Sunday, December 26, 2021
The figures tell of a boom year - but it never felt like it
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.

We will not remember 2021 with great fondness I suspect. A year in which we were supposed to shake off the coronavirus and return to something like normal turned out rather differently. We end the year almost as we began it, amid great uncertainty.

When future historians look back on it, certainly economic historians, there will be a curiosity. Looking at the latest official figures published a few days ago and assuming only very modest growth in the economy in the current quarter, growth this year will be roughly 7 per cent, give or take a decimal point or two.

In any normal circumstances that would be regarded as a boom. Indeed, in 20 or30 years’ time, when people are looking at the gross domestic product (GDP) data, it will look very much like the fabled V-shaped recovery, and a pronounced one at that.

Context is important. 2021’s growth comes after the slump of 2020, when the economy, we now know, shrank by 9.4 per cent; huge but a bit smaller than earlier estimates. Even so, 2021’s growth looks on the basis of the figures, like boom time for the economy. So why did it never feel like it?

One reason is statistical. If we look back on 2021 then, on the quarterly growth numbers, there was only one really strong three-month period. The year started with a 1.3 per cent quarterly fall in GDP, during the third lockdown, bounced back strongly with a 5.4 per cent expansion in the April-June quarter, ss things re-opened, then slowed to 1.1 per cent in the third quarter, and has probably slowed further in the fourth, under the impact of Omicron.

The growth story of 2021, just like the slump story of 2020, was all about the second quarter. In the second quarter of last year, GDP plunged by 19.4 per cent, and largely explained why 2020’s GDP fall was the biggest in a very long time. This year’s second quarter bounce, which translated into a 24.2 per cent increase compared with a year earlier, is now quite a long way behind us but guaranteed that the final tally for 2021 would be very strong.

There was, however, more to it than this. It never felt like because we always had one eye on Covid, and its recurrence, and one on soaring inflation, together with supply chain problems and shortages of workers in some sectors. Recoveries can bring stresses and strains, but this one brought more than most.

You can perhaps see this best when it comes to business investment. Businesses were given an almighty incentive to bring forward investment by Rishi Sunak in the first of his two budgets this year, back in early March. The 130 per cent “super deduction” against corporation tax was that incentive, and it provided a bridge to the time, in April 2023, when the rate of corporation tax will shoot up from 19 to 25 per cent.

Give it time, perhaps, but the incentive is a long way from producing an investment boom. Figures published just before Christmas showed that business investment fell by 2.5 per cent in the third quarter and was lower than at the end of 2020, before the incentive was introduced. It was a hefty 11.7 per cent below where it was at the end of 2019, before the pandemic struck.

To be fair to business investment, and to the chancellor, some of the latest fall reflected what the official statisticians described as “large decreases” in investment in transport equipment, which probably reflects chip shortages and shortages of new cars and commercial vehicles. But there was also a drop in investment in intellectual property, partly offset by stronger spending on ICT (information and communication technology) and other equipment.

The point still stands, however. Businesses have never been sure this year that the worst was over. They have had to cope with as well as the fear and reality of Covid and inflation, a chaotic and business-unfriendly government which has loaded it with hefty additional taxes, even if most of them are yet to come.

We are not, either, trading our way to success. Net trade is currently subtracting from economic growth and, in the three quarters of 2021 for which we have figures, annual growth in imports exceeded that for exports.

There is a way to recover for both exports and imports, as a result of the pandemic, supply chain problems and Brexit. It looks as though the volume of exports this year will have fallen by around 16 per cent compared with 2019 levels, while imports are down by about 14 per cent. It will take longer for trade to get back to pre-pandemic levels than most areas of economic activity.

I don’t want to end on too downbeat a note. I always say that you write off the British consumer t your peril but for much of this year, households seemed to be about as cautious as businesses when it came to spending. The re-opening of non-essential retail in the spring was followed, not by a runaway boom, but several months in which retail sales fell, which was never part of the script. Even allowing for the diversion of spending to hospitality and holidays, this was disappointing for shops.

The latest figures tell us, however, that before Omicron, consumer spending was bouncing back, narrowing the gap compared with pre-pandemic levels.
One of the most interesting economic variables over the past couple of years has been the household saving ratio, saving as a percentage of disposable income. In the spring of 2020, when people were unable to spend on a lot of things they usually do, the ratio rose to an all-time high of 23.7 per cent. Most of this was “involuntary” saving, but some was precautionary.

The ratio fell in the second half of last year, but remained well above normal level, before jumping to a high 18.4 per cent in the first quarter of this year. Now, however, it has come down quite sharply, to just 8.6 per cent in the third quarter. That is higher than immediately before the pandemic but lower than, for example, in the mid-2010s.

I suspect that this saving story is now over. Consumer confidence has faltered in the wake of Omicron but it has not collapsed. Households, moreover, are facing a cost-of-living squeeze, which will intensify with the huge increases in energy bills, alongside tax increases, due in April. People will not have the luxury of putting so much aside. Whether or not the great British consumer can be relied on to spend through adversity will be one of the big questions for 2022.