In fact, I can confidently predict that I will never do so again.

Yet, as you may know, that is what the Office for National Statistics has just told us happened in the second quarter in the latest gross domestic product (GDP) figures. This was good news, and we should not look a gift horse in the mouth. Remember the debate about the shape of the coronavirus recession and recovery?

Would it be a V-shape, with a rapid bounce back, or a depressing “L”; down sharply and then flatlining, which some feared? How about a “U” or bath shape, with a fall, a prolonged period of dragging along the bottom, before recovery.

As a V-shaper, always expecting a pronounced recovery as restrictions were lifted, I am pleased to say that that is what we mainly appear to have. It is a bit messy, thanks to a lockdown-induced 1.6 per cent GDP fall in the first quarter, introducing elements of a square-root shaped cycle. But we will look back on it as an even more pronounced “V” than is typical.

You can see this in the quarterly figures, which have GDP now 4.4 per cent below pre-pandemic levels at the end of 2019, and on course to get back there over the next two to three quarters. Or you can find it in the monthly GDP figures, which in June were just 2.2 per cent below the monthly definition of the pre-pandemic level, in February 2020. On these figures, three months of rises in line with June’s 1 per cent increase would get back to that level.

The quarterly figures are probably the ones to use, given that most countries do not yet publish monthly GDP data. More on international comparisons in a moment.
Before that, it is worth dwelling for a second on how we should define recovery from the pandemic. Getting back to pre-pandemic levels is the least demanding test. The other two tests are getting back, when things settle, to the long run rate of growth we had before the pandemic. Given that this was rather subdued, particularly since 2016, I would hope that we can do better than that.

That then takes us to a second test. Can we get back to where we would have been had the pandemic never happened? Most forecasters think there will be some permanent scarring - and of course we will be living with the larger government debt – but estimates of the extent of such scarring have been coming down.

The recovery, as noted above, is something to be celebrated. Last year the government’s view was that comparisons with the UK and other countries should not be made, because of different ways of measuring the public sector. Now they are quite keen to do so, even though these effects remain. GDP was boosted in the second quarter by the return of schools, and it was boosted in June by a big increase in GP visits, as well as the re-opening of hospitality. I don’t think the two were related.

Even so, the UK still has further to recover than other big economies. America’s GDP is already above pre-pandemic levels and the other G7 countries – Japan, Germany, France, Italy and Canada – are closer to getting there. Much will depend on the course of recovery, and in the UK’s case the “pingdemic” of forced self-isolation, from now on.

There are three other things worth noting, which are potentially troubling. The first is business investment. In his budget in early March Rishi Sunak announced an important incentive to boost investment, the so-called 130 per cent “super deduction” against corporation tax. It is early days, but so far the response has been underwhelming.

Business investment picked up by a modest 2.4 per cent in the second quarter and was 15.3 per cent below pre-pandemic levels, which themselves were too weak for comfort. Business investment fell by 10.2 per cent last year and will have to go some in the second half if it is to avoid another annual fall, which would be disappointing in the context of the chancellor’s tax incentive. The good news is that investment intentions are strong - but they have to be delivered.

Second, anybody looking for a post-pandemic rebalancing in the economy will struggle to find it in the figures. This is developing into a services-led recovery. Manufacturing is described by the statisticians as “broadly flat”, which it is. Manufacturing output in June was barely higher than last November, when the economy was in lockdown.

Some of that reflects volatility in sectors like pharmaceuticals but vehicle manufacturing is also struggling. This could be purely the effect of microchip shortages or it might reflect a wider malaise. Honda’s factory in Swindon closed at the end of July. Manufacturing recovered faster than services last year, being less affected by restrictions, but it appears to have been flatlining since.

Finally, talking about imbalances, both exports and imports remain below normal levels; those of 2019. There are Brexit and Covid effects at work here, though recent weakness in exports has been to non-EU countries. The disruption in EU trade in the early part of the year appears to have faded, though exports of goods to the EU in the first half of the year were down by 14.5 per cent on the corresponding period of 2019, while imports from the EU were down by 23 per cent. That might explain some of the shortages we are seeing.

Normality has returned in one respect. In June there was a monthly trade deficit of £12 billion in goods, and of £2.5 billion in total trade, including services. That total trade deficit was £26.2 billion over the latest 12 months, suggesting that the surplus of £14.6 billion over the previous 12 months was an aberration.

So what should we make of it all. It is certainly a recovery, and a strong one, driven by the removal of restrictions. But it is not yet, by a long way, a Heineken recovery, reaching the parts that others do not reach. Slogans like building back better remain just slogans, for now at least. There is plenty of work to be done.