Economists expect the UK economic recovery in 2021 to be slower than in peer countries, because of a lower starting point, a larger services sector, low business investment and the impact of Brexit.
A survey of nearly 100 economists revealed that most of them expect the size of the economy not to return to pre-pandemic levels until the third quarter of 2022, despite the expectation of a strong consumer-led rebound from the rollout of the coronavirus vaccine. Increased unemployment, bankruptcies and the impact of Brexit are expected to limit the pace of the recovery.
Many economists say the government should not raise taxes at least until the economy has fully recovered, and others note that, given low interest rates, the pressure to reduce the burden of public debt is low.
Here are the full responses to questions about the economic outlook for 2021.
UK economy: Do you expect the economy to regain its pre-pandemic size in 2021? How will the UK’s recovery compare with its peers?
Howard Archer, chief economic adviser at EY Item Club: No. We do not expect the UK economy to regain its pre-pandemic size to around mid-2023. We expect GDP growth around 6 per cent in 2021 as the economy increasingly benefits from the positive Covid-19 vaccine developments. We assume the UK and EU do ultimately agree on a Free Trade Arrangement. Growth is seen at 4.5 per cent in 2022.
Angus Armstrong, director of Rebuilding Macroeconomics, at the National Institute of Economic and Social Research (NIESR): The economy will regain its pre-pandemic size in 2023. Much depends on the efficacy and success of vaccine rollout. UK recovery will be slower than peers: (a) larger service sector: (b) weakness of business investment: (c) lack of clear social distance messaging.
Nicholas Barr, professor of public economics at LSE: No. Output will grow but not return fully to its pre-pandemic level. The extent to which recovery compares with that in other countries will be heavily influenced by whether or not the UK and EU have a free trade agreement. If not, the UK recovery will be in the bottom 30 per cent or so compared with other OECD countries.
Ray Barrell, emeritus professor of economics and finance, Brunel University: It is unlikely that the UK will regain its pre-pandemic size in 2021. Even if a reasonable Brexit agreement is reached before the end of the year it will mean slow underlying growth in 2021. A thin Brexit agreement would be damaging and reduce potential growth more. We can add more problems to that. The pandemic has worsened the prospects for the UK more than for most other countries. The political reaction of the UK to the pandemic has been poor, especially as compared to the majority of European countries. Restrictions have come in later than was desirable, and as a result more damage was done to the economy than was needed. A well-managed set of restrictions reduces both short-term and long-term damage. We have not seen that in the UK. It was clear in late March we would have a difficult 15 months. The UK announced a short-term furlough scheme and extended it every few months. At the same time, Germany introduced extensive schemes for short-time working that would run well in to 2021. Output prospects are improved in the latter case by the increased degree of certainty that longer-term commitments produce.
Aveek Bhattacharya, chief economist, Social Market Foundation: The British economy is likely to fall slightly short of regaining its pre-pandemic size in 2021. Since it has more ground to regain than countries that have been less affected by the pandemic in economic terms, I expect that Britain’s growth rate will be higher than peer countries in 2021, but overall GDP will be lower than peers relative to pre-pandemic levels.
The devil will be in the economic details. A consumer spending splurge as a vaccine shifts us back to normality is likely to offset disappointing business investment figures — particularly in the event of a “no deal” Brexit. Even if growth in the UK exceeds that of peers next year, the medium-term outlook remains weak — with Britain’s lacklustre productivity performance holding back the economy.
David Graham Blanchflower, professor at Dartmouth College, New Hampshire, and Glasgow university: Hard to know. Four huge unknowables are the pandemic and how it will be impacted by vaccines: what form of Brexit will finally happen, what responses there will be by monetary and fiscal authorities and what long-run changes in behaviour there will be. My suspicion is that Brexit will be disastrous and mean much worse outcomes than in its peers.
Philip Booth, senior academic fellow at the Institute of Economic Affairs: No. The UK recovery will be slower than its peers because so much of the economy is based around services that have been badly hit and because it would be necessary to regain the very high employment rates that we had previously if we are to recover previous levels of output. If you start with a labour participation rate of 60 per cent then it is not that difficult to get back there.
Nick Bosanquet, professor of health policy at Imperial College: No — it will only recover in 2023. “The economic emergency has only just begun.” Business investment will fall 10 per cent in 2021. For consumers, trouble has been shifted forward. Every month means higher debt for many households and for companies. Rising unemployment will lead to spending caution. Exports will continue to decline. We will have the groaning twenties—not the roaring twenties. At best slower growth than the eurozone and the US— a hard BREXIT would mean a year of recession.
Erik Britton, managing director at Fathom Consulting: The UK will grow rapidly in 2021, probably regaining its pre Covid-19 level by the end of the year. Brexit after-effects will hold growth back significantly but on the other hand, the UK has further to recover than most of its peers, so growth will probably be about the average by international standards, and extremely strong by historic standards.
George Buckley, chief UK economist at Nomura: We expect a prolonged recovery that takes until the end of 2023 or longer before UK output regains its pre-crisis peak. The fall in UK GDP has been among the worst in Europe (alongside Spain) in part due to its heavy reliance on services (80 per cent of the economy) and Brexit concerns weighing on investment spending. Consensus forecasts for the level of UK GDP in 2021 (relative to 2019) have been revised down (again alongside Spain) more than all of the UK’s peer group countries (G7 and beyond) over recent months.
Jagjit Chadha, director at NIESR: No. The recovery will as a central case take another year at least just to regain pre-Covid-19 levels of activity. The botched exit from the EU will not help as it will hamper our ability to trade goods, services and capital with countries that be growing quite rapidly in 2021. We will probably not do better than our peers and probably worse.
Mark Cliffe, global head of the New Horizons Hub at ING: The economy as a whole may recoup half of 2020s losses. But the annual change in GDP will barely even begin to tell the story. The lived experiences of different segments of the population and of different sectors of the economy will continue to differ radically. The progress through the year will also be erratic, as it will be contingent on the interconnected “3 P’s” of the pandemic, psychology and policy. The success or otherwise of the vaccine rollout, unprecedented shifts in behaviour and often-erratic changes in policy mean that we further surprises are in store. And this is before we throw in the dislocations from Brexit.
David Cobham, professor of economics at Heriot-Watt University: It seems obvious that the poor and always lagging handling of the pandemic will mean that the UK economy is highly unlikely to regain its pre-pandemic size in 2021, and its recovery will also compare badly with most of its European peers.
Brian Coulton, chief economist at Fitch Ratings: No. According to our December 2020 GEO forecast, the UK will see a slower than average recovery in 2021 after a deeper than average downturn in 2020. The GEO sees UK GDP falling by 11.2 per cent in 2020 and rising by 4.1 per cent in 2021. Our equivalent forecasts for developed countries overall are -5.4 per cent and + 4.5 per cent respectively. The GEO assumed a no deal/WTO terms Brexit. This assumption knocked about 2pp off of our 2021 forecast relative to a forecast assuming a UK/EU FTA.
Diane Coyle, Bennett professor of public policy at University of Cambridge: No, it will take longer, and be slower than our peers. A combination of the structure of the UK economy meaning we have been harder hit, and indecisive or inadequate policy responses.
Bronwyn Curtis, chair at JPMorgan Asian Investment Trust: No. I’d like to think that the early rollout of the vaccine would mean the UK economy would open up earlier and therefore recover more quickly than other G7 countries. However, the economic disruption caused by the imposition of tariff and customs checks at the border from Brexit will cut 1 per cent or more off growth.
Paul Dales, chief UK economist at Capital Economics: We are a bit more upbeat than most as we expect the economy to regain its pre-crisis peak in early 2022. That would be later than the US, but about the same time as the eurozone. And unlike most forecasters, we don’t think the Covid-19 crisis means the economy will be smaller than otherwise forever more. In the second half of this decade, we think it will return to the path it would have been on if Covid-19 never existed.
Howard Davies, chairman of NatWest: No. We will not recover fully until 2023. The depth of our fall in 2021 makes it likely that we will continue to be a laggard in Europe, though not far off the disappointing French performance.
Richard Davies, professor of economics at Bristol University, and visiting professor at the Centre for Economic Performance, LSE: In current price terms, yes, I suspect by Q2. This will be an important milestone in fiscal terms. In volume terms it will take longer, I suspect until mid 2022. Compared to our peers we will do better in terms of employment numbers, worse in terms of wages. If the new strain of the virus is in the UK-only, rather than everywhere, our recovery will lag our peers’.
Panicos Demetriades, professor of financial economics at the University of Leicester: I think this is unlikely. I expect the recovery in the real economy to be slow and protracted, partly because it will take the whole year to vaccinate the entire population and many travel restrictions will, therefore, remain in place at least until the start of the summer. Moreover, there is still uncertainty as to the efficacy and take-up of the vaccines, while the emergence of new strains could mean that Covid-19 may not be fully defeated by the end of 2021. On top of all this, Brexit — in whatever shape or form — will weigh heavily on the recovery of the real economy and will have its own deleterious effects on the travel industry and trade.
Wouter Den Haan, professor of economics at the LSE It seems very unlikely that losses occurred in 2020 will be made up in 2021 given that at least the beginning of 2021 will still be affected by the pandemic and the deterioration of firms’ financial health will slow growth. And Brexit is not going to help either.
Michael Devereux, professor of business taxation at Oxford university: No. The UK will do much worse, both due to the pandemic and to Brexit.
Swati Dhingra, associate professor, LSE Centre for Economic Performance: No, and it will be slower than others. Probably an initial optimistic uptick from a Brexit deal and then a longer period over which reduced market access starts to come into play too.
Peter Dixon, chief UK economist at Commerzbank: No. Following major recessions, over the past 50 years it has taken an average of 15 quarters for output to get back to pre-collapse levels. Given the expected degree of economic scarring, the recovery is unlikely to be significantly quicker this time around. I am currently expecting GDP to hit late-2019 levels only in 2023. I would expect UK growth to run in line, or maybe slightly below, rates in other industrialised economies. But since the collapse in 2020 was greater than in most other countries it will take longer to get back to pre-pandemic peaks. And then there is the additional burden posed by Brexit. It is increasingly looking as though there will be significant export-related disruption in H1 2021 which will add further to downside risks.
Jan Eeckhout, research professor of economics at Pompeu Fabra University, Barcelona: No
Noble Francis, economics director at Construction Products Association: No. UK economic recovery is likely to be hindered by the national lockdown in November and subsequent Tier restrictions affecting 2020 Q4 and early 2021. In addition, there is likely to be trade disruption in January after the end of the Brexit implementation period. After this, initial economic recovery is likely to be quick due to the economy fully reopening (as it did after the initial lockdown eased in mid-May 2020). However, increasing unemployment after the furlough scheme ends is likely to mean that growth rates subsequently slow.
John Gieve, chairman at Nesta: I don’t think it will get back to its peak in 2021. The Covid-19 effects will last into the summer and the Brexit effects after that. I expect the UK to continue to recover less fast than other OECD countries.
Andrew Goodwin, chief UK economist at Oxford Economics: Though we don’t expect the UK economy to regain its pre-pandemic size in 2021 (we expect that to happen in mid-2022), we do expect it to outperform most of its peers. That’s partly because of methodological issues — the UK’s different treatment of public sector output has exaggerated the weakness in 2020 relative to other countries, but equally will offer a greater boost as life returns to normal in 2021. But it also reflects our expectation that the UK will be among the first countries to vaccinate vulnerable groups, meaning it will also be one of the first to meaningfully lift social distancing restrictions. We expect a strong consumer-led recovery to follow, with GDP growth of 6 per cent in 2021.
Mark Gregory, chief economist at EY: No. UK economy will recover in 2021 in a similar fashion to our European peers but will not rerun its 2019 size.
Rupert Harrison, portfolio manager at BlackRock: The UK economy ends 2020 further behind its pre-pandemic peak than most of its peers, but the scope for a bounce back in 2021 is also correspondingly bigger. Despite very rapid growth in 2021 I still expect the UK economy to be just below its previous peak at the end of the year.
Neville Hill, chief European economist at Credit Suisse: No. The UK was already lagging its peers in the early stages of recovery, and we expect that to continue. Parts of the UK economy are unprepared for a new trading relationship with the EU on 1 January 2021, and we expect the adjustment to be a meaningful headwind to the UK’s recovery.
Brian Hilliard, chief UK economist at Société Générale: No. It will be several years before it returns to the pre-Covid-19 trend
Andrew Hilton, director at the Centre for the Study of Financial Innovation: One would have to be mad to make point projections, given the uncertainties — over Covid itself, over availability and distribution of vaccines, and over the continued deference to “the science”. And, of course, the uncertainties of how other countries will respond. “Suppression” is not “cure”, and one assumes that, at some point, someone somewhere will say (in the immortal words of Roberto Duran) “no mas”, we can’t go on killing the economy to protect a few old farts with comorbidities. (I say that as someone aged 74, and overweight.) In other words, too many uncertainties — even without a discussion of post-Brexit trading conditions, the impact of a Biden presidency, a new German chancellor, the resurgence of Scots nationalism etc. But a guess: the first quarter will be lousy (down 45 q/q, from an already low base), and sometime in Q2 the backlash will begin. For the year as a whole, flat will be good — which means down 10-11 per cent from pre-pandemic levels.
Dawn Holland, fellow at the NIESR: The economy is unlikely to regain its pre-pandemic size before 2023. Recovery in the UK is likely to lag its peers given (1) uncertainty regarding the implications of Brexit, regardless of whether a deal is reached, (2) UK travel bans — including freight — related to the new Covid strain.
Paul Hollingsworth, senior European & chief UK economist at BNP Paribas: No. Although I expect a robust economic recovery in 2021, the low starting point, the likely steady relaxation of social distancing measures and the additional Brexit headwinds are likely to mean that the economy does not return to its pre-pandemic peak until 2022. Compared to its peers, the UK is likely to be a laggard.
Ethan Ilzetzki, associate professor at the LSE: The UK economy will begin its recovery in 2021 but will not return to its pre-pandemic level of GDP until 2022. The UK was hurt more by the pandemic that its peers, its recovery is riding on lower trend productivity growth, and Brexit will inflict further harm on the UK even if an agreement is reached by the end of 2020. Some of the cross-country comparisons are hampered by measurement problems that are unique to the pandemic and differ across countries, so that the official statistics may be somewhat misleading.
Dave Innes, head of economics at the Joseph Rowntree Foundation: There are two key factors determining when the UK economy will regain its pre-pandemic size. First, there can only be sustained economic recovery once we’ve successfully contained the virus. Until then, recovery will be stop-start as the government’s largely self-defeating attempts to stimulate the economy in the summer and autumn 2020 showed. The prospect of a large proportion of the most at risk groups being vaccinated early next year makes the prospect of a sustained economic recovery more likely.
The second factor is the speed of the recovery once it takes shape. There is some reason to hope this recovery will be relatively quick once it does take shape, not least thanks to the huge savings many households have built up, which will turn to spend as social distancing restrictions are finally relaxed. But, overall, it is most likely the economy will recover to its pre-pandemic size in 2022 rather than this year.
Dhaval Joshi, chief European strategist at BCA Research: Absent further shocks, the UK economy can expect to regain its pre-pandemic size in the second half of 2021.
This will constitute a slower recovery than its peers because the UK economy has a higher exposure to retail and hospitality, the two sectors devastated by the pandemic and its immediate aftermath. Furthermore, with or without a trade deal with the EU, the UK economy will face a drag from Brexit.
David Kern, consultant economist at Kern Consulting: No. The UK recovery will be slower than that of the US: it will be in line with that of the EU.
Hande Kucuk, deputy director for macroeconomics at NIESR: We do not expect the UK to regain its pre-pandemic output levels until 2023. The pace of the recovery in 2021 is heavily dependent on the prevalence of Covid-19 and the end of the Brexit transition period. Despite positive news regarding vaccine rollout, rising infection rates and going in and out of lockdowns will continue to weigh on the recovery in early 2021. The exit from the EU single market is likely to broaden the shock to growth and employment as the economic impacts of the two shocks, Covid-19 and Brexit, largely do not coincide. The end of the Brexit transition period is likely to affect sectors which have not been as hard hit by Covid-19, weakening the UK’s recovery compared with other countries, and reducing productivity in the long run.
Gerard Lyons, chief economic strategist at Netwealth: I expect the UK economy to return to its pre-crisis level during the first quarter of 2022. This is likely to be in-line with other major economies in western Europe, with the euro area back to pre-crisis levels by mid-2022. I expect Asia to lead the global recovery and the US to recover solidly too.
I expect a strong rebound in the UK and world economy from spring 2021 onwards.
Over the last year, we have witnessed global health and a global economic crisis, and it is only once we are genuinely over the health crisis that we can make inroads into the economic crisis. So this positive growth outlook assumes a successful rollout of vaccines and continued accommodative fiscal and monetary policies.
Stephen Machin, professor of economics at the LSE: Unlikely. And UK likely to be worse than most peers.
Chris Martin, professor of economics at the University of Bath: No. I expect GDP to reach 95 per cent of the pre-pandemic level by end-2021. I think unemployment will remain high and wages will be subdued
Costas Milas, professor of finance at the University of Liverpool: Simple maths suggests that a 10 per cent contraction in 2020 requires a GDP increase of 11 per cent in 2021 for the UK economy to recover all its losses. This is unlikely to happen even if the government proceeds fast with its vaccination schedule and, at the same time, we escape a “no-deal” Brexit. I also think that the UK will do worse than the US or Germany. A word of caution, however: we, forecasters, should learn from the 1665 plague of London, where Daniel Defoe noted that all predictors, astrologers and “cunning men” did disappear from the streets. Our forecasts, for 2020, were really poor (to say the least). Of course, we are still here but the pandemic should force us to rethink on our economic models and perhaps consider the issue of collaborating in our work with other scientists. Epidemiologists, for a start!
David Miles, professor of financial economics at Imperial College: No. I don’t see much reason for optimism here. The scarring effects of much higher unemployment, massive disruption to young people’s education and possible large-scale insolvencies will likely be significant. There are also long-term (not directly Covid-19) health issues — among which mental health issues are worryingly large.
Patrick Minford, professor of applied economics at Cardiff Business School, Cardiff University: Yes. It will be a similar pattern to peers.
Allan Monks, UK economist at JPMorgan: No. Rising Covid-19 cases and the relaxation of restrictions over Christmas are likely to prompt another significant round of tighter measures in January. The UK has generally had tighter restrictions in place and for longer than many of its neighbours, and this is likely to mean GDP starts the year around 10 per cent below its pre-pandemic size. The recovery will also be hampered by disruption arising from the UK’s new trading relationship with the EU and a tightening in fiscal policy. Even as vaccines become more widely distributed during the year, GDP is likely to remain below its pre-pandemic size until 2022.
Andrew Mountford, professor of economics at Royal Holloway, University of London: No — I don’t expect the economy to recover quickly. Some of the disruptions will have had permanent effects and so even with a 100 per cent vaccination rate, consumption and investment would not fully rebound due to lower expected future income/wealth. However, we will not, of course, reach a 100 per cent vaccination rate and so the timing will depend on how quickly the threat of infection recedes. Given the prevalence of Covid-19 in the UK population I, therefore, expect the UK recovery to be a slow process and slower than those of its peers who managed the pandemic more successfully.
John Muellbauer, professor of economics at Oxford university: No. Poor recovery compared with most countries in Europe.
Jacob Nell, chief UK economist, head of European economics, at Morgan Stanley: No. We expect the UK to lag its advanced economy peers on a mix of a deeper 2020 contraction, from our longer lockdown, Brexit headwinds and less supportive policy in the recovery than at domestic market peers. At MS, we put the UK back at 4Q 19 levels in 1Q 23, while we see the US back at 4Q 19 levels in mid-21 and the euro area in 1Q 22.
Andrew J Oswald, professor of economics at the University of Warwick: No. Slower.
David Owen, MD and chief European economist at Jefferies: No. Given the timing of the effective rollout of the vaccines, Brexit and the latest lockdowns we expect the fiscal year 2021 to be a lot stronger than calendar 2021, as recovery is delayed until Q2 2021. We expect the UK economy to grow by around 5 per cent in calendar 2021, but potentially over 10 per cent in fiscal 2021. By December 2021 the level of UK GDP could still be close to 5 per cent below its pre-Covid-19 level. Part of the UK’s underperformance has been a measurement issue, in particular the measurement of non-market services. However, assuming the right policy mix the UK economy could go on to outperform many of its peers from Q2 2021 onwards.
David Page, head of macro research at AXA Investment Managers: No, we do not expect the UK to rebound to pre-pandemic size in 2021, in fact we see this as only likely by end-2022. We suggest that the UK will lag recovery in the US, primarily because of the scale of UK lost output in 2020 and expect the US to regain Q4-19 levels in H2 2021. This is also broadly true of European peers, but we also expect disruption caused by the UK’s final move out of EU trading conditions — even though we still expect an FTA — and we expect this to lag the UK’s recovery relative to other European economies. In our base case, we consider the UK and EU to roll out the vaccine to complete before next winter. There is a chance that the UK rolls this out more quickly — in line with current government plans — which would likely result in UK outperformance. But we consider this an upside risk case at this stage.
Alpesh Paleja, lead economist at the CBI: We expect a gradual recovery to commence from next year, as health outcomes start to improve. However, growth is very skewed towards household spending — as real incomes start to recover, once the initial hit to the labour market fades — and government spending, reflecting announcements around pandemic-related spending. Business investment will very much remain the missing piece, with capital spending held back by both near and longer-term uncertainty, the latter over which pandemic-related changes to consumer preferences, ways of working, etc will persist. As a result, we don’t expect GDP to regain its pre-Covid-19 peak until the end of 2022.
Tej Parikh, chief economist at the Institute of Directors: The vaccine rollout and reduction in Covid-19 restrictions over 2021 will lead to a strong rebound in the UK economy. The UK’s recovery will catch-up quickly with peer nations on the back of policy support, and the economy will likely return to pre-pandemic levels toward the end of the year.
Ian Plenderleith, chairman Sanlam UK: Not quite pre-pandemic in 2021, but close to (90 per cent?) and back to pre-pandemic by 2022.
UK recovery will likely be slower than peers as a result of Brexit and political uncertainly over devolution (mainly Scottish independence, but also demands for greater regional powers in England).
John Philpott, founding director of The Jobs Economist: The UK economy will recover in 2021 but at too slow a pace to enable GDP to return to the pre-pandemic level. The Covid-19 vaccine(s) will prove a shot in the arm for both the UK economy and its peers. But Brexit will be a shot in the foot, dampening the post-pandemic recovery relative to other major economies as well as debilitating longer-term growth prospects.
Kallum Pickering, senior economist at Berenberg Bank: No. If the UK and the EU manage to strike a deal that avoids a hard exit from the EU Single Market and Customs Union, and virus risks fade materially from Spring onwards, the UK could return to its pre-pandemic level by late-2022 — roughly two quarters later than the eurozone and more than a year after the US. A no-deal hard exit could delay the rebound by roughly two quarters.
Jonathan Portes, professor of economics and public policy at King’s College London: Conditional on relatively successful and speedy rollout of a vaccine, and a non-catastrophic Brexit (but assuming some short-term disruption), I’d expect a relatively strong recovery on the back of pent-up demand, returning to pre-pandemic levels of income per head by the end of the year. I’d expect similar trends in other advanced economies.
Richard Portes, professor of economics, London Business School: No. Badly.
Adam Posen, president of the Peterson Institute: No. The UK will be among the last, if not the last, of the high-income economies to regain its pre-pandemic size. While sterling depreciation and policy stimulus may offset some of the public health failures, Brexit will cost more than can be overcome and will erode trend growth.
Vicky Pryce, former joint head, Government Economic Service and now chief economic adviser at the Centre for Economics and Business Research (CEBR): No. It is most unlikely that the economy will get back to pre-pandemic levels before sometime in 2022 at the earliest even if the vaccine programme is successful. The UK is behind other countries, not because its services are a large part of the economy, as is often suggested, given that this is also the case in a number of similarly developed economies. Instead, it is the lateness of the lockdown measures and an appalling communications strategy, if we want to call it that. And the likelihood is for more and extensive lockdowns in the early part of 2021 before things start to improve. In addition, Brexit uncertainty may have contributed to the slow growth in the UK in the past few years and also during 2020 and, frankly, the damage may already have been done. Investment has been and will likely remain below where it would have been without Brexit, innovation and productivity will suffer, limiting competitiveness and growth for years to come.
Lucrezia Reichlin, professor of economics at the London Business School: No. The UK will have a weaker recovery than its peers.
Ricardo Reis, AW Phillips professor of economics at the LSE: Recover a lot, but not fully. For instance, I expect that most measures of real activity in 2021 Q2 will be well above those in 2020 Q2. But I would be very surprised (even if pleasantly so) if 2021 annual real GDP per capita were at the same level as 2019. (This is conditional on there not being a new strain of the virus, and the vaccine being rolled out effectively.)
Philip Rush, founder and chief economist at Heteronomics: No
Yael Selfin, chief economist at KPMG: We do not expect the UK economy to reach its pre-pandemic size before Q3 2022 at the earliest. A lot will depend on how the pandemic evolves in the first quarter of 2021 and on the extent of border disruptions as a result of that and the change in trading relationship with the EU.
Potentially tougher restrictions in the UK due to the new Covid-19 variant coupled with the disruptions expected from Brexit will put more downward pressure on growth in the UK compared to its peers.
Andrew Sentance, senior adviser, Cambridge Econometrics: No. I wouldn’t expect the UK economy to recover its ore-pandemic size until the second half of 2022 at the earliest. I think other major European economies will struggle to be ahead of us given the latest wave of lockdowns.
Philip Shaw, chief economist at Investec: No. Despite the likelihood of a decent bounce, the ending of the various labour market support measures will mean higher unemployment, capping household income growth and the pace of household consumption. A number of business failures also mean it may take more time to reach pre-pandemic levels of GDP. The call for the chancellor is whether to prolong some sort of state intervention in an attempt to give growth great momentum. That is not our central case but, given Mr Sunak’s track record of pragmatism, we would not rule it out.
To an extent, the UK is among the more vulnerable in the G20, given its reliance on services in general and consumer spending in particular. However, differences between the UK and other countries in measuring public sector price changes arguably mean that the degree to which the UK has underperformed in 2020 needs to be taken with a pinch of salt.
Jumana Saleheen, chief economist, CRU: In 2021, the UK is expected to grow by 8-10 per cent from the low levels of activity seen in 2020. However, the UK economy will not return to its pre-pandemic size until mid-2022. The UK recovery compares poorly with its G7 peers. The UK is the slowest to regain its pre-pandemic size, alongside Italy. The US is quickest, followed by Germany, Japan and Canada — all three of which regain their pre-pandemic size in 2021. The slower UK recovery can in part be explained by its large tourism, hospitality and creative sectors — those that have been hit hardest by social distancing requirements. The recovery is also slowed down by Brexit headwinds, as the UK ad EU settle into their new trading arrangements.
Andrew Simms, director/fellow at New Weather Institute / Centre for Global Political Economy, Sussex University: No. But it’s not about size, it’s about quality. And with the many lessons from lockdown and the latest climate science ringing in our ears, there is enormous potential in 2021 for the UK to lay foundations for rebuilding a better, more equal, caring and environmentally viable economy.
We should be aiming for more, better and better shared employment, an economy in which we achieve greater regional equality, to care for each other better, rediscover how to make things for ourselves again, to design and introduce the energy, transport, food and retail systems that maximise good work, breathe life back into high streets and communities and radically reduce environmental impact.
That may sound like a long and ambitious list, but it fits a series of choices that as a country we have to make anyway due to a combination of external circumstances, necessity and opportunity. Decentralised renewable energy is on the march: lockdown has reconnected us with our communities and the importance of local producers and supply chains, revealed much travel to be unnecessary and triggered a pandemic related re-evaluation of socially useful key workers. We have long passed the point of giving mindless applause to any economic activity simply because it guarantees the economy’s overall size. The public sphere has been revealed as the ultimate foundation of the economy, even in the sense of being the wage payer of last resort in a crisis, and Government policy and spending priorities are uniquely able right now to reshape the economy. Its new shape needs to enable the more equal sharing of its benefits, rapid transition towards low environmental impact and raising wellbeing. These can be tracked and make more meaningful measures of success.
Two things will undermine the UK’s recovery compared to its peers. One is the confusion, uncertainty and bureaucratic nightmare of Brexit. The other is that compared to Germany, for example, we still have a largely unreformed, over-centralised and self-interested banking system which lacks the skills, capacity and clear mandate to support especially micro, small, and medium enterprises. The UK urgently needs both a real, green national investment bank, and authentic, regional banks, like the nascent South West Mutual.
Nina Skero, chief executive at CEBR: We do not expect the UK economy to recover to its pre-pandemic size until 2022. The stricter Tier 4 measures introduced in late December may push the recovery back by anywhere from one to six months, depending on how long they stay in place for and how widespread they become.
Compared to its European peers, the UK is set to follow a similar recovery trajectory, but compared to advanced Asian economies the pandemic-related losses will be far greater.
James Smith, economist at ING: A full 2021 recovery is unlikely. While a vaccine will hopefully usher in a more sustained rebound in the latter half of the year as shuttered sectors reopen, the scarring from higher unemployment will slow the recovery down. Overall 2021 growth may end up higher in the UK than elsewhere (Brexit-depending), but this is really just a reflection of the larger fall in output during 2020.
Andrew Smithers, founder of Smithers & Co: No, output will probably be lower in 2021 than in 2019. It’s likely to be similar.
Alfie Stirling, director of research and chief economist at the New Economics Foundation: It is possible, but ultimately highly unlikely, that UK output will recover to its pre-pandemic level before the end of 2021. Towards the end of 2020 many forecasters were expecting GDP to return to pre-pandemic levels sometime in 2022. One cause for optimism since then is that the speed of vaccine licensing and distribution has been stronger than some of those forecasts assumed. But it remains early days, with many known, and probably unknown, challenges to come. More worrying still is the rise of a potentially significant new variant of Covid-19 with especially high prevalence in the UK. The length and severity of new effective lockdowns could mean things get a lot worse this winter than many forecasters were previously counting on.
The UK is likely to fare worse than many other advanced economies, primarily because we have been less successful than most at controlling the spread of the virus, but also because any adverse effects from Brexit will be larger here than anywhere else. At this stage, it looks unlikely that UK GDP will outperform the Office for Budget Responsibility’s current core scenario, which doesn’t see output return to pre-crisis levels until the end of 2022. Even then, there would still be substantial scarring of the economy, compared with where livings standards would have been had the pandemic not occurred, or indeed had it been better managed.
Gary Styles, director at GPS Economics: It looks more likely that output will return to pre-Covid-19 levels during 2022 rather than 2021. The UK’s recovery is likely to look very mid-table rather than a leading performance.
Suren Thiru, head of economics at the British Chambers of Commerce: While a vaccine offers real hope, the looming triple threat of further lockdown restrictions, surging unemployment and post-Brexit disruption means that the journey back to pre-pandemic output levels is likely to extend well beyond 2021.
With the UK facing a prolonged period of tougher lockdown restrictions to tackle the new variant of Covid-19, the risk of a double-dip recession in early 2021 is uncomfortably high.
UK’s recovery is likely to lag many of their peers. The economic scarring caused by the pandemic is likely to be more pronounced in the UK, given its greater reliance on those consumer-facing industries who are most acutely exposed to the headwinds from the pandemic. Failure to implement an effective strategy to keep the UK economy before a mass vaccine rollout is achieved would also impair any recovery.
Phil Thornton, director at Clarity Economics: The economy probably contracted 10 per cent in 2020 and will at best post growth of half that amount circa 5 per cent. The UK’s fall will be larger and its rebound smaller than other comparable economies. A no-deal Brexit outcome would reduce the pace of that recovery
Samuel Tombs, chief UK economist at Pantheon Macroeconomics: The UK economy enters 2021 from a more depressed starting point than its peers, due to the toxic combination of the government’s poor response to Covid-19 and Brexit uncertainty. The UK, however, has a head start over its peers in vaccine rollout, and UK households amassed more savings in 2020 to potentially spend in 2021 than those in the rest of Europe. This suggests that the UK will have greatly narrowed the gap with its peers by the end of 2021, though Brexit will prevent a full catch-up.
John Van Reenen, Ronald Coase School professor, LSE: It will not regain its size. Overall UK performance is worse than peers because of health policy failures: too slow to lockdown in spring and autumn.
Konstantinos Venetis, senior economist at TS Lombard: Unlikely. The UK will probably grow faster than the rest of the major advanced economies next year, but the depth of the 2020 slump means GDP will reach pre-virus levels later.
Daniel Vernazza, chief international economist at UniCredit: The UK economy probably won’t recover its pre-pandemic size until early 2023, around six months behind the eurozone and a year later than the US.
The UK has underperformed peers during the pandemic so far, largely because of the slow initial response to the health crisis, despite advance warning. The economic outlook depends predominantly on the path of the virus, Brexit, and the response of households, firms and the government to these developments. In my view, the UK’s underperformance will continue.
On the one hand, the UK has potentially more to gain from the rollout of Covid-19 vaccines, given it has been more impacted by the pandemic. The UK has so far secured relatively large orders of vaccines per person and is advanced in their distribution. And, according to opinion polls, Brits are more likely than many peers to say they would accept a vaccine if it were available to them.
On the other hand, the UK economy faces several substantial headwinds next year that will likely dominate. Brexit, with the transition period expiring at end-2020, will inevitably lead to substantial disruption in 2021 and weigh significantly on UK exports, with the effects amplified if there’s no trade agreement with the EU. The particular weakness of investment and employment intentions from business surveys reflects the acute uncertainty facing firms.
It also seems likely to me that, since the prevalence of the virus has been greater in the UK than peers, precautionary behaviour of households and firms may persist for longer, resulting in higher precautionary saving for households and higher cash balances for firms. Also, the sectors most hit by the pandemic (those that involve a high degree of social interaction) account for a relatively high share of output and expenditure in the UK, which, coupled with the high prevalence of the virus, may result in higher longer-run costs, from higher unemployment and the associated loss of skills.
David Vines, professor of economics, Oxford university: No. Much more slowly
Keith Wade, chief economist, Schroders: Having been one of the biggest losers from Covid-19, the UK stands to be one of the biggest winners from the vaccine in 2021. The return of the economy’s significant service sector should create a strong rebound as demand recovers and activity normalises.
Sushil Wadhwani, chief investment officer at QMA Wadhwani, a PGIM company: It is most unlikely that the UK economy will regain its pre-pandemic size in 2021. Although policy has helped, it is inevitable that we will see some scarring.
Ross Walker, chief UK economist at NatWest Markets: No. UK growth will be relatively strong in 2021 (5.5 per cent) but that is primarily because the starting level of GDP (in 2021) will be far lower in the UK than in other economies: the UK about 11 per cent below vs about 8 per cent in Euro Area and about 3 per cent in the US. The UK has been an egregious economic underperformer during the pandemic (and it is not as if a public health outperformance could be cited as a mitigating factor).
Martin Weale, professor of economics at King’s College, London: No. I expect the UK to have a slower recovery because of the effects of Brexit.
Simon Wells, chief European economist at HSBC: The UK is experiencing two large economic shocks: Covid-19 and a fairly hard Brexit. Despite the good news on vaccines, many logistical challenges remain and the new strain means another national lockdown looks more likely. Surveys suggest a considerable number of UK firms are not fully prepared for the end of the Brexit transition period, even assuming a deal is finalised by the end of 2020. So there could be significant near term disruption. Therefore the UK’s recovery is likely to lag that of its peers.
Peter Westaway, chief economist, head of investment strategy, at Vanguard: No, I don’t expect the UK economy to reach its pre-pandemic size until 2022 Q1.
And as a separate point (though often the two often get confused), I don’t expect the UK to recover its pre-pandemic trajectory at all but stay around 2 per cent below due to scarring, mainly due to destroyed productive potential (higher structural unemployment and lost capital stock).
From a lower starting point, made worse by the current wave of infection and held back by Brexit disruption, the UK will recover more slowly than other countries in Europe and the US. By the middle of 2021, developed countries will begin to benefit from access to vaccines allowing a recovery in face-to-face spending. Scarring is worse in the UK than in the euro area, and considerably worse than the US where scarring will be minimal.
Mike Wickens, professor of economics, universities of Cardiff and York: No. It will take longer. 2022? Size — ie, level — is not a good measure for an economy with growth. I expect the rate of growth to rise substantially in the second half of 2021 but the future path GDP to be lower than pre-pandemic.
Trevor Williams, visiting professor at the University of Derby: No, and the UK’s recovery will be significantly weaker than its peers.
Tony Yates, macroeconomic policy unit research associate at the Resolution Foundation: No. The pandemic itself will leave a scar, of uncertainty, debt, and incomplete adjustment to some semi-permanent changes in spending, how businesses organise themselves. And layered on top of this will be a weakness caused by our exit from the EU. I expect the latter to mean that, despite us dealing with Covid-19 roughly as badly as the continent, we will do slightly worse than them.
Linda Yueh, adjunct professor of economics at the London Business School: Unfortunately, it’s unlikely. The scale of the loss in output is such that it will take the economy until probably 2022 to return to its pre-pandemic level of GDP. The extent of hysteresis and other factors that could damage the UK’s growth potential would determine how its recovery compares with its peers.
Fiscal policy: Do you expect the chancellor of the exchequer to announce higher taxes or lower public spending in 2021? When and to what extent do you think fiscal consolidation will be needed?
Howard Archer: We do not expect Mr. Sunak to enact fiscal tightening in 2021 as attention needs to remain focused on getting the economy established on a firm footing. However, assuming that positive vaccine developments and the avoidance of a Brexit no deal allows the economy to establish a firmer footing as 2021 progresses, the chancellor may well set out the potential future action that he plans to take to restore the public finances. We expect this to be more focused on tax hikes than lower public spending.
Angus Armstrong: Expect some tax raising measures in the budget. I do not accept that borrowing capacity is unlimited, but the UK faces an enormous shortage of demand. Attempts at early consolidation would be as counter-productive as austerity proved.
Nicholas Barr: Higher taxes will be imposed with 100 per cent certainty, but not in 2021. The rate of increase of national debt will decline relative to 2020 but will continue to increase because public spending, though lower than in 2020 will be higher in real terms than 2019, not least because of political pressure to retain the higher level of universal credit.
Ray Barrell: A wise chancellor would announce no tax increases and no expenditure cuts in 2021. Debt levels are not high by historical standards, and they can be managed. Borrowing costs are low, and borrowing will fall as the economy improves. A wise government needs to first assess the level of spending it needs to fulfil its objectives and cover risks, such as pandemics. Then it should look at taxes, and perhaps only then rethink spending. The risks that have to be faced may require a larger and more resilient health system which costs more. At some time, deficits and borrowing will have to come down significantly. By 2025 we should be in a position to discuss fiscal consolidation and the path of future borrowing, and hence agree on how to raise taxes to the best effect. This rational approach to taxation and spending will be subject to sabotage by a significant group of MPs, mostly Conservative, who backed austerity between 2010 and 2017. I suspect the cabinet can hold this group off for a year or two, and hopefully longer.
Aveek Bhattacharya: 2021 is likely to be too early to start fiscal consolidation — I do not expect a significant increase in interest rates or inflation next year. However, I suspect that the chancellor may seek to signal his commitment to fiscal consolidation by making some announcements on tax, spending or even both. 2021 could be the year that pension tax relief for higher earners finally becomes less generous.
David Graham Blanchflower: That certainly would be disastrous. The actions taken in 2020 were excellent but the desire for more austerity seems to be gaining ground. This would be disastrous, just as it was in 2020 when it created the lowest recovery in 300 years. Real wages in February 2020 were still lower than they were in February 2008.
Philip Booth: Fiscal consolidation is clearly needed immediately. I expect the chancellor to do what is easiest politically which will be more borrowing and higher taxes (in that order) before lower spending. This order of things should be reversed — that is there is a clear need for spending restraint and the OBR forecasts clearly show the dangers of continuing to ignore the build up of debt.
Nick Bosanquet: Chancellor will seek to move fiscal trouble forward — but will be constrained in further extension of special programmes such as furlough. The main risk factor would be confidence factor causing fall in the exchange rate with a threat of inflation — this is more likely in 2022-3 not 2021.
Erik Britton: No fiscal consolidation is needed during 2021 but the chancellor will probably announce both higher taxes and lower spending to come in future. He might introduce some of these measures during 2021 — that would be a mistake. Consolidation will be necessary eventually but can wait until the recovery is firmly established.
George Buckley: 2020 was a year of fiscal largesse required to combat the virus. 2021 will be a year of economic recovery — at some point, we hope. But the economy will still be fragile and ongoing fiscal support will be necessary in our view — not necessarily new measures but a perpetuation of some of the measures and support already in place. We doubt the economy will be in a position to withstand fiscal tightening until 2022 or beyond. Even then there may be limited appetite for hard austerity but a combination of tax rises, limitations on spending and a withdrawal of Covid-19 support will be needed. Careful withdrawal of support and consolidation of the public finances will be required in order to manage the inevitable inequality issues that the virus has created. And the UK government may be inclined to tighten policy less than otherwise because in “relative” terms all countries are in the same boat — the UK does not stand out as a high-public-debt economy more than the rest.
Jagjit Chadha: The evolution of the virus and its spread, as well as the form of Brexit we adopt will determine fiscal priorities. If both progress better than we currently think we can turn to higher taxes and lower spending. In the meantime, low interest rates afford us plenty of time to wait and see. More importantly also to address the fiscal framework, which is a task awaiting urgent attention.
Mark Cliffe: With the economy recovering partially and erratically it is hard to imagine material cuts in spending or tax rises. If anything, politics will dictate continued loosening of fiscal policy. Since interest rates rises are not on the horizon, a material fiscal tightening could be years away. The fiscal policy story will be more about how far the government goes for redistributive measures to support its “levelling up” agenda. With COP26 next year, look out for carbon pricing and eco taxes to become more important ways of raising revenue. The other wild card is whether Brexit turns toxic and the government starts a tariff war.
David Cobham: I fear that he may but hope that he will not. Fiscal consolidation should wait until both the pre-pandemic GDP level has been regained and a decent — 2 per cent — growth rate has been re-established.
Brian Coulton: In general terms, our GEO forecasts do not assume significant fiscal tightening in 2021 in the major advanced economies. Growth will likely remain the top priority for policymakers, particularly with the recent tightening of social distancing restrictions. The prospect of an easing in the health crisis from mid-2021 following the vaccine rollout is likely to reinforce the commitment to continue to support the private sector “through’” the crisis in the months ahead.
Diane Coyle: Probably, but it will also probably be too soon. It’s imperative for the government to invest — in making up educational gaps, in infrastructure, in research — and also to support young workers and the far too many people living in poverty (or worse) in the UK. As long as real rates stay so low there’s no need for major fiscal retrenchment. “Austerity” would be a catastrophic mistake.
Bronwyn Curtis: I don’t expect any announcements of a tightening in fiscal policy in 2021. I expect a further loosening by cutting VAT and/or providing other financial support to businesses hurt by the new trading arrangements with the EU.
Paul Dales: It would be a mistake to tighten fiscal policy in 2021 as the public sector needs to support the economy until private sector demand has recovered in full, which may take another couple of years yet. And unlike most forecasters, we don’t think fiscal policy NEEDS to be tightened to pay for the pandemic. If we are right in thinking the economy will get back to its pre-crisis trend, the deficit and debt ratio will fall automatically.
Howard Davies: I doubt if he will do more than signal the intent to stabilise fiscal policy in the longer term. Anything more would risk causing a steeper fall in spending and particularly investment.
Richard Davies: I hope not. This can be done in 2022, if needed. Despite commentary drawing out the similarities, the fiscal situation is very different from that in 2008/09. Yes, the numbers are bigger, but the shock, while not a V is shorter and sharper than that crash, and the pre-crisis fiscal situation was strong. We can afford to continue supportive fiscal policy and should do so.
Panicos Demetriades: It will be unwise to initiate fiscal consolidation before the economy recovers fully from Covid-19. So far, the chancellor’s judgment has been about right in terms of the fiscal stance he has adopted. Fiscal consolidation is more likely in 2022.
Wouter Den Haan: Given the low level of interest rates, there is no reason to worry about fiscal consolidation any time soon. Past conservative governments did push through severe austerity packages during even though interest rates were low and even though macroeconomists warned of the negative consequences. This Tory government, however, is a bit more populist which strangely enough does make it more likely that fiscal policy will be more aligned with experts’ views.
Michael Devereux: No. Fiscal consolidation will eventually be needed, but please — not in 2021.
Swati Dhingra: Not yet in any big way.
Peter Dixon: It is likely that some form of fiscal consolidation will be announced in 2021 (though may not necessarily be immediately implemented). Cuts in public spending along the lines we saw a decade ago would be politically unpopular and probably counterproductive so measures are more likely to comprise tax rises. Having ruled out increases in income tax, national insurance and VAT rates in its 2019 manifesto, the government will likely initially look to other options. Things to look out for are increases in capital gains tax to align it with income taxes, and limiting the rate of pension tax relief to 20 per cent as the current system is highly regressive. Whether major consolidation is necessary is another matter. The UK issues debt in its own currency with almost three-quarters held domestically, and with interest rates remaining low for the foreseeable future, managing the debt burden will not be a problem. We are entering a period of financial repression in which rates will stay low way out into the longer term. This will give the government time to stimulate growth which is the best way to ensure long-term fiscal consolidation.
Jan Eeckhout: Unchanged.
Ideally it is needed as soon as possible.
Noble Francis: Neither significant tax rises nor public spending cuts in 2021 as the government’s focus has been solely on short-term sticking plasters for issues as they have arisen and this is likely to continue this year. However, in the longer-term, government is likely to implement both tax rises and, in particular, spending cuts given the unprecedented rise in government spending and debt over the past 12 months.
John Gieve: I think he will announce virtue tomorrow.
With a first Budget in March, I expect a second in the autumn (and possibly some other mini-budgets in between). Borrowing should reduce next year under current policies as the level of Covid-19 spending reduces. I think he will announce a plan to keep it falling with further squeezes on the less sensitive spending programmes and some tax increases from 22-23.
Andrew Goodwin: I would draw a distinction between policy changes which take effect this year and announcements of future policy. It is far more likely that the fiscal stance is loosened further in 2021, than it is that we see premature austerity. But I would not be surprised to see the chancellor indicate that he plans to tighten policy in 2022 and beyond.
We see no urgency for fiscal consolidation — debt servicing costs are exceptionally low and there is no suggestion they will rise any time soon. But we suspect the chancellor will eventually take remedial action anyway and revert to something akin to the fiscal rules proposed in the Conservatives’ 2019 election manifesto. This would suggest a consolidation of around 1.5-2 per cent of GDP.
Mark Gregory: Both but he will announce and out off implementation into the future. Fiscal Consolidation is a low priority as growth will surprise on the upside reducing the pressure for action.
Rupert Harrison: I think the pace of recovery will be faster than the OBR forecasts and therefore the structural hole in the public finances will be smaller. Despite this I still think the chancellor will in 2021 announce continued future restraint in day to day current spending and probably some gradual future tax rises on both businesses and individuals. Even with a rapid bounce back 2021 will still be too early to begin fiscal consolidation but pre-announcing some consolidation measures may be politically sensible. The chancellor may also want to err on the side of pencilling in measures that do more than needed, with the hope that he might be able to reverse some of them in the run-up to the next election.
Neville Hill: Given the economy will still be smaller than its pre-pandemic size, and still operating under restrictions for much of next year, it would be unwise to undertake fiscal consolidation, so we do not expect an announcement in 2021. There is absolutely no urgency for fiscal consolidation. Bond yields are exceptionally low, negative at some maturities. And government debt interest service costs are at record lows, despite the increase in public debt.
Brian Hilliard: He is likely to tell us that taxes will have to rise at some stage, but not yet. Public spending will fall anyway as the pandemic subsides but there will not be a return to anything like the post-Great Financial Crisis austerity.
Andrew Hilton: If he is completely demented, Sunak will announce higher taxes (a wealth tax?) in March. If he has got even half a brain, he will say lots of nice soothing things and defer any difficult decisions until October at least. As to when/whether we should go for “fiscal consolidation” (a weaselly phrase, if ever I have heard one), that absolutely depends on when/whether we can put the pandemic behind us — and that depends on how quickly we can vaccinate 70 per cent of the population, and whether the media (including the FT) will then permit politicians to ignore the inevitable bleating from “scientists” and reopen the economy. I am not optimistic — and, I fear/expect that we will hear a lot more about MMT, and how public spending doesn’t matter so long as there is spare capacity and prices aren’t skyrocketing.
Dawn Holland: Fiscal adjustment measures are unlikely to be introduced in 2021, since the economy will still be operating well below capacity.
Paul Hollingsworth: The chancellor can afford to wait before significantly tightening the public finances. It is unlikely that the economy will have staged a substantial rebound in time for the Budget on 3 March, and there is a lot of uncertainty about both the pace of the cyclical recovery and the long-term structural damage to the public finances. With the cost of servicing debt so low, and central banks having committed to keep interest rates low for an extended period of time, there is no immediate pressure on the chancellor to “balance the books” — ensuring the recovery is assured is a much more important objective in the short run, and would be better in the medium term as well.
Ethan Ilzetzki: No fiscal consolidation will be needed in 2021 and fiscal consolidation would be very bad policy. The markets are begging governments with high credit rating to provide more safe assets and there is little risk that this will reverse in the short run. A crisis in emerging markets is more likely, but if this occurs this will increase appetite for UK gilts. The deficit will decline because of the economic recovery. Unfortunately, I fear that the exchequer will feel obliged to some action to reduce the deficit further. The UK media is contributing to this pressure, as we are already hearing the media punditry warning about growing public debt. Few economists share these concerns.
Dave Innes: The chancellor will continue to be torn between his fiscal conservatism and the need for public spending to support the economy. But 2021 will not be a year for consolidation. With little room for monetary policy to stimulate an economic recovery, active fiscal policy will be required.
The November 2020 Spending Review indicated that although the chancellor is willing to spend big when required, there will be a tight spending envelope for many areas of current spending. A key decision he will make at the March budget is whether to extend the £20 uplift in universal credit. Doing so would cause hardship for millions of families, and would also contract the economy as low income families cut back on spending. The decision to give the £20 uplift to Universal Credit was the right thing to do in March and it is the right thing to make it permanent now.
Dhaval Joshi: There will be both higher taxes and lower public spending.
The highest-profile public spending cut will be the end to income-support for “furloughed” workers, which makes sense once the pandemic has eased.
Other than that, there is no urgency for fiscal consolidation because the bond markets are telling us that governments can borrow at zero or negative interest rates. In other words, the public sector is not “crowding out” the private sector.
David Kern: Higher taxes and/or lower public spending will most likely start to take effect in 2022: but some of the tightening measures will probably be announced in 2021.
Hande Kucuk: The fiscal policy response should be put in the context of the economic damage from Covid-19. It is essential that public spending continues both to protect incomes and to lead the fight against the virus, the defeat of which is crucial to a sustainable recovery. There is no immediate reason for concern about elevated public debt resulting from the Government’s policy interventions. Interest rates are far lower than at the time of the Global Financial Crisis and are likely to remain low for some time. The maturity of public debt is long, and foreign demand for UK government debt remains robust.
We expect the public debt-to-GDP ratio to reach close to 110 per cent next year. Fiscal consolidation should wait until the recovery is on a more secure footing. It is an ideal time to undertake a comprehensive tax review to address the question of how tax policy can contribute to the expected lasting impact of the virus on the deficit. However, the timing of tax rises is crucial not to put the recovery at risk.
Controlling debt in the medium to long run is important to restore fiscal space against future shocks. However, this should be done in a way to match long run economic goals. Addressing the structural changes that the UK economy is undergoing (transition to digitalisation and green economy) and reducing regional disparities require public investment in targeted areas. This requires a better fiscal framework that involves a consistent multiyear approach to public spending.
Gerard Lyons: I am not expecting the chancellor to announce a policy shift to higher taxes or lower public spending in 2021. Of course, as in any year, there may be individual taxes that rise or fall.
The key is that there is not premature fiscal tightening and that policy helps support the economy over the next year.
Although I am not expecting imminent fiscal tightening, I would expect the chancellor to reaffirm his commitment to lower the budget deficit and to reduce the ratio of debt to GDP, steadily, over time. I think his message will be that once the economy has started to recover, then we should expect to see a shift from a proactive to a more prudent fiscal policy from 2022.
In my view, there is no need to panic about the fiscal outlook. In an environment of low inflation, rates and yields, a policy of reducing the ratio of debt to GDP over time makes sense.
Stephen Machin: It is needed, but the chancellor appears reluctant.
Chris Martin: Not sure, as fiscal policy choices will be driven by unpredictable political events and pressures. I think fiscal consolidation in the next couple of years would be unwise. The post-2010 austerity period held back recovery from the 2008 crisis. Repeating this mistake would be highly damaging.
Costas Milas: The Chancellor of the Exchequer might announce a combination of higher taxes and public spending but with effect from 2022 onwards.
David Miles: Not on a significant scale. As long as the cost of borrowing is very low you don’t have to raise taxes and cut spending much near term — 4. If Debt/GDP is about 1 now (UK-US levels) you can run a primary deficit of (g-r) — where g is growth rate and r is real cost of borrowing — and keep Debt/GDP constant. Right now one might hope in the future g=1 per cent-1.5 per cent and r=0 to -2 per cent, so could run persistent primary deficit of up to about 3 per cent of GDP. In the UK this is £60bn. This is a gift from someone, maybe savers and DB pension systems.
Patrick Minford: With the real interest rate lower than the growth rate the solvency constraint is over-fulfilled — ie, revenues will grow fast enough to pay off the debt after paying interest costs. Therefore the Treasury should pursue a fiscal policy of supporting demand and supply-side reforms for the next few years.
Allan Monks: Emergency stimulus measures will naturally be withdrawn as restrictions are lifted, but the risk is they are taken away too early in a way that slows the recovery. Tax increases are likely to be implemented, although targeted at those individuals who have emerged relatively unscathed by the pandemic — specifically higher earnings and those who were able to strengthen their balance sheets during lockdown. While a it would be premature for the chancellor to oversee a large fiscal tightening until a recovery is well under way, he will want to take action to stabilise the debt-to-GDP ratio, which the OBR currently projects is on an unsustainable upward path for the next five years.
Andrew Mountford: If he’s sensible, the chancellor shouldn’t announce current tax rises or spending cuts in 2021 but he could announce plans for future tax rises/spending cuts. In my view the discussion about how to manage the public finances in a recession is too centred around flows of revenue when it should be focused on stocks of assets.
Raising revenue in a recession when firms’ and households’ balance sheets are stretched is very difficult and likely to do harm. Not so for taxes on stocks of assets which are immobile (ie land). A tax of, say, 1 per cent on all land and property over land in the UK would not need to be collected until the land is sold — it would still be an asset on the UK government’s balance sheet. The ONS estimates the value of land and assets-over-land to be over £5tn compared to a GDP of c£2tn. Thus a 1 per cent tax would be worth 2.5 per cent of GDP and so could back substantial spending (ie positive flow now backed by assets to be realised later).
People object to such taxes by arguing that (i) such a property wealth tax would be difficult to collect. But such a land and property above land tax is collected by a stroke of the pen at the Land Registry. (ii) such a property wealth tax would lead to inefficiency in investment behaviour. But to the extent that this tax would lead to less investment in land as an asset and therefore more to businesses then this should be a good thing. One can also argue that this would be an efficient tax.
Land prices in the UK are very high as they benefit from a safe asset premium. Land is safe because of the institutions of the UK economy (rule of law, property rights, lack of corruption). The UK state that underwrites these institutions should receive some of the benefit — the safe asset premium- that it is generating. (iii) Such a property wealth tax would cause a large industry of tax avoidance.
Clearly people will play games to avoid the tax but simply assigning 1 per cent of the land and property above land to the government should be a straightforward task for the Land Registry. If it necessitates an increase in openness and transparency of the Land Registry then this will be a good a thing. Games playing to sell the property at a deflated prices to reduce the tax liability could be countered by making this illegal and giving the government the right to buy a property itself if the sale price seems out of line with the market or if ownership hasn’t been transferred (or tax payment made) after, say, 50 years.
While this is the obvious tax to impose during a recession, it would also be a good tax to impose in normal times. Land prices reflect the performance of the whole economy. The value of a property depends as much on the ability of people to pay for it, ie on the health of the economy, as in the actions of the property owner. It seems efficient therefore for the economy as a whole to benefit from rises in property prices and to use the revenues to fund institutions and public capital (education, health, law, infrastructure) which will enable further gains in property prices. Thus I’d implement a tax of 1 per cent per annum for, at least, the duration of the recession and maybe indefinitely, (up to say a maximum of 50 per cent ownership of any one property).
John Muellbauer: Very likely, though the announcement could be delayed till the autumn, given the concern about dampening a pick-up in aggregate demand. Property tax reform will be heavily discussed, with the Property Research Group with 31 Tory MPs and led by Kevin Hollinrake, playing a leading role.
Jacob Nell: We expect the chancellor to announce higher taxes (tax relief on pension contributions, alignment of CGT with income tax and some green taxation looks plausible candidates to us), likely to be implemented from April 2022, to close the £20-30bn funding gap identified by the OBR. We see this as a policy error — with inflation low, and borrowing costs close to zero, the UK government should drive the recovery by borrowing to finance non-recurrent spending, as Europe is doing with the recovery fund. This logic actually underlies the increase in the permissible level of net public investment from 2 per cent of GDP to 3 per cent of GDP which allowed the March 2020 increase in public investment. But since then borrowing costs have fallen not risen, so we see headroom to do more. We see this as capable of accelerating the recovery, since it would increase private sector confidence, while the typical crowding out effect — as higher borrowing drives higher rates — will be mitigated we think by QE, which will help keep yields lows.
Andrew J Oswald: Lower public spending in 2021. Higher taxes in 2022.
David Owen: The chancellor needs to provide a road map for a post Brexit post Covid-19 UK economy. It is far too early to tighten fiscal policy, particularly with ongoing QE. What is required is a targeted fiscal response to better position the UK economy for recovery and to focus on measures of public sector net worth. History shows that the UK Debt Manager can roll over the levels of debt we are likely to see, especially if a large programme of green financing is rolled out.
David Page: On net, we expect the March Budget to see further fiscal stimulus, which we think will be necessary to support a nascent recovery in H1 2021. But we think that the chancellor may include some spending cuts and perhaps marginal tax tightening as part of that. We believe the best way to lower the medium term debt outlook is through short-term supportive fiscal policy to encourage a swift rebound in GDP and avoid “scarring”. The chancellor appears to have an eye on the more political intuition that high debt is reduced by government thrift. We believe that this is wrong, but the chancellor has recently made comments suggesting that he may continue to follow the recent path of political ideology overcoming economic orthodoxy or the national best interest. Genuine consolidation should be reserved until the economy is more fully recovered, unlikely before 2023. The chancellor could however announce future fiscal consolidation, which would reinforce a broader commitment to fiscal rectitude, even if delaying it until it was economically sensible. However, over the longer-term, material consolidation will be required and we expect such consolidation to be in place for decades rather than years, to reduce debt levels sustainably back towards more optimal levels.
Tej Parikh: An increase in taxes or a notable reduction in economic support could choke off the UK’s economic recovery in 2021. A vaccine alone will not be an antidote for the economy, given the damage caused to businesses and households by the pandemic in 2020, so fiscal support will need to provide some uplift. With interest rates at record lows the chancellor may not even need to embark on any significant fiscal consolidation. In fact, a fiscal tightening could conversely slow the recovery and necessitate even more austerity further down the line.
Ian Plenderleith: Yes, in 2021. A lot of deficit reduction needed over next few years, principally by higher tax revenue because we want public services maintained/enhanced, and a start to increasing tax take will, and should, be made in 2021. Will be politically very controversial.
John Philpott: The combination of a slow economic recovery and uncertainty about short-term growth prospects should make the chancellor cautious about making any major announcements in 2021. I would expect serious consideration to be given to fiscal consolidation by the start of 2023, with the initial focus on modest tax increases.
Jonathan Portes: No significant fiscal consolidation in 2021-22 (in terms of discretionary non-pandemic related measures) but pre-announced tax rises (and reviews pointing towards rises) and some spending reductions relative to current plans.
Richard Portes: Yes. But neither needed now nor desirable.
Adam Posen: I expect him to announce a small amount lower public spending on net, with a bunch of sizeable gross flows offsetting (further cuts to social programs, bailout funds handed to Brexit hit industries, for example)
Vicky Pryce: There will be some tinkering with taxes, maybe even some windfall taxes and a sorting out of anomalies in the area of national insurance and an end to the triple lock. The VAT cut for tourism and hospitality will also probably be reversed to as well as the abolition of stamp duty for houses under £500,000. But they will be minor. Spending will be reduced substantially anyway from current levels as a number of the stimulus measures will come to an end but not until later in 2021. Indeed the extension of the furlough scheme to end April suggests that the government is not at all convinced of the speed of recovery as more lockdowns loom for the new year and even more fiscal support may well be needed in the short term.
The markets are not looking for any real move to fiscal consolidation in the immediate future- all countries are needing to borrow more, indeed encouraged to continue to support their economies by the likes of the IMF and the World Bank and it is clear that central banks have more firepower still as evidenced by the latest increase in intended QE by the European Central Bank. The UK has also proved to be willing to support record borrowing with matching QE and the Bank of England has even been hinting of moving to negative interest rates of needed.
Yields on UK government 10 year bonds are at record lows as the markets are satisfied about sustainability of that debt although reassessing the long term impact on growth of a post Brexit future may shake markets at some point. Extra spending to support health outcomes will in any case be decreasing overall at some point next year but some money will need to be redirected to stimulating investment, look after sectors in difficulty and deal with the individual and regional inequalities that will have developed.
The deficit to GDP ratio will fall sharply anyway and that will be sufficient for the markets after a ratio of up to 20 per cent possibly this financial year. So no need for fiscal consolidation of the type seen before during the austerity that followed the financial crisis in the UK. The world has moved on in relation to what size of debt-to-GDP ratio is sustainable in the long term. What the UK needs is growth- not unnecessary fiscal rules, which are put there to be broken. But I fear that the government may still try to reign back too soon but as tax increases prove politically difficult what might suffer could well be medium term infrastructure plans as has already been hinted with HS2 and levelling up promises may be abandoned. That could cause considerable social tensions as inequality patterns become that much more ingrained and that much more difficult to shift.
Lucrezia Reichlin: NO.
Ricardo Reis: Neither. I expect fiscal consolidation to be a very important feature of the budget post 2021. But not in 2021. At most, I expect (and desire) come announcements of fiscal plans for the medium term. These would lower uncertainty on what fiscal policy will be, in light of a very large public debt.
Philip Rush: Both likely in the Autumn-2021 Budget. Fiscal consolidation is unavoidable amid a substantial hit to potential GDP.
Kallum Pickering: The chancellor is likely to announce some fiscal consolidation at the March budget. This is likely to come mainly from higher taxes planned for 2022 onwards, once the recovery is fully under way. The extent of the fiscal consolidation depends mainly on how much scarring the Covid-19 downturn causes. Based on its central scenario, the OBR estimates that public borrowing will settle at around 3.9 per cent of GDP by 2024 once the UK returns to full employment — compared to the pre-pandemic estimate of 2.2 per cent. The range around this call is wide, with borrowing falling to sub-2 per cent in the OBR’s upside scenario and staying above 6 per cent in its downside scenario. If the upside risks to the medium-term outlook materialise, only a modest amount of fiscal tightening will be needed. As long as borrowing costs remain low, the additional public debt incurred during the pandemic does not present an immediate economic risk.
Jumana Saleheen: I do not expect tax hikes or spending cuts to be announced in 2021. The large-scale fiscal stimulus provided by Rishi Sunak in 2020 means that on current spending plans, fiscal policy will be a drag to UK GDP growth in 2021. To kickstart and secure the UK’s post-Covid recovery, further stimulus will be necessary in 2021, a point made clear by the IMF. The current UK debt burden is the highest seen during peacetime, but fiscal austerity in 20201 would be a big mistake. Fiscal consolidation is likely to be required at some point in the future, my best guess it that this will most likely be delivered after 2023.
Yael Selfin: Fiscal consolidation is unlikely to take place before the UK economy is back on solid ground. So while the chancellor may announce plans to curb spending already in 2021 they will form part of a medium term strategy rather than an immediate cut. Public spending is expected to fall significantly once all social distancing restrictions are lifted, with programmes like JRS and the range of loan schemes ending as businesses can return to normal trading.
Andrew Sentance: Fiscal consolidation is not needed in the short-term and I would hope the chancellor will hold off announcing any significant fiscal tightening measures until 2022 when the shape of the recovery should be clearer. Any tax changes should be introduced in the context of broader tax reform which is needed in many areas of the tax system.
Philip Shaw: The government will not want to move quickly to correct public borrowing bearing in mind that this could derail the recovery. However, nor does the chancellor want to gain a reputation for running excessive deficits as the mood among investors could potentially sour quickly, raising debt servicing costs. It is possible that he addresses this by pre-announcing some tax hikes going into the future, most likely on Corporation Tax. He may also increase capital gains tax rates as soon as next year as arguably, this would have little overall impact on demand. We would note though that in contract with this year, the UK is unlikely to be running a deficit of the magnitude of £400bn in 2021/22 as the winding down of the various support schemes will have a material effect on the deficit.
Andrew Simms: There is clearly scope for wealth taxes, but neither rational nor justification for rises targeted at low income households. As the Bank of England policymaker, Gertjan Vlieghe, pointed out recently, “We are really not all in this together. It is far, far worse for some than for others”. Low income countries, and low income households in wealthier countries have been hardest hit. The UK cutting aid to some of the world’s poorest countries was both an inhumane act, reneging on an international commitment, and in the context of the global pandemic almost certainly counter-productive. But lower public spending would be senseless and damaging for the foreseeable future in the UK. Spending that maintains or creates necessary and new employment pays for itself through the multiplier. Further public money creation through QE remains an option, and there are as yet unexplored options to ensure that such money is more productively directed towards immediate economic, employment and environmental objectives — such as “levelling-up” the UK through investing regionally in rapid and socially just low-carbon transition.
With the annual inflation rate in November at 0.3 per cent, inflation is only on the agenda in the sense that it is among the lowest levels experienced for decades. Borrowing may be high but with record-low interest rates, UK government repayments on its debt are set to be £20bn lower next year than it planned for.
As needs constantly repeating, the UK as a country does not budget like a household. Households don’t have central banks, they can’t raise money by issuing 50 year bonds that offer less than one per cent interest and have them snapped up by the City in spite of the wider crisis. There should be no fiscal consolidation, in short, until public investment has revived the economy and set it on a path of recovery compatible also with the UK making its proportionate contribution to halting the climate emergency.
Nina Skero: 2021 will be another “shaky” year and the focus will very likely be on supporting growth, with any fiscal tightening on the cards for 2022 and later.
James Smith: The key fiscal question is when, and how, the Job Retention scheme is unwound. If this happens before all sectors are allowed to reopen permanently, then there is likely to be a further rise in unemployment as we head into the summer. The fact that there were still over a million workers “fully furloughed” at the end of October, six months on from the start of the scheme, shows what is at stake if wage subsidies are prematurely withdrawn in 2021.
Andrew Smithers: I expect both higher spending and higher taxes, as per cent of GDP.
Alfie Stirling: Given the spending cuts announced as prematurely as Nov 2020, it is highly likely that either further cuts or tax rises will be announced before the end of 2021 too.
If this does happen, it will almost certainly be a costly mistake. Current levels of government debt and borrowing hold little credible risk to the economy. On the other hand the risks of suppressed demand, such as that caused by the government failing to borrow at the rate needed to provide sufficient protection to family incomes, carries a potentially tremendous cost. A policy error of this kind is currently one of the most likely causes of future long-term scarring — which would see permanently higher unemployment and lower standards of living for millions of people.
In the long run, debt does not need to be repaid: but it does need to be serviced sustainably, and possibly managed down as a proportion of GDP. Neither of these look set to be particularly challenging. More pressing will be the need to use tax policy to reduce inequalities — especially of wealth — made worse by the economic effects of pandemic, and to help permanently restore fragile public services and address the challenges of an ageing population.
Gary Styles: Higher taxation announcements look very likely in 2021 but with the majority of the impact being from 2022 onwards. Any announcements next year are largely to set the direction of travel for public spending and taxation rather than improving public finances in the short-term. The scale of the required medium term tax rises and public spending controls are likely to frighten most rational consumers, investors and perhaps even politicians.
Suren Thiru: While chancellor may announce some fiscal consolidation in 2021, these are likely to be only implemented in future years, given the current headwinds facing the UK economy.
Although the fiscal challenges facing the UK are significant, the temptation to start fiscal consolidation too early must be resisted to avoid extending the economic pain from coronavirus.
Instead with ultra-low borrowing costs, the focus must be on boosting economic activity to sustainably grow and broaden the UK’s tax base. Although there will need to be fiscal tightening at some point, the initial focus should be on stabilising UK debt as a share of GDP rather than shrinking it, to avoid choking off any economic recovery.
Phil Thornton: There is an emerging consensus that with interest rates close to zero and an ability to print money, there is no need for the UK to embark on an austerity drive. Sometimes economists and politicians can learn from previous misjudgments and the austerity programme of 2010 to 2015 should not be repeated. However, the chancellor will need to take some action for political reasons to appease Tory backbenchers. But those moves should be focused on higher taxes particularly on the more well-off and NOT further cuts in public spending.
Samuel Tombs: 2022 will be the year of peak fiscal pain. The government is under little pressure to actively tighten fiscal policy in 2021, but it will want to get the required fiscal consolidation out of the way well before the general election in 2022. Tax rises likely will place a bigger role in the forthcoming consolidation than in the early 2010s, given that the government has ambitious plans for investment and faces pressures on public spending from an ageing population.
John Van Reenen: He will announce plans to do so, but not begin to do so until 2022. Consolidation should be slow and delayed to avoid making the same mistake of a premature move to austerity after the Global Financial Crisis.
Konstantinos Venetis: Probably a bit of both, but nothing spectacular. The economic outlook precludes a material shift away from high levels of public expenditure for the foreseeable future. The improvement in tax receipts will not prove brisk enough to obviate calls for higher taxes. But the government can be expected to settle for tweaks rather than bold moves on tax policy and hope for a powerful rebound in private spending to shore up public finances. The chancellor has talked about the “responsibility, once the economy recovers, to return to a sustainable fiscal position”, but the economy is unlikely to return to its pre-virus output level until mid-2022 — not far from the next general election in spring 2024. Perhaps the easier forecast to make is that under most macro scenarios the Bank of England’s QE and forward guidance will remain a cornerstone of favourable funding conditions.
Daniel Vernazza: I do not expect any fiscal tightening in 2021 (although public spending will reduce as temporary Covid-19-related spending comes down).
My base case is that fiscal consolidation will be postponed until after the next election scheduled for May 2024. But there is a non-negligible risk that tightening could come already next year and peak in 2022: if so, the timing would be mostly for political reasons, both to demonstrate to Conservative backbenchers that the government intends to keep to its fiscal rules, such as balancing the current (or day-to-day) budget over a rolling three-year period, and to get tax rises out of the way before the next general election. This would be a mistake, I think, given there is likely to still be a significant margin of spare capacity in the economy.
It is prudent for the government to aim to reduce the public debt as a share of national income during the good times, both to maintain the confidence of financial markets and to create fiscal space for when an adverse shock hits. This is unlikely to be during the next few years, as spare capacity persists. There is no simple rule to follow regarding what adjustment is likely to be needed. The debt dynamics depend on a few key parameters, namely the average interest rate on public debt, nominal GDP growth and the primary budget balance. Interest rates are likely to stay very low for several years, which makes a higher public debt more sustainable (as evident in the low ratio of debt-service payments to fiscal revenues).
David Vines: No. Fiscal consolidation should be greatly delayed.
Keith Wade: Some tapering of the furlough scheme is likely toward the end of 2021, but fiscal consolidation will be pushed out until 2022. This is likely to be very modest with debt costs remaining tightly controlled by the Bank of England. The UK’s populist government will prefer financial repression to austerity or tax increases.
Dr Sushil Wadhwani: It is unlikely that the chancellor will announce either higher taxes or lower public spending in 2021.
Views on appropriate fiscal targets are changing within the Economics profession. It is increasingly fashionable to deride debt-GDP ratios and to emphasise debt servicing ratios instead. With real interest rates so low, it may therefore be tempting to do nothing in terms of fiscal consolidation.
Once we are past the current economic emergency and are experiencing a post-vaccine recovery, we should consider again the need for fiscal consolidation in the context of some new fiscal rules.
I suggest that we should set a rule in terms of an acceptable level for the ratio of real interest payments to GDP. However, instead of using currently prevailing levels of real interest rates, we should aim to be cautious and, instead, assume that real interest rates are, say, 200 bp higher than current levels. We should then re-examine whether the debt service ratio is at an acceptable level once one makes a more cautious assumption about interest rates. I believe that this should help determine the need for fiscal consolidation.
Ross Walker: No. The recovery is too fragile and “austerity” feels like an impossible sell politically. Then the 2024 election comes on to the horizon. UK fiscal consolidation will be in the next Parliament but will be more tentative than the post-GFC episode.
Martin Weale: The problem we face is that we do not know how frequent disasters like the epidemic are. If debt rises whenever there is a disaster but does not go down between disasters, then it is hard to see the costs of the debt can be kept down. At the moment low interest rates mean the debt is not a burden but the short maturity of the debt, as a result of QE, means that we are very exposed to the fiscal risk of higher interest rates.
Simon Wells: The reality is that both fiscal and monetary policy stimulus might have to be extended. On the fiscal side, our borrowing forecasts for 2021/22 are considerably higher than official forecasts.
Peter Westaway: I do expect the chancellor to start preparing the ground for fiscal tightening even if those measures do not take place during 2021.
Instead, the huge hit to public sector debt should be seen as a one-off shock to be shared across future generations, not paid for by the people who have already suffered from the pandemic.
Given the low interest rates that the new debt has been financed at, the immediate burden on taxpayers is relatively low, and could be lowered still further if new debt is financed with ultra-long horizon gilt issues. With medium-term growth rates likely to exceed the interest cost of this debt, the debt ratio will gradually fall in any case over the next decade.
A more radical approach is for the Bank of England to finance much of the additional debt, turning temporary QE purchases during the pandemic into permanent monetary financing. At a time when inflation is below target, the time to do this is now, but crucially, implemented as a one-off measure. Future governance of monetary financing should be authorised as a tool for the Bank of England to use, under their control, for emergency use only.
Once all that is done, a new fiscal framework should be established, setting clear targets for government capital spending, and a well defined target for current deficits designed to generate a gradual fall in debt-GDP ratios, augmented by an enhanced role for fiscal policy as a cyclical adjustment mechanism, overseen by a politically neutral fiscal council.
Mike Wickens: Yes. But it would be a mistake while low interest rates make borrowing so cheap. And while they are low — only while they are low — money finance makes more and is less fiscally painful. I would issue consols to tie in the benefits of current rates for the long term and avoid austerity.
Trevor Williams: I don’t think there will any notable tax increases in the March 1 — assuming stays at that date. It might have to move back — or earlier to become a no-deal Budget. In either case, I cannot see how tax rises can be announced.
Tony Yates: I hope that much of the deficit will be closed by the automatic stabilisers, and the ending of the semi-“automatic” Covid-19 related spending. What discretionary consolidation is needed I would hope would come from increased taxes, not spending. But the debt and uncertainty overhang, and the Bank of England’s incapacity to respond meaningfully, might mean that little discretionary consolidation is possible next year.
Linda Yueh: The chancellor might set out a future course of both higher taxes and lower public spending in 2021, but it shouldn’t take effect until the recovery is on solid ground, which won’t be until the economy recovers to its pre-pandemic level. The higher spending will likely include capital investment, which can help raise growth and create jobs. But growth alone is probably insufficient to address the level of public debt that the UK and most other countries will contend with in the coming years.
Workers: How do you expect the UK labour market to perform in 2021?
Howard Archer: While the government’s most recent measures should have some limiting impact on the rise in unemployment, we predict that the upward unemployment trend will still be appreciable given the significant challenges and uncertainties facing the economy. The EY ITEM Club suspects that the unemployment rate could reach 7.0 per cent by mid-2021, although the peak is forecast to be both lower and later than had been expected before the extension of the furlough scheme.
Should there be no trade deal between the UK and the EU, the EY ITEM Club suspects that the unemployment rate could reach 8.5 per cent rather than the 7.0 per cent peak rate currently forecast.
Angus Armstrong: Unemployment will rise: the question is how much. I expect the chancellor will extend or replace CJRS to at least mid-year. It would be counter-productive to have a cliff-edge end to the scheme before the bulk of vaccination has been completed. Wage growth is likely to be surprisingly weak.
Nicholas Barr: As the economy picks up, cyclical unemployment will fall. Structural unemployment, however, will tend to grow inasmuch as some of the responses to the pandemic, eg the move to online, will return part — but only part — of the way back to pre-pandemic patterns. (My prescription meds, ordered online, appear magically through the post — ain’t no going back). I set out the arguments more fully in a blog: https://blogs.lse.ac.uk/Covid-1919/2020/10/01/britains-job-support-schemes-right-direction-more-to-do/
Ray Barrell: The UK labour market has performed remarkably well in 2020, but unemployment is almost certainly going to be higher in 2021 than at the start of 2020, even if things go well. New ways of doing things will follow from the pandemic. It will take the labour market time to adjust. Of course, uncertainty is bad for the economy, but ending it can be even worse. A hard Brexit would do a lot of short term damage to employment.
Aveek Bhattacharya: I suspect things are going to get worse before they get better, with an increase in unemployment as the furlough is withdrawn. While things are likely to improve by the end of the year, the demise of high street retail and reduced commuter footfall in cities with the rise in homeworking could leave unemployment rates elevated for some time.
David Graham Blanchflower: Much depends on the monetary and fiscal response. My suspicion is we will see the unemployment rate rise further. The major concern is what happens at the low end as it appears that, as in the US at the end of 2020 the bottom part of the wage distribution has dropped out. Underemployment is set to rise further.
Philip Booth: reasonably well in re-absorbing many, though not all, of the workers who have been made unemployed.
Nick Bosanquet: From Q2 onwards rise in unemployment. to 8 per cent — also fall in economic activity. There will be a combination of higher unemployment with shortages of qualified staff for infrastructure, digital and green projects.
We will see a growing problem in young unemployment — both for graduates and for school leavers with weak qualifications. The middle group of apprentices will do better. (demand from projects).
Erik Britton: High levels for of unemployment are likely to remain in place throughout 2021 and beyond — particularly prevalent in low skilled labour-intensive sectors.
George Buckley: A combination of the usual lags between shifts in output and joblessness, and ultimately the withdrawal/reduced generosity of the furlough schemes should mean further increases in unemployment in 2021. We agree with the Bank of England and OBR that unemployment will rise to a peak around mid-2021. Also, some employees who lost their jobs this year and have become disillusioned are likely to re-enter the labour market to look for work as the virus dissipates — thereby adding to recorded unemployment.
Jagjit Chadha: Little prospect for increases in real wages on average but an increase in wage inequality seems in prospect. Unemployment may also rise quite sharply given the twin shocks as firms deaths will rise and births fade away.
Mark Cliffe: The massive divergences in performance between sectors, between the digitally-enabled winners, the key sectors and those left behind will continue to dominate. Even if the vaccine rollout sparks a big rebound in demand later in the year, the wounds of job losses and bankruptcies will remain deep.
David Cobham: There will be a significant recovery but not one strong enough to bring unemployment back to the 2019 level. We are facing a serious episode of hysteresis, associated primarily with the demise of many small and medium-sized businesses which have not been adequately protected.
Brian Coulton: We expect the UK unemployment rate to rise to 7.8 per cent by Q3 2021. The CJRS is due to be phased out next spring and the impact of the huge macro shock — which has hit labour intensive parts of the service sector hardest — will become more apparent. Meantime we expect numbers on the furlough scheme to go back up in the immediate months ahead as the leisure, hospitality and retail sectors face renewed lockdown restrictions.
Diane Coyle: Unemployment will rise, without question. Perhaps not as much as feared as I’m sceptical that employers will invest in automation in the next year or two. They are more likely to return to the low-investment, cheap/precarious labour model we’ve seen since the financial crisis.
Bronwyn Curtis: As furlough and other support is withdrawn from businesses, I see the unemployment rate rising over 7 per cent. The UK has already seen net migration from the UK and that could intensify in 2021.
Paul Dales: 2020 was the worst year for the economy, but 2021 will be the worst year for the labour market. That’s because the furlough scheme delayed the normal labour market response. We think the unemployment rate will rise from 4.9 per cent to a peak of 7.0 per cent in mid-2021. Clearly that’s not great. But if that’s the peak after a 25 per cent peak-to-trough fall in GDP, then the furlough scheme will be hailed as a huge success.
Howard Davies: Recorded unemployment has risen less rapidly than expected, but there will be an acceleration when the furlough schemes are closed. It is pain deferred not denied.
Richard Davies: We will see a return to the previous trend: stronger than expected employment numbers, with lower than expected wages. I’m dubious of the notion of a Covid-related “leap” in technology adoption that will lead to higher productivity and wages. Rather, expect more of the same: low productivity growth, with real wage growth depending crucially on inflation.
Panicos Demetriades: There will be a slow recovery in the labour market, as the economy recovers from Covid-19. However, the impact of Brexit on trade and the travel industry could slow down, if not reverse, that recovery.
Wouter Den Haan: Poorly, especially for new entrants.
Michael Devereux: Badly. Unemployment will rise and average wage rates will fall.
Swati Dhingra: Remain weak.
Peter Dixon: I expect things to get worse before they get better. The furlough scheme has shielded the labour market from the worst of the output collapse even as redundancies are rising sharply. Assuming support measures are phased out in 2021 I believe the unemployment rate could breach 8 per cent in the course of the year.
Jan Eeckhout: Worse: wages will not grow: employment will likely not recover pre-pandemic levels.
Noble Francis: The fortunes of the UK labour market will depend on the length of the Coronavirus Job Retention (furlough) Scheme and the Self Employment Income Support Scheme, the speed at which consumer spending returns, government support for revitalising sectors of the UK economy and the impact of Brexit disruption on the UK economy. After the furlough scheme ends, unemployment will undoubtedly rise but certainly not to extent that it would have done had the scheme ended as originally planned in October 2020.
John Gieve: The unemployment rate will jump as the Covid-19 measures run off in Q2. I expect the rate to fall from that peak as spending picks up especially in the entertainment and hospitality sectors.
Andrew Goodwin: The Job Retention Scheme has done a very good job of limiting the rise in unemployment and should help to preserve jobs in sectors such as the arts and hospitality until social distancing restrictions are lifted. We would expect this to mean unemployment peaks below 7 per cent, much lower than many had feared at the start of the pandemic. And we could see unemployment begin to fall rapidly in H2 2021, if economic growth rebounds strongly.
Mark Gregory: After a shaky start, demand for Labour will recover with hospitality coming back strongly in the second quarter. Lower immigration and skill shortages in sectors like IT and logistics will create upward pressure on wages.
Rupert Harrison: The UK economy proved itself exceptionally good at creating jobs during the recovery from the financial crisis and I would expect the same to be true this time. The labour market recovery could be even more rapid because the biggest bounce back will come in employment rich service sectors. I would expect unemployment to peak lower and fall more rapidly than the OBR forecast.
Neville Hill: Furlough schemes have been successful at shielding the labour market from the worst of the recession. But as restrictions ease next year as will that support. And at that stage we would expect a material increase in unemployment. We expect it to climb to 7 per cent this year.
Brian Hilliard: Badly — with a delayed reaction to weaker demand as the furlough scheme is wound down.
Andrew Hilton: If there were a God, gig workers would rise up and burn down Whitehall and Goldman’s shiny new offices. Those least able to cope will continue to be screwed, and those (in the public sector, in trading markets, in the Premier League) will continue to make out like bandits. Furlough programmes will continue to make official unemployment data meaningless, but no one sane will encourage his/her child to opt for self-employment. Join the Civil Service and hunker down for the next 25 years . . . Not, I would say, a recipe for global success, but, sadly, that the way it will go.
Dawn Holland: Job security is likely to remain a key issue. As firms struggle to keep afloat, the number of payroll employees is likely to remain depressed.
Paul Hollingsworth: It is likely to be a year of two halves for the UK labour market, with a continued deterioration likely in the first half, particularly when the job retention scheme comes to an end, followed by an improvement in the second half as the economic recovery really gets going. Nonetheless, we expect unemployment to end the year higher than it starts it.
Ethan Ilzetzki: Things will get worse before they get better. UK unemployment will go up during 2021, but it is hard to tell whether this will be a statistical artefact or a real phenomenon. Current statistics grossly understate the true unemployment rate as many furloughed workers will not come back to work. Once job support schemes are eliminated we will see a statistical rise in unemployment, which will begin recovering in the second half of the year, assuming the vaccine proves effective in containing the public health crisis.
Dave Innes: It is remarkable given the size of the economic shock from coronavirus that we are heading into 2021 with an unemployment rate of only around 5 per cent. That more people haven’t lost their jobs already is thanks to the success of the furlough scheme. Extending the furlough scheme through a turbulent winter was the right thing to do and will keep unemployment increasing only slowly in the first few months of 2021.
Unemployment will actually rise fastest as the economic recovery finally takes hold. This will be the right time to gradually withdraw support for businesses and jobs and allow some structural change to take place in the economy, leading to job losses before new ones are created. The sectors hardest hit by social distancing and lockdown restrictions will fare differently in the recovery. Covid-19 is likely to speed up long term trends, with more jobs lost in physical retail, whilst jobs in hospitality are likely to recover quickly once social distancing restrictions can be relaxed.
Workers already at risk of poverty pre-pandemic are most likely to lose their jobs in the coming wave of unemployment. Social distancing and lockdown restrictions most affect low-wage sectors such as hospitality, retail and leisure, and these sectors also have a relatively large share of female and ethnic minority workers. While young people have understandably been prioritised for active labour market support so far, policy will also need to provide support to older workers losing their jobs in these sectors to prevent this short-term unemployment becoming a long-term challenge.
Dhaval Joshi: The UK labour market will perform very poorly in 2021 and will be a major concern.
The reason is that the pandemic has accelerated online shopping and working from home, and thereby accelerated the demise of labour-intensive sectors such as bricks-and-mortar retail, and city centre economies that thrive on office workers. Just retail employs 10 per cent of UK workers, and a significant proportion of these jobs will be destroyed forever.
Hande Kucuk: We expect unemployment to rise once the furlough payments cease at the end of next March, with important implications for different sectors, different age groups, skill levels and geographies. Sectoral shifts will be taking place, as a result of voluntary social distancing, reduced willingness to travel, increased online purchasing and the high level of working from home. This will require a reallocation of labour from contact intensive sectors to sectors such as infrastructure, education, social and healthcare, which is likely to take a longtime due to different skill requirements for each sector. The government’s role in both protecting existing jobs and encouraging transition to new ones will be critical for the labour market in the coming years.
Gerard Lyons: I expect unemployment to peak in the second quarter, at over 7 per cent. One of the hallmarks of the UK economy has been its ability to cope with shocks.
It is hard to tell how much scarring there will be as a result of this crisis. There are some important sectors of the economy — large parts of the creative sector, for instance — that would in normal times be thriving, but which may suffer significant job losses and take time to recover, fully. Ahead of the pandemic, jobs in the creative sector, for instance, were growing at twice the pace of the whole economy.
Also, a focus in 2021 has to be on helping young people find their footing in the labour market, equipping them with skills for future growth sectors.
In the wake of the pandemic, one should expect an increased focus on the future of work and this will further cloud the jobs outlook.
Stephen Machin: Not very well. If the furlough continues to be extended that will be better for jobs and unemployment, but this is postponing the bad news coming.
Chris Martin: I expect unemployment to rise. I am unsure how high it will reach, but a rate of 10 per cent is possible. Wage growth will remain low for some time. The gig economy has been hit badly by the pandemic. I expect it to recover strongly once the pandemic passes. I expect the pandemic to highlight the disparity between the gig economy and the traditional economy, and for this to emerge as a policy issue later in 2021.
Costas Milas: Unemployment will continue to rise to (perhaps) as much as 8 per cent.
David Miles: Significantly higher unemployment than pre Covid-19 will likely persist through 2021, even if wage rises are near zero.
Patrick Minford: With the labour market flexibility demonstrated after the financial crisis I expect unemployment to fall during 2021.
Allan Monks: Extended furlough schemes have slowed the rise in the unemployment rate but a further increase to around 7 per cent or so looks likely by mid-year. Job losses among lower paid jobs are pushing recorded average earnings higher but this will mask the impact of pay restraint in both the public and private sector. The household saving rate remains high, however, and liquid assets on the balance sheet have risen sharply due to lockdowns. Some unwind of this large savings buffer will help to support spending even as real income growth is constrained.
Andrew Mountford: I think that unemployment will rise sharply in early 2021 and fall back only slowly. It will reflect the recovery of the UK economy which I think will be slow, see my answer to question 1.
John Muellbauer: Unemployment is likely to rise to near 7 per cent by autumn.
Jacob Nell: We expect unemployment to peak shortly after furlough ends, effectively a delayed recognition of the jobs lost through Covid-19. Furlough is currently scheduled to end in May — although we see a risk furlough — and so the unemployment peak — is pushed back if restrictions in response to the highly transmissible Kent strain of Covid-19 are only lifted once the vaccine has been widely rolled out, which could be later in the year. We see the peak at 8.2 per cent — a relatively mild hit for the depth and duration of the Covid-19 shock — as furlough and migrant outflows continue to cushion the domestic labour market. On reopening, for similar reasons to 3Q21, ie pent-up demand reflected in higher household savings, we expect a strong rebound in consumption. Although unemployment will then start to decline, we expect the decline to be gradual given cautious companies, nursing damaged balance sheets, and cautious banks, as they start to recognise the bad loans of the pandemic.
Andrew J Oswald: Weakly.
David Owen: Unfortunately unemployment will continue rising, as a central case to between 7-8 per cent, but with a risk of even higher figures. To date falls in the payroll have been heavily skewed towards hospitality, arts and entertainment and London. The risk is of a more general loss of jobs in 2021 as government support is withdrawn. The key is to help generate a rapid pace of new company formation and to keep the flow of credit and finance flowing through the economy.
David Page: A rebound in activity in 2021 should mark the starting point of reducing spare capacity in the labour market and a move towards a genuine recovery in the years to come. However, much as the true scale of the damage done to the labour market has been masked by the incredibly important furlough scheme this year, so its end next year could see traditional measures of labour slack start to rise. As such, we forecast the unemployment rate rising to around 7.6 per cent by mid-2021, before starting to fall back slowly thereafter.
Alpesh Paleja: With the Job Retention Scheme (JRS) having insulated a large part of the labour market so far, we’ll probably see further falls in employment ahead. We expect the unemployment rate to peak at 7.3 per cent in mid-2021, reflecting both job losses already in train and the JRS coming to an end (though with the recent announcement of an extension until end-April, this peak might end up being a little lower). The labour market should begin to recover thereafter, but by the end of the year, unemployment will still be higher than before the pandemic. There is also the risk of longer-term scarring in the labour market — for example, the entrenchment of longer-term unemployment, and lingering impacts on the job prospects of younger people.
Tej Parikh: Unemployment is likely to keep rising in early 2021, particularly as government support schemes wind down. But as economic growth returns, many firms will begin to open new positions and look to rehire, which means unemployment may peak at around 7 per cent.
Ian Plenderleith: Big rise in unemployment as furlough ends.
John Philpott: Unemployment will continue to rise throughout 2021, with the rate of the increase likely to accelerate in the spring once the government’s furlough scheme is withdrawn. Thankfully it now looks as though, contrary to expectations when Covid-19 struck, unemployment will peak at a lower rate than following the financial crisis of 2008. The major caveat to this more positive expectation is uncertainty about the extent to which employers will restructure in anticipation of a changed post-pandemic economic landscape or instead return to pre-pandemic business as usual. The widespread restructuring would result in a departure from the “job rich/low productivity” labour market of the past decade and slow the return to the pre-pandemic unemployment rate.
Rising unemployment in 2021 will dampen growth in average earnings which will only just about manage to outpace higher (in part Brexit induced) price inflation. The combination of a higher unemployment rate and modest real wage rises will leave workers and households feeling financially depressed despite the psychological boost of knowing that an end to the pandemic is in sight.
Jonathan Portes: I’d expect employment rates to recover relatively strongly (again conditional on vaccine/Brexit), with unemployment falling to 5 per cent or so by end of 2021. The big unknown (economically and statistically) is foreign workers: the published statistics suggest a very large fall during the pandemic, with a million or so working age migrants leaving the UK. If this is accurate, and sustained, it will mean employment levels will recover much more slowly (and we may seem some skill/labour shortages).
Richard Portes: Won’t get back to pre Covid-19 unemployment rate by end-2021.
Adam Posen: Strong growth in employment overall, offset by localised unemployment in various sectors hit by Covid-19 and Brexit. The year will end with unemployment 1.5-2.0 per cent lower as measured, but some decline in labour force participation offsetting.
Vicky Pryce: The furlough scheme will hide the underlying deterioration in job prospects for a while, especially now that more lockdowns are likely which will push many firms to finally close for good, despite the extra support provided. SMEs are likely to be hit most as we have seen already but many sectors such as the airline industry may take years to get back to normal. The jobs lost in retail and the supply chain may never return as Covid-19 has accelerated the restructuring that was going to happen in any case and also encouraged the introduction of technology to both delay organisational structures and also reduce face to face contact. Many of the hospitality and tourism jobs and those in the creative sectors may also not return and the fears of long term scarring may indeed materialise with a negative impact on the economic potential of the economy. Women and the young have been worst affected with those lower down the pay scale less likely to be able to work from home. Brexit will also reduce the attractiveness of the UK as a place to invest in as it will no longer be a natural gateway to Europe. And it will be harder for firms to expand if bringing in workers from abroad with the required skills and aptitude becomes more expensive or more difficult. We know that migration, in general, raises the skills level in all sectors, not just in the digital, fintech and creative areas, and that will be a loss to productivity and growth. How much reskilling of UK workers there might be to compensate is still a question mark.
Lucrezia Reichlin: Higher unemployment.
Ricardo Reis: I expect hours worked to massively rebound in 2021 relative to 2020. I do not expect it to rebound all the way, but to stay a little below.
(This is conditional on there not being a new strain of the virus, and the vaccine being rolled out effectively.)
As for employment, or unemployment rates, they have become less useful measures of labour market activity. With all the government programs and payroll scheme, those measures can change abruptly with changes in government policy without a direct counterpart in people’s well being.
Philip Rush: The labour market has been shielded from output-destructive policies by the furlough scheme. Unemployment will surge after it ends to about 7 per cent, in my view.
Kallum Pickering: Solid rebound once the pandemic risks ease. Expect an initial spike in unemployment around April/May as the furlough scheme ends — to a rate of 7.5 per cent — before a sustained recovery thereafter. Expect the unemployment rate to fall to around 6 per cent by end-2021.
Jumana Saleheen: 2021 is likely to be a terrible year for workers in the UK labour market. I expect the unemployment rate to rise to 7-10 per cent in 2021. The Coronavirus Job Retention Scheme has been successful in protecting jobs — which is good news. But it has also delayed certain structural changes in the labour market, trends which have been accelerated by the pandemic. Good examples here are the decline of the retail high street and the rise of remote working. 2021 will be the year in which some of those tough adjustments will need to be made.
Yael Selfin: We expect unemployment to rise further in the first half of 2021, with the JRS partially shielding workers, but despite that more than 1 million workers are likely to lose their jobs during the pandemic.
Many of those losing their jobs will come from sectors such as retail where jobs are unlikely to return after the pandemic thanks to the accelerated adoption of online commerce. These workers will require additional help with training to be able to find new jobs in different sectors.
Andrew Sentance: I would expect unemployment to peak at around a rate of 7-7.5 per cent in 2021 and then gradually drop back.
Philip Shaw: On the basis that the furlough scheme is wound down as planned, unemployment looks set to rise further. However, this may be more limited than the OBR is forecasting (6.8 per cent on average in 2021) providing the current spike in Covid-19 infections is capped quickly and GDP growth is buoyant over H1. As yet, it is difficult to gauge the impact that the Job Support Scheme might have.
Andrew Simms: How the UK labour market performs in 2021 will be a function of whether and how the government succeeds in steering a course for economic recovery, and the degree to which it mitigates damage from the self-inflicted harm of Brexit.
Key to both will be filling the skills and training gap. It was exposed recently by problems with even the government’s relatively modest Green Homes Grant scheme. As a £2bn toe-in-the-water intended to support 140,000 jobs and part of a wider “green recovery” plan that it meant to be an official priority it quickly ran into problems. People trying to use the scheme quickly experienced a shortage of providers boding badly for the government’s bigger green industrial revolution. Too little consideration has been given to the rather vital question of whether the trained workers are there to deliver it, an oversight that included official government advisers the Climate Change Committee who admitted that in costing the low carbon transition they had overlooked the workforces training needs.
The performance of the labour market will also be determined by policy signals indicating whether key infrastructure and technology choices are likely to go more down capital or labour intensive routes. In energy, for example, nuclear options are expensive and capital intensive, whereas renewables are cheaper and, pound for pound of investment creates more jobs. Similar choices are to be found in most sectors. The moving feast of the furlough scheme will also determine outcomes and there is a need to think creatively.
The combination of Brexit and rapid, low-carbon transition means that the UK is going to need to learn a lot of new tricks, become relatively more self-sufficient and create stronger and more circular local and regional economies. A version of a basic income scheme and/or universal basic services, could underpin this process of change and provide enough material security to unleash a huge amount of entrepreneurialism and creativity in working lives. After the experience of furlough, it is now perfectly realistic and imaginable to see a scheme like this being trialled. It would have the benefit also of tackling the inequalities in the labour market revealed by the pandemic between waged workers, and those in more precarious freelance and gig economy roles.
Nina Skero: Cebr anticipates the unemployment rate peaking at around 7 per cent in 2021. The big question is how many jobs has the furlough scheme saved and how many has it postponed the end of.
James Smith: It all comes back to how furlough support is unwound. There is a clear risk that unemployment rises through 2021 as this unprecedented state support is gradually removed.
Andrew Smithers: Unemployment will be higher than it was in 2019.
Alfie Stirling: Much like the macroeconomy, it is likely that things will get worse before they get better. Unemployment is likely to reach close to 8 per cent in 2021. Without significant and direct intervention from government to help create jobs and fund new training and skills opportunities for workers in stranded sectors, there is a real risk of high unemployment and weak earnings growth for years to come.
Gary Styles: Large rises in unemployment with a very challenging and unhelpful mix by region, industry and skill level. UK unemployment rates of 7 per cent plus are very likely.
Suren Thiru: The furlough scheme will help safeguard many jobs over the coming months. However, with firms face a perfect storm of increased costs, reduced demand, and diminished cash reserves amid the prospect of further lockdown restrictions, sharp and sustained rises in unemployment over much of 2021 remains likely.
Higher structural unemployment is likely to be a key characteristic of the UK labour market in 2021 as the economic scarring caused by the pandemic limits the competitiveness and viability of some industries.
Phil Thornton: The unemployment will continue to rise as businesses either cut back staffing or go bust in the wake of the latest lockdowns, adding to the backlog of business failures and redundancies that are not yet in the data. This will hit youngest workers worst where unemployment is already rising sharply.
Samuel Tombs: The unemployment rate will rise further in the first half of 2021, but the 6.5 per cent peak that we expect is well below its 8.5 per cent peak after the 2008-to-09 recession. The furlough scheme is keeping surplus workers attached to businesses, while the latter are surviving thanks to government-backed loans.
John Van Reenen: Rise in unemployment to about 6 per cent.
Konstantinos Venetis: The worst is behind for the labour market, but unemployment will stay elevated in 2021 as the sectors hit hardest by the pandemic struggle with profitability.
Daniel Vernazza: Unemployment will continue to rise over the coming months, even with the government’s extension of the furlough scheme through April 2021 preventing a more substantial rise in measured joblessness. When the furlough scheme expires, unemployment will likely peak around 7 per cent. There should be an improvement in the second half of 2021. Headline UK labour market statistics, such as the unemployment rate, understate the true extent of the hit to the labour market, which is better captured in aggregate hours worked. Wage growth is likely to remain subdued.
David Vines: Massive unemployment
Ross Walker: Unemployment to rise for much of 2021 (~6 1/4 per cent peak) — reflecting post-Covid-19 and post-Brexit structural adjustments — but the peak in the unemployment rate will be some way below Bank of England & OBR projections.
Peter Westaway: Unemployment during this pandemic period will peak just below the levels reached during the financial crisis of a decade ago. Of course, true unemployment has anyway been much higher but hidden by the generous furloughing scheme in place. As the real economy begins to normalise in the second half of the year, economic activity will rise and spare capacity will gradually be eliminated. But unemployment will likely end up higher as furloughing is phased out and it becomes apparent that many of those hitherto protected jobs have disappeared. As a result, these hysteresis effects in the labour market are likely to mean that even after the output gap is closed by end 2021-early 2022, structural unemployment will likely ratchet up by around 1 per cent.
Mike Wickens: Furloughed jobs will become full-time in the second half of the year but new jobs will take longer to appear. So measured employment will rise only slowly.
Trevor Williams: Unemployment will continue to rise sharply, as employment falls under the influence of firm closure and increased lay-offs.
I should reach 7 per cent in the third quarter of the year.
Tony Yates: This is hard to read, as two large and opposite things will be going on. As the vaccination program rolls out, I expect a mini-boom of sorts, closing much of the gap between pre-pandemic GDP and present output: at the same time there will be a shake-out as support schemes finish, and employment has not yet adjusted to the new spending patterns.
Linda Yueh: This is highly uncertain and will be dependent on the distribution of vaccines, the end of the furlough programme as well as other government support measures, as well as the growth in jobs in the economy.
Monetary policy: How much scope does the Bank of England have to loosen monetary policy again in 2021? Would it make any difference?
Howard Archer: While there is scope for the Bank of England to loosen monetary policy further in 2021, we doubt this will be very effective. If there is more lifting to be done for the economy, we believe fiscal policy will be more effective.
The EY ITEM Club suspects that the case for further Bank of England support for the economy will wane as 2021 progresses.
Providing a UK-EU FTA is secured, the EY ITEM Club believes that the UK’s recovery will become more firmly established through 2021 helped by the rolling out of the Covid-19 vaccine.
The Bank of England is still reviewing the case for negative interest rates, but the anticipated waning need for further stimulus fuels the EY ITEM Club’s belief that they are unlikely to be adopted. Interest rates are expected to remain at 0.10 per cent throughout 2021 and most likely much longer than that.
Should the UK and EU ultimately fail to come to a deal on an FTA, the EY ITEM Club believes the Bank of England would be likely to respond with more stimulus to support the economy. This almost certainly would involve more asset purchases. In addition, a move to negative interest rates would become more likely.
Angus Armstrong: There is some scope for reducing the cost of wholesale funds: but retail lending rates are unlikely to be materially affected and so little, if any, real economic impact.
Nicholas Barr: Little scope: little difference.
Ray Barrell: There is a lot of scope to loosen monetary policy, but that loosening would have little impact. Assets would have to be purchased, and deposits (and the money stock) would be increased as a result. Loose monetary policy seldom has much impact in the short term, and this will be particularly the case at present when interest rates are so low.
Aveek Bhattacharya: The Bank of England has some scope to loosen monetary policy further — for example, exploring negative interest rates. However, fiscal policy should be the main tool for supporting economic recovery, with a particular emphasis on productivity-enhancing infrastructure investment as well as a robust adult education strategy.
David Graham Blanchflower: Little scope but I expect to see rates gong negative and more QE.
Philip Booth: It would make no difference, we are not suffering from a monetary shock but a supply shock.
Nick Bosanquet: Bank of England is showing a greater grip than the Treasury — increased easing in November because of signs of weakening consumption and investment. It may declare an economic emergency and surprise with a strong move in mid-2021.
Erik Britton: No point in going to negative rates but further QE is possible, supporting a widening government deficit. The impact will be slight.
George Buckley: The MPC’s marginal tool of policy easing currently is the asset purchase facility. Another expansion of the Asset Purchase Facility would not *loosen* policy currently as much as it would *extend* current conditions. Rather, the way in which the Bank could quickly loosen would be to step up its weekly purchase rate of gilts, which of course may ultimately require an expansion of the APF. Official rates could be cut, but this is likely to have an effect only at the margin because we doubt the MPC would be willing to sanction a particularly sizeable cut in Bank Rate and its effect may be more limited currently than during more ‘normal’ periods.
Jagjit Chadha: Maintaining low interest rates and about this level of QE is about what is required. The credibility of monetary policy keeps funding costs down and accommodates the fiscal space we may yet need.
Mark Cliffe: Since fiscal policy is likely to remain loose and the economy is set to stage a least a partial recovery, the Bank of England is unlikely to be under pressure to do much. Downside risks to the consensus view predominate, in which case the Bank is likely to lean more towards yet more asset purchasing (QE) than a serious shift to negative interest rates. This will help to support asset prices, but fiscal policy will have to do more of the heavy lifting on the real economy.
David Cobham: Not much scope, even if interest rates are made mildly negative, but the effects will be limited by the poor state of the supply-side, see previous answer.
Brian Coulton: There is plenty of scope to scale up the QE programme even further though we doubt we will see negative interest rates. More QE would depress gilt yields, help prevent a tightening of credit conditions and boost the housing market.
Diane Coyle: I don’t think monetary policy is doing anything other than increase certain asset prices at present.
Bronwyn Curtis: The measures open to the Bank include moving to a negative Bank Rate, more asset purchases and more targeted lending to banks and businesses. At 0.1 per cent interest rates are already unnaturally low which is bad for savers, dividends and company pensions schemes. And as the yield curve is very flat, they need to more asset purchases to have the same impact. Monetary policy has been the tool of choice for many years now, but its usefulness is limited in this environment. It is better to do more targeted fiscal policy.
Paul Dales: Our GDP forecasts imply that the Bank won’t loosen policy further in 2021 and that the markets are wrong to price in the possibility of negative interest rates. That said, policy won’t be tightened for many years yet. Bank Rate may be no higher than +0.10 per cent in five years’ time. The alternative scenario is if there is a no deal Brexit. The Bank would then probably expand its quantitative easing of corporate bonds and may cut interest rates to a touch above 0.0 per cent.
Howard Davies: They could move rates into negative territory, but the impact would be very small. If investment demand remains very subdued further rate reductions are pushing on a piece of string.
Richard Davies: Yes there is scope, and it would make a big difference. The Bank of England, like all central banks, influences interest rates, not just Bank Rate. Mortgage rates, for example, have risen c50 basis points (and over 100bp for higher LTV) in recent months according to the Bank of England’s own data. This is a monetary tightening, and something a central bank can offset. Doing so requires “unconventional” operations to more directly influence household and corporate borrowing costs. It would help because there is no sign, in on the ground reporting or in hard data of the British household cowering in fear — consumption has rebounded — so lowering peoples’ monthly debt-service outgoings will help the economy.
Panicos Demetriades: There is limited scope for monetary policy to make a difference to the economy in the current circumstances, given how low interest rates are already. What is needed is continued fiscal support of the private sector until the economy recovers from Covid-19.
Wouter Den Haan: The Bank of England still has some room to manoeuvre, but clearly limited. It would be a big mistake to think that all that is needed is accommodating monetary policy.
Michael Devereux: It doesn’t have much scope, but I don’t think it would make much difference in the current situation anyway.
Swati Dhingra: They can do some more QE but that’s not doing much at all.
Peter Dixon: There is still scope for easing but it is more likely to be via balance sheet activities than conventional interest rate policy. I am yet to be convinced that cutting rates into negative territory will deliver much net benefit. The biggest downside in my view is the impact on the income of future generations of pensioners, particularly if rates remain negative for a prolonged period. This is a particular problem given that the UK is increasingly reliant on private DC pension provision. However, there is scope for the Bank of England to swell its balance sheet further (ie more QE) if required. Whilst it is arguable whether QE provides much of a direct boost to growth, it does create additional fiscal space for the government which will allow it either to put in place growth-boosting measures or avoid the worst of a growth-dampening fiscal contraction, so in that sense it is very useful.
Jan Eeckhout: Limited scope. Probably will make little difference.
Noble Francis: The Bank of England has relatively little scope for monetary policy in 2021. Lowering interest rates further, making them negative, and further Quantitative Easing would have little significant impact other than to sustain asset prices.
John Gieve: I expect it to announce at least one further bout of QE early in 2021 (perhaps even over the new year if there is no deal) when it will be focused on stabilising markets and sustaining demand in the face of resurgent Covid-19 and Brexit. I think most of the impact will be the message that it is ready to act in support of the Government rather than on direct effect on demand.
Later in the year, as the Covid-19 effects reduce, I expect a sharp rebound in consumer spending and inflationary pressure which will make it consider tightening.
Andrew Goodwin: Our calculations suggest the Bank of England could implement another £170bn or so of gilt purchases (on top of the £150bn already planned) before it hits its self-imposed limits. We do not have much enthusiasm for the idea of negative rates — the costs are obvious but the benefits less clear.
In general, we think monetary policy has become much less effective in recent years. If further stimulus is required, fiscal policy should be doing virtually all of the heavy lifting, although no doubt the MPC will be keen to be seen to be doing something.
Mark Gregory: The Bank has scope to use more QE but it will not be necessary as pent up demand will drive growth.
Rupert Harrison: There is plenty of scope to announce more asset purchases but I don’t think it will prove necessary to increase the rate of purchases. Maintaining low interest rates and supportive financial conditions will be important to sustain the recovery, and is a form of co-ordination between monetary and fiscal policy, allowing the government to continue to support the economy with fiscal policy for longer than it otherwise could. Around the world this implicit support is a huge change from the previous cycle.
Neville Hill: Fiscal policy will be far more critical in determining the strength of any recovery in the UK economy in 2021. However, monetary policy can continue to support expansionary fiscal policy through ongoing QE. We think a cut in policy rates into negative territory would be of little benefit.
Brian Hilliard: It can loosen through QE but is unlikely to move to negative rates unless there is another major shock.
Andrew Hilton: Ah, the second point is key . . . The siren voices of proponents of negative interest rates are picking up volume. But they should probably be resisted. For negative rates to be effective, there would have to be a range of other policy changes (including CBDC) that simply cannot be introduced in this timeframe. We are stuck with what we have.
Dawn Holland: There is limited scope for further stimulus via monetary easing.
Paul Hollingsworth: The pandemic has reduced the Bank of England’s scope for further policy stimulus, but it is not out of ammunition yet. Debt issuance is likely to remain elevated for a number of years yet meaning there should be ample gilts to buy, whilst the parameters of the bond-buying programme could also be tweaked to provide more scope here.
In theory, the MPC could also cut the policy rate into negative territory, though we are sceptical that this would provide much bang for buck against the current headwinds, and comes with adverse side effects.
Ethan Ilzetzki: Monetary policy is about as loose as it can be.
Dave Innes: With interest rates already very low pre-pandemic and now reduced to 0.1 per cent, the Bank of England now have little room to further loosen monetary policy. There will be much discussion next year on whether we will see the Bank set negative interest rates. But even if they do the contribution this would make to the recovery will be small compared to the chancellor’s decisions on fiscal policy.
Dhaval Joshi: There is not much scope to loosen monetary policy, but the Bank of England can follow the ECB into NIRP (negative interest rate policy).
NIRP would help in two ways: by propping up the mortgage-rate-sensitive housing market: and by weakening the pound.
David Kern: The Bank of England is unlikely to ease monetary policy further in 2021, except perhaps a marginal cut in Base Rate to zero. Additional easing is unlikely to make much difference.
Hande Kucuk: The scope for reducing interest rates was severely restricted at the onset of the Covid-19 crisis, with Bank Rate at just 0.75 per cent at the end of 2019. Following the outbreak of Covid-19, the Bank of England cut its interest rate to 0.1 per cent, reaching effective lower bound, and increased the size of its quantitative easing (QE) programme, almost doubling the size of its balance sheet and contributing to lowering rates on government bonds. While an expanded central bank holding of gilts exposes the government to rises in Bank Rate, we forecast Bank Rate to remain at its current low rate for three years.
The Monetary Policy Committee might expand QE purchasing next year due to weak recovery prospects stemming from the prevalence of Covid-19 and the exit from the EU single market. We think that an expansion of the Term Funding Scheme with additional incentives for SMEs is more likely than cutting Bank Rate into negative territory. The continuation of the QE purchases will continue to support fiscal space by contributing to lowering long-term gilt yields, but the Bank’s expanded balance sheet does raise questions about the future of countercyclical policy and requires a clear operational plan for a credible exit strategy.
Gerard Lyons: The Bank of England still has many policy options. It could cut policy rates, expand its balance sheet, widen the assets it buys, engage in yield curve control or even change its remit, to a different inflation target or a monetary policy target. In addition, it could engage more in forward guidance. So, in answer to your question, it still has plenty of scope.
Whether it should, or will, adopt any of these measures is a different issue.
In the wake of the 2008 global financial crisis, monetary policy was the shock absorber for the UK and global economy. During this crisis, fiscal policy has, sensibly, carried out more of the policy heavy lifting. That being said, as we saw over the last year, monetary policy has played an important supportive role, particularly in terms of interventions in the gilt market.
During 2021, I would expect the Bank to expand its balance sheet and I would not be surprised if it cut policy rates. My own preference is for the Bank to avoid negative rates and for it to consider, as part of a reassessment of its remit, a move towards a nominal GDP target and, depending upon economic and financial conditions, a move to yield curve control. But I am not expecting these.
The annual rates of inflation may be volatile during 2021 because of the comparisons with the crisis, but despite this, inflation pressures should remain subdued, allowing the Bank scope to do more if it feels inclined to act.
Would it make any difference? Yes. I would expect the Bank to only engage in such easing measures if it felt the recovery was fragile, or deflationary measures were prominent and in such circumstances, such easing would likely be effective.
While this question was on monetary policy, the significance of micro- and macroprudential and wider financial stability policy measures in supporting monetary policy will also be important in 2021.
Stephen Machin: Not much.
Chris Martin: I would be interested in seeing the effect of negative Bank of England rates. I would be in favour of this as part of a package of other measures designed to encourage lending by commercial banks. But I suspect that monetary policy is quite weak compared to fiscal policy. This is why I would see a return to austerity as a mistake.
Costas Milas: It looks likely that the Bank of England will have to step in again to stimulate the economy in light of the (ongoing) impact of the pandemic as well as Brexit (and more so if the government offers us the gift (sic) of . . . a “no-deal” Brexit). Nevertheless, I don’t think we will end up with negative interest rates. Students on economic and finance courses often find it hard to grasp the concept of negative interest rates. The same, and much more, should be the case for the public.
David Miles: Not much scope and probably an error to believe negative rates are a net benefit.
Patrick Minford: It would be a mistake. With recovery and the amount of QE in the system money supply growth could become a threat to inflation. The Bank should be cutting back QE, and with fiscal policy expansionary, interest rates should be pushed up.
Allan Monks: The Bank of England would feel comfortable cutting to -0.5 per cent if it needed to. But it is unlikely to cut in response to a very disruptive event and is not rushing to implement negative rates due to concerns over how it would affect bank profitability. A slower recovery or underlying inflation concerns would be the most likely prompts. While the Bank of England has argued that negative rates would make QE more effective, the modest room it has to ease means the policy is unlikely to materially alter the bigger picture — for example if the UK were to experience a persistent or significant undershoot in inflation. A bolder move would be for the Bank of England to signal it can go a lot lower than people generally expect.
Andrew Mountford: `Loosen’ is such a vague term. Monetary policy is multidimensional and is about much more than the extent of quantitative easing or the choice of one price — the Bank of England Bank Rate — to control a measure of inflation. Eg if loosening implied allowing an increase in the riskiness of UK banks’ balance sheet then this would be counter-productive.
John Muellbauer: The Bank of England will have to carry on buying UK government debt to prevent yields from rising. Hopefully, the UK’s parlous state and staggering government debt levels, exacerbated by enormous waste, as catalogued by the FT, will not result in Sterling being treated like an emerging market currency.
Jacob Nell: We see the Bank of England as more dovish than most, reflected in the larger than expected November QE top up and the December TFS extension by 6 months. Given a bias to use all tools to reinforce the impact of policy when close to the lower bound, we expect the next move on rates: a cut to ZIRP in February. We see this as a signal opening the door to NIRP later in the year — but only expect the Bank to go to -25 bps, likely in November, if there is a sluggish recovery, and on our base case we see a strong enough recovery to deter a negative move on rates.
We also see a chance of TFS being put back into the APF, with Treasury air cover, so that banks can get TFS as negative rates — a subsidised, more bank-friendly way of going negative. Negative rates do of course work — as the ECB, Riksbank and others attest — and the side effects have been exaggerated, but we doubt the Bank of England will go below -50, so we see a maximum of about 60 bps of easing they could deliver on rates. But the basic problem in the UK is the risk of a liquidity trap in which easier monetary policy has little effect, and the much more effective policy response is fiscal policy, with central banks able to play a useful supporting role by extending QE to keep yields low and the cost of borrowing affordable, as long as inflation remains under control.
The problem has been hawkish policymakers (Sunak keeps talking about cutting the deficit and Bailey has been reluctant to commit to keep buying, in contrast to the ECB and Fed). This likely reflects concerns — which we see as misplaced biases from an inflationary past — that continuing to buy bonds constitutes monetary financing and monetary financing is inflationary. So the really effective policy response in the UK — which ironically climate change may end up delivering by overriding the policymaker instincts of a past inflationary era — is a co-ordinated fiscal and monetary response: government borrowing to finance non-recurrent spending backed by central bank bond buying to keep yields low, until the recovery is secure and inflation is sustainably back at target.
Andrew J Oswald: Not much
David Owen: The Bank of England could well up taking rates negative in 2021 to perhaps -0.25 per cent, before raising rates in 2022. Even with a strong recovery from Q2 onwards inflation could continue undershooting target, especially if sterling were to strengthen, given the amount of spare capacity in the economy. The ECB template would suggest such a policy could be particularly effective if in combination with tiering banks were given a significant incentive to lend to non-financial corporations. Supporting credit remains key to stop an even larger shake-out in the labour market and more widespread business failures and help head off the risk of a downturn in the housing market. In s case of a no deal Brexit we should expect the Bank of England to be buying credit.
David Page: The Bank of England has material scope to increase the quantity of its QE purchases in 2021. However, its impact on the economy would be limited by how much such action reduced medium-term market rates. At present, 10-y gilt yields are close to 0.30 per cent and the Bank of England would have some stimulative effect in reducing those closer to the 0.1 per cent short-term policy lower bound. This may be all the more so if longer-term yields rise over the coming quarters as markets anticipate rebound at home and abroad. However, if rates are lower, and closer to the policy rate floor — after a messy, no-deal Brexit for example — the scope for additional stimulus would be limited. This might be when the Bank of England would seriously consider negative rates. We do not believe that taking the policy rate into negative territory by itself would be net stimulative, but allowing term rates to trade deeper in negative territory could prove stimulative for private borrowers. However, on balance our forecast is that the Bank will avoid negative rates next year.
Alpesh Paleja: The Bank probably still have some room if needed, though it’s limited. Still, scope for asset purchases to remain the marginal tool for any further loosening in monetary policy, subject to new questions over their efficacy in more “normal” market conditions. Negative interest rates are a plausible scenario should growth remain weak and slack widen further, subject to the outcome of the review with the PRA. There remain some unanswered questions about the impact of negative rates on banks’ profitability (and hence their effectiveness as a stimulus tool), which hopefully the review will address.
Tej Parikh: With the vaccine providing some economic uplift it is unlikely that the Bank of England will need to loosen monetary policy further in 2021.
Ian Plenderleith: Some scope to loosen further, mainly by increased QE and forward guidance, it not a lot. But impact likely to be muted. Main stimulus (if more needed) would have to come from the fiscal side, with monetary policy playing essentially a supportive role.
John Philpott: Not much scope but in any case likely to leave both Bank Rate and QE unchanged.
Jonathan Portes: Some but not much.
Richard Portes: Very little. Could go to negative rates, but wouldn’t make much difference. Must stay accommodative and hope that fiscal will deliver recovery.
Adam Posen: The Bank of England has scope to respond to negative shocks, particularly financial or deflationary ones, as needed. It has less effect on stimulating recovery in opposition to real fears (Covid-19, Brexit) weighing on investment and demand. I expect it to resort to negative interest rates and encouraging pound depreciation over 2021 to try to create recovery.
Vicky Pryce: There is a bit more scope to expand QE and of course interest rates can be reduced further and move to negative as the ECB did during the eurozone crisis and cut rates further still since. Although this may create distortionary effects across the economy and impact negatively on banks’ profitability, there are different ways one can intervene to deal with these issues and they shouldn’t be show-stoppers if the Bank of England decides to go down that route.
Lucrezia Reichling: There is scope for increasing the size of interventions and for innovating tools. It would make a difference.
Ricardo Reis: Very little scope. The main tool of monetary policy is its effect over the yield curve. It is very hard to see that shifting further down at almost any maturity up until 10 years.
Yes, it makes a difference. I can easily imagine many ways in which monetary policy could go wrong in 2021 and leads us down a deflation spiral or up an inflation ladder.
Philip Rush: There is no scope to deliver stimulus through Bank rate and QE is more reactionary at this stage by preventing tightening.
Kallum Pickering: Limited room to lower the bank rate — even with a negative rate — or long-term benchmark yields via more asset purchases. However, the Bank of England still seems to have a strong influence over inflation expectations and hence can still influence real interest rates. Via is special lending facilities, the Bank of England has plenty of scope to support credit — in case further easing is needed, we favour a negative late “TLTRO-style” policy as opposed to a negative bank rate. Further easing would make a difference in case of a market panic and could provide emergency liquidity to credit markets. However, at already ultra low rates, the Bank of England’s ability to stimulate medium nominal demand is limited — fiscal policy has much more scope to support the rebound.
Jumana Saleheen: The Old Lady of Threadneedle Street’s policy cupboard is bare. Short term interest rates are already close to zero, meaning there is little scope for further conventional monetary easing. Long term interest rates are also very low, meaning the bang from more QE has faded significantly. 2020 marks the end of the inflation targeting paradigm as we know it. It should be no surprise that the paradigm which worked so well between 1990-2010, has passed its sell by date. This limits of monetary policy in a “low for long” world, is a topic that has been discussed extensively by economists and central bankers since the Global Financial Crisis. Many solutions have been proposed to save the exiting paradigm: none are silver bullets.
Yael Selfin: To the extent that demand is weak due to uncertainty about the short-term outlook and supply is restricted as a result of the pandemic, further easing may not stimulate spending significantly. However, targeted programmes to ease businesses’ liquidity constraint during the pandemic could continue helping shore up those temporarily hit by the pandemic.
Andrew Sentance: No scope to loosen policy further with rock bottom rates and a large amount of QE already injected. Negative interest rates would be damaging to the economy.
Philip Shaw: The Bank of England’s marginal policy remains QE for now. Given how flat the yield curve is, we are not convinced that adding further to the asset purchase target would really make an awful lot of difference. Negative interest rates may well become part of the Bank of England’s toolkit next year. We maintain our scepticism over the effectiveness of a sub-zero policy rates as, even though the price of credit might become cheaper under such a regime, the impact on commercial bank margins and capital is likely to have an adverse effect on volumes of credit provision.
Andrew Simms: With the bank rate set by the Bank of England already at 0.1 per cent it’s tempting to conclude that monetary policy has nowhere left to go and is, therefore, a busted flush. But that, of course, is wrong for two important reasons. Firstly, interest rates can, of course, go negative and, secondly, in the long shadow of the 2007-2008 financial crisis, the large scale public creation of money (quantitative easing) has gone from being a seemingly exotic tool to one so standard that it now sits alongside the base rate on the Bank of England’s website as one of its two default tools of monetary policy. The magic money tree has set down deep roots. Negative interest rates interest rates might seem as otherworldly as a mainstream proposition as quantitative easing did not very long ago, but negative rates have a history. The Swiss used them in the 1970s for stabilisation, Denmark and Sweden were early adopters of negative rates post 2008 crisis, with several EU countries following suit along with Japan. At the very least the economic sky did not fall any more as a result.
Of course, to work as a stimulus negative interest rates have to encourage people to spend their savings or to borrow (bearing in mind that lending then becomes less attractive to banks). But, according to one recent survey, one in five UK households have no savings at all, and two in five have less than £1,000 in savings. I think it is doubtful whether, even for those with more savings, given wider insecurities that negative rates will significantly shift people’s spending patterns. However, greater targeting of QE is a different matter and something once conceded as possible by Mark Carney, when Bank of England governor. It remains, for example, one other way in which it would be possible to finance a proper national or “green” investment bank — which could be significant given the UK’s infrastructure and low carbon transition challenges.
Nina Skero: Cebr expects the next interest rate change to be an increase, with the base rate rising gradually as the economy begins to recover and inflationary pressures kick in. Even after these increases, monetary policy will remain accommodating by historic standards.
James Smith: Despite the hype surrounding negative rates, it’s become increasingly clear that the Bank under Governor Bailey views QE as a more potent tool. We could therefore see policymakers step up the pace of purchases, like they did in March, if financial conditions deteriorate. Negative rates are possible if the economic outlook deteriorates further, but there’s still a lack of consensus on the MPC as to how effective the policy would actually be.
Andrew Smithers: The Bank can buy more government bonds so it must have more scope to loosen monetary policy. It would make a difference as this tends to boost asset prices thus mildly boosting demand through lower savings and it increases the likely size of any subsequent fall in asset prices and the recession that they produce.
Alfie Stirling: There is little scope for effective monetary policy loosening in the traditional sense. The most effective use of monetary policy operations in the near term (and perhaps beyond) will be to help manage the cost of government debt and borrowing, smoothing the path for fiscal policy to provide the required level of support to the economy.
Gary Styles: There is very little scope for the Bank to loosen policy. The outlook for inflation in both the short and medium term will be a significant constraint on any further easing.
Suren Thiru: With interest rates at a historic low, further monetary easing is unlikely to boost the economy and negative rates may do more harm than good.
The focus instead should be on delivering a fiscal environment that limits economic scarring and helps kickstart a recovery. This should include taking steps to close the remaining gaps in government support and giving businesses with direct incentives to invest and hire.
Phil Thornton: Negative rates seem unlikely to the bank rate is not likely to change. the BoE will provide more stimulus through QE if needed. This will be important in continuing to prevent a credit and cash flow crunch
Samuel Tombs: Both reductions in Bank Rate and more QE are running into diminishing marginal returns. The MPC also can’t do much to drive down the burden of existing debts in any one year, now that the vast majority of mortgages are fixed rate. But with CPI inflation likely to remain below the 2 per cent target next year, the MPC should do what it can. Enhancing the current Term Funding Scheme, the TFSME, by letting banks access funds from it at a negative interest rate, would be a straightforward way of stimulating the economy, whilst avoiding some of the problems associated with negative Bank Rate for lenders that rely heavily on households’ deposits as a source of funding.
John Van Reenen: Could increase QE and have (mildly) negative interest rates. Monetary policy weak because of zero lower bound. Needs fiscal policy.
Konstantinos Venetis: As the headroom to ease monetary policy further becomes more and more limited, the Bank of England is seeking to extend it. The MPC has already played its strong hand on forward guidance: and with real interest rates already so low, the effectiveness of QE as a policy tool has diminished. This leaves a foray into negative Bank Rate as the next step for policymakers who feel compelled to act. At some point, the perceived benefits of NIRP start to outweigh the costs. But it is also doubtful that it will translate to any actual stimulus for the real economy — it is fiscal policy that will need to shoulder the burden of adjustment until demand turns the corner.
Daniel Vernazza: There is some scope to provide more accommodative monetary policy, if needed. This would probably involve an increase in asset purchases and/or providing more specific forward guidance. The Bank of England has said it sees negative rates as part of its toolkit, but I don’t expect the central bank to use them in 2021 (when the balance sheets of commercial banks are likely to come under greater strain).
Would looser monetary policy make any difference? There are diminishing returns to the central bank’s remaining tools (the politically acceptable ones). With current and expected future interest rates already very low, flattening the curve further is unlikely to provide a big boost to the economy.
David Vines: There is enough scope, through QE, to ensure that sterling depreciates by around 15 per cent in real terms.
Keith Wade: We do not expect negative interest rates but there is scope to add more QE. The main benefit would be to keep down government borrowing costs and prevent GBP from strengthening.
Dr Sushil Wadhwani: In terms of interest rates, I assume that the effective lower bound is somewhere between -0.5 per cent and -1 per cent, and so the scope to cut rates is very limited. While I believe that the available evidence suggests that lower rates will help, the overall effect is likely to be small. Unless we are willing to contemplate far-reaching institutional changes that make highly negative rates feasible, this weapon is likely to only have limited efficacy. Obviously, in 2020, it has been highly convenient that the Bank of England was willing to buy gilts while the government was engaging in a fiscal splurge — this was akin to “helicopter money” in all but name. That policy weapon remains potent.
Ross Walker: Significant scope for ongoing QE — a rationale for which has been restored by the prospect of a substantial multiyear fiscal expansion. The potency of the “traditional” QE channels (via lowering risk free rates, portfolio rebalancing effect, excess reserves prompting lending etc) is greatly reduced.
Martin Weale: There is room for further asset purchases. The impact is uncertain but we can be confident that they do not hinder recovery. We may see a move to a negative interest rate, but the Bank does not seem to be in any hurry.
Simon Wells: We expect another £100bn of purchases being announced by the Bank of England in May. However, the Bank already owns a large proportion of outstanding government debt and may need to seek more creative solutions, such as the yield curve control. Negative rates remain possible, but not our central case.
Peter Westaway: There is some scope for the Bank of England to loosen monetary policy in the form of increased QE or even negative interest rates. But neither of these measures is likely to move the dial that much, and there may be resistance from some MPC members to negative rates too. Fiscal policy is the policy lever that matters most at the moment, especially in propping up labour income. And it is the gradual removal of that support rather than tightening monetary policy which will be most important in 2021.
Mike Wickens: Almost no scope. It would be better to keep money financing the deficit and be alert to future inflation.
Trevor Williams: It can loosen further, from negative rates to further QE, possibly up to £250bn more in the case of no deal.
It does make a difference to expectations (lowering the curve though more at the short end than the long (a mild steepening but lower at every level.) and the volume of funds in the market place.
Tony Yates: Not much. I don’t think negative rates, if it chose to try them, would be very stimulative, net: and further QE likewise would not make much difference. Macro-stabilisation policy for the foreseeable future is in the hands of the Treasury, 23 years after it tried to delegate it to the Bank. Ideally, we would have institutional reform to give the Bank of England and advisory say over the macro component of fiscal policy.
Linda Yueh: The Bank of England has scope to loosen monetary policy which would help, including signalling just like the ECB and the Fed. Both central banks have both indicated they intend to maintain loose policy until at least the end of 2023. The greater impact will be if this is accompanied by fiscal policy that aims to support jobs and longer term economic growth, particularly in terms of raising productivity and greener growth.
Levelling up: With respect to regional inequalities, will 2021 be a year of levelling up or levelling down?
Howard Archer: May be some very modest levelling up — but we doubt there will be major progress.
Angus Armstrong: Covid-19 and a hard Brexit both worsen regional inequality. While the government’s intention is to be applauded, there is yet to be a coherent strategy of local engagement and participation — necessary for sustained levelling-up — across all regions.
Nicholas Barr: Given the limited growth prospects little or no levelling up on average and, given the likely regional distribution of impacts of Brexit, significant levelling down in some parts of the country.
Ray Barrell: Regional levelling depends heavily on the outcome of the Brexit negotiations. A no deal Brexit, which is still possible, will damage manufacturing, especially vehicle related production, relatively quickly. This will impact more on regions away from the south-east. The negative impacts on the business services sector and finance will come through more slowly as they will be access related, and the south-east will eventually suffer. Even a poor deal will produce more levelling down in the short run, so not a good start to a long run project.
Aveek Bhattacharya: The immediate impact of Covid-19 has been to level down — all areas of the country have been hit hard, but SMF research has shown that London’s economy has fared worse than the rest of the country, with a sharper rise in unemployment and a collapse in job vacancies. However, the longer term impact — both the economic shift towards remote working and the policy focus on investment in “left behind” areas — is likely to lead to levelling up as well-paying, professional jobs become more dispersed across the country. That longer term impact may be starting to make itself felt in 2021.
David Graham Blanchflower: Hard to see how there is much levelling up unless the incidence of the pandemic and lockdown continue to be uneven. Much depends on Brexit but in all likelihood it will increase demands for Scottish and Irish and perhaps Welsh independence. I see Brexit as the worst decision made by any country in peace time in the last 1000 years.
Philip Booth: No difference.
Nick Bosanquet: The pandemic period has seen a divide between the furlough and steady employment group and households with lower incomes. For poorer households expenditure exceeded income by £140 in March-September and the position will have worsened since. Better off households have had a savings ratio of at least 20 per cent. This has led to widening regional inequalities. Policy moves since such as the extension of furlough and the stamp duty holiday have led to a concealed boom in the Home Counties with very little positive across much of the North. 2021 will see further levelling down, although some areas in the North will have better times attracting those fleeing high house prices and high commuting costs in the South. Divisions within the North as well as the North/South divide.
Erik Britton: Big infrastructure projects in support of net zero and to improve public transport are fully justified, especially in regions where the job losses arising from permanent Covid-19 related changes are mist pronounced. Some support for relatively deprived regions is therefore likely. But the recovery will be very strong everywhere in our central case, so those effects will probably disappear in the general rising tide.
George Buckley: In its Spending Review the government made few changes to the aggregate amount of investment spending it intends to do over the coming few years — with more in the current fiscal year than originally intended and less in future years to compensate (ie, front loading). However, investment spending — with an intention of levelling up — remains far larger than the plans under the previous administration. So — levelling up plans from the government, but there will inevitably be some levelling down beforehand as rising unemployment is concentrated among the lower paid.
Jagjit Chadha: Given the economic prospects for some recovery there may be some catch-up but not much. We seem unlikely to adopt a consistent and sustained set of policies that will address the regional gaps in the medium term. The one year horizon is actually rather meaningless when we think of structural change.
Mark Cliffe: The full extent of the pandemic damage to disadvantaged communities has yet to work its way through the system. Add in the Brexit shock, and it is likely that regional inequalities will get worse before they get better. A vaccine-induced economic rebound, coupled with a dose of targeted fiscal support may start to turn things around, but the impact on jobs and incomes may be more of a story for 2022.
David Cobham: I would love to see some serious levelling up, but I don’t believe the current government understands what would be required. It remains London-based and South-East-oriented, and will not make the political and financial investment required.
Brian Coulton: A no deal Brexit would hurt the manufacturing sector. But the course of the pandemic will have a big impact on the relative income of big urban city centres. The metropolitan areas will be the hardest hit by renewed restrictions in the near term but also stand to benefit most from any later rebound related to an easing in social distancing.
Diane Coyle: The regional gaps will probably get larger in the short term. To actually achieve levelling up will require systemic and radical policy changes, and I can’t see signs that the government is thinking on a sufficiently ambitious scale.
Bronwyn Curtis: The economy won’t return to its pre-pandemic level in 2021 and unemployment will rise. The hardest hit areas will get some relief when the economy opens up, but not enough to level up. I don’t expect to see a stock market collapse in 2021, so the wealthy will still be better off.
Paul Dales: As employment will probably fall in the first half of 2021 and by most in the poorest regions, 2021 will be a year of levelling down rather than levelling up. This supports our view that fiscal policy won’t be tightened.
Howard Davies: I expect little or no change. Unless relative prices and wages fall, and there is little sign the government are prepared to promote that, there is little reason to expect other parts of the country to outperform London and the south east, where agglomeration benefits remain very powerful.
Richard Davies: There will be no levelling at all: the most important inequalities in the UK are within regions, and these will widen. Also, the key faultline for Covid-19 is sectoral, not regional, with the gaps between those relatively shielded and those not (hospitality) widening. Britain’s seaside towns will continue to do badly, with hopes of a “staycation” boom undermined as post-vaccine trips to Europe surge.
Panicos Demetriades: We know that Covid-19 has affected the poor more than the rich — so it is exacerbating income inequalities within regions. As restrictions are placed on entire regions, as opposed to localities with high infection rates, I expect that Covid-19 will exacerbate regional inequalities. As regions start to recover from Covid-19, however, the areas that have been affected most will start growing more quickly. However, Brexit complicates the picture as it will affect areas that are more dependent on the EU, such as London. It is hard to predict which of these tendencies will prevail.
Wouter Den Haan: Recessions tend to increase inequalities and this one is no exception.
Michael Devereux: I’m pessimistic — it seems most likely that there will be increasing inequality.
Swati Dhingra: Up looks unlikely.
Peter Dixon: The levelling up plans promised in the 2019 Conservative manifesto have been totally blown off course. Regional disparities are deeply entrenched: Even if the government were to embark on a major attempt to address the problem in 2021 it will take years before any measures bear fruit. But the economic damage caused by Covid-19 means that the public sector resource constraint will bite more quickly. Brexit will complicate matters. Empirical analysis by Thiemo Fetzer at Warwick suggests that the West Midlands and South West regions will be particularly hard hit. It is difficult to see 2021 being a year of levelling up.
Jan Eeckhout: Regional inequalities are likely to increase.
Noble Francis: There is unlikely to be a substantial levelling up in 2021. The government announced a £4bn “Levelling Up Fund” at the end of November 2020 but there is little detail and the finance will only start to be available in 2021. Local authorities will have to bid for the finance when their focus is on social care rather than on project proposals. Even where they do bid for finance, activity down on the ground from winning bids is still unlikely to occur until 2022 or 2023 at the earliest. There may be an extent of levelling down as a structural change away from commuting and towards increased permanent working from home for many particularly affects London and especially the commercial (retail, offices and leisure) sector as well as the renting residential sector in the capital.
John Gieve: I expect some “levelling up” policy measures but the indicators (employment and poverty) will move the other way because Brexit will hit the Midlands and North harder than London and the South.
Andrew Goodwin: One of the hidden transmission mechanisms is through local government finances. We could see a lot of councils getting into serious financial trouble and if central government doesn’t bail them out, the consequent cuts will take spending out of local economies — in this scenario we would see levelling down.
The big infrastructure projects that the government hopes to use as a vehicle for levelling up would require a much longer timescale to pay off. It’s hard to see how these projects would have any impact on regional inequality in 2021.
Mark Gregory: There will be little change with a slight increase in imbalances as the sector strengths of cities and the South East will drive faster relative growth.
Rupert Harrison: The areas and sectors that have seen the biggest declines in 2020 will see the biggest bounce backs in 2021, so in that respect it will be a year of levelling up.
Neville Hill: Manufacturing businesses that are highly integrated into EU supply chains are likely to find that the UK’s departure from the single market leaves them less competitive. Given their location, that should mean regional inequalities widen in 2021.
Brian Hilliard: It will be a year of slightly less levelling down as the pandemic eases and the worst-hit areas start to recover.
Andrew Hilton: Strange question . . . It assumes we “level”, either up or down. I fear we will do neither. Those in senior public sector jobs (in the SE) will do very well — certainly in relative terms and possibly in absolute terms as well. Those who trade financial markets (in the SE) will continue to do even better. And professionals who can WFH (also in the SE) will get by. See a pattern? The result will be further widening of regional inequalities — even ignoring the impact of Brexit, which is also likely to hit poorer regions harder than the SE.
Dave Innes: Coronavirus has already shaped our economic geography, but its long term effects are difficult to predict. London and other big cities have seen unemployment increase fastest, with jobs in hospitality and leisure normally supported by commuting most affected. Many of these jobs will return next year, but it is possible Covid-19 will level down London and create opportunities elsewhere. However, any long term changes in our economic geography as a direct result of Covid-19 will be small compared to the size of our regional disparities that the government had promised to address.
It of course won’t be possible to level up in a single year. What matters in 2021 is that the government kicks off policies that will begin to grow our weakest economies in five or ten years. The November spending review was not encouraging. The government’s announcements on adult skills fell short of what had been promised in their 2019 manifesto, while weaker local economies will receive less money to spend on local growth in 2021 than previously. Without further policy action 2021 will be another lost year on levelling up.
Dhaval Joshi: Both.
On the downside, city-centre economies are the big losers from the structural shift to “working from home”. And the biggest loser of all will be the biggest city centre: London.
On the upside, there will be some winners. Working from home will spawn thriving new local economies and communities, albeit this change may not happen instantaneously.
David Kern: Neither.
Hande Kucuk: 2021 is likely to be a year of levelling down as the Covid-19 pandemic and Brexit are large shocks that amplify existing inequalities across regions and households. Impacts upon different regions and sectors vary widely, and so do variations across different household types. Reducing regional disparities as part of the levelling up agenda will require reallocation of investment across regions taking into consideration the fact that Covid-19 and Brexit is expected to have a stronger impact on some regions than others.
Gerard Lyons: The economy will emerge from the pandemic with some significant challenges, including higher unemployment and some small firms nursing high debts. In contrast, many people have emerged from the crisis with high savings and many firms with balance sheets in good shape. It is a mixed picture.
Despite this, I certainly do not think 2021 will be a year of levelling down. Instead, I expect 2021 to set in motion the move towards levelling up the economy, in the wake of the pandemic. It would be premature to call it the year of levelling up, but it should be the year levelling up starts.
Although levelling up is the phrase used, I think it better to think of it in terms of the need to rebalance the economy. The UK’s imbalances can be seen in terms of place, such as London versus the rest, urban-rural, coastal-inland and in other areas such as skilled versus unskilled, home earners versus renters plus social imbalances and, now, in terms of those who emerge from the crisis with secure jobs and high savings versus those who have been hit hard by the pandemic. On top of these there are macroeconomic imbalances too, such as the trade and budget deficits. An important part of the 2021 levelling up agenda will be addressing the aftermath of the pandemic as well as starting the long path towards addressing deep-rooted economic imbalances.
Stephen Machin: Not up.
Chris Martin: I expect to see regional, economic and social disparities widen in 2021. Professional workers in full-time jobs have been shielded from the worst effects of the pandemic. Workers in insecure, poorly-paid gig sectors jobs have not. The latter type of workers are concentrated in the type of “left behind” small towns in the North and other regions that have driven the levelling-up debate. So the gap will widen. Expensive, high-visibility infrastructure projects are not the right way to address these issues.
Costas Milas: 2021 will most likely be a year of levelling down mainly driven by the impact of the pandemic as well as Brexit (whether or not a “no-deal” Brexit occurs).
David Miles: Sadly, not levelling up.
Patrick Minford: With recovery strongest in poorer areas, I expect to see levelling up. I hope to see this strengthened by fiscal expansion as above.
Andrew Mountford: Not sure what is meant by this question. Clearly, a large recession that causes larger losses in wealthy regions (“levelling down”?) and so reduces some measure of inequality is not something that should be cheered. It probably also wouldn’t alter other measures of inequality such as health or educational inequalities.
John Muellbauer: The economic fundamentals are driving levelling down. Even good policy can only do so much to counteract this, and good policy is in short supply.
Jacob Nell: I think that the pandemic year — spring 2020 to spring 2021 — is likely to level down in terms of regions, since the areas which benefited most from international trade and global business — notably London — were worst hit and weaker areas were supported by a pandemic safety net of furlough and loan guarantees. Looking ahead, I expect this pandemic levelling down effect across UK regions will start to reverse in 2021 as the pandemic is overcome, the world returns to previous patterns of behaviour and pandemic support is withdrawn, so London will rebound more strongly, having been harder hit, than other regions. Arguably, with the UK recovery lagging on double trouble from Covid-19 and Brexit, and a less supportive policy response, the UK as a whole will be levelling down compared to European peers.
Andrew J Oswald: Levelling down.
David Owen: Very difficult to say in post Covid-19 post Brexit world, even if the March budget tries to address such issues. Deep economic scarring remains inevitable. 2021 will bring with it significant structural change and innovation. At present, it is difficult knowing how this will all pan out.
David Page: We do not expect regional inequalities to be affected greatly next year one way or the other as the whole country is likely to face a marked rebound in activity from a significant economic shock this year.
Tej Parikh: As economic activity returns in 2021, there should be more downward pressure on regional inequalities relative to 2020 when various parts of the economy were forced to close down. The removal of region specific restrictions will play a key part in determining how quickly various areas of the UK can bounce back.
Ian Plenderleith: No perceptible progress. Levelling up is a 10-year project.
John Philpott: I suspect 2021 will be another year when talk of regional levelling up will be more evident than any meaningful signs of change.
Jonathan Portes: On current trends, the recovery will be K-shaped: those who work in relatively well-paid jobs that can be done from home will have lots of surplus savings to spend, while those in lower-paid, customer-facing and insecure jobs will continue to struggle, and those unemployed and on benefits will be still worse off as a result of a decade of targeted cuts. This will disproportionately affect the disabled, low-income families with children, some ethnic minority communities, and disadvantaged areas. But by far the biggest inequalities are intraregional, not inter-regional — child poverty is higher in London than in any other region, for example. At a regional level, these trends will be much less obvious.
Richard Portes: Little change for the north, some “levelling down” for London.
Adam Posen: Levelling down.
Vicky Pryce: There is little chance of levelling up during 2021. The Covid-19 crisis has exacerbated regional inequalities, partly through different lockdown experiences but also due to the differential regional impact of sectors most affected during the pandemic by closures or other restrictions. Brexit will only exacerbate that by producing a double whammy hitting areas dependent on manufacturing exports which have been less badly affected so far as well as regions of the economy focusing on services for export or depending for their survival and growth on the existence so far of mutual recognition of regulatory regimes and which be subjected to significant non-tariff barriers emerging as the UK becomes a third country vis-à-vis the EU from January 1st. The result is likely to be more of a levelling down.
Lucrezia Reichlin: Levelling down.
Ricardo Reis: I don’t know. I timidly admit that, at the bottom of a very very deep recession, and in face of an uncertain recovery, my mind has been more focused on how to get back the size of the cake, rather than on how the cake is split across regions.
Philip Rush: The whole country is being harmed by the government’s actions.
Kallum Pickering: Levelling up from a modest increase in public investment.
Jumana Saleheen: Regional inequalities have been a long time in the making and there is no quick fix; it’s a long game. I expect 2021 will be a year of levelling down, mainly due to Brexit. Brexit will create short-term disruptions as companies in the UK and EU settle into the new trading arrangements. Brexit is also likely to disproportionately hurt the less-educated blue-collar workers who tend to live in the traditionally “left-behind” regions of the UK. I expect regional inequalities to get worse before they get better. And whether they eventually get better depends on the government developing a more impressive set of policies than it seems to have at the moment.
Yael Selfin: It is hoped that once both Brexit and the pandemic are no longer clogging ministries’ in-trays, more substantial plans can be prepared to address the levelling up challenge.
A post pandemic Britain will require new thinking about the ways to link and boost failing places.
Andrew Sentance: Not much change.
Philip Shaw: Despite the likely rhetoric, the government may not have the policy space to focus much on levelling up. Its priority looks set to be ensure the entire economy moves ahead, especially with the new trading relationship with the EU to manage.
Andrew Simms: The next year could be a year of “levelling up” but only if the government follows through on many of it promises and pledges. Many of the areas needing support are post-industrial regions which should be prime beneficiaries of the promised green industrial revolution. But at the last budget statement, new funds to pay for it stood at £4bn compared to over ten times more, £40bn-£50bn pledged to the roads programme and military spending.
Among the problems with the latter are that one precisely contradicts green policies, and the other is by economic definition, “unproductive spending” and highly capital intensive making a poor contribution to job creation compared to other spending priorities. A step change in support for training and apprenticeship programmes will be needed and should be at the heart of any green new deal.
Regional bias towards London and the South East needs addressing in all areas of policy from infrastructure to sport, the arts and banking. At the same time, greater financial autonomy and revenue raising powers for local government need to go hand in hand with a confident regional banking system which has an explicit mandate to support local economies.
Nina Skero: The economic and societal changes sparked by the pandemic (increased homeworking, preferences for larger homes with outdoor space etc) may act as a boost for smaller cities and towns which have suffered economically due to a lack of local employment opportunities and inconvenient transport links to business hubs. These forces, combined with what promises to be a challenging year for London, could make 2021 a year of relative levelling up.
James Smith: The pandemic has unfortunately hit those at the bottom of the income scale, and those who tend to be in more insecure forms of work. It has also disproportionately hit those at the very beginning of their career. Supporting these dislocated workers will be an important starting point for the government’s “levelling up” policy.
Andrew Smithers: Up, as this seems to be government policy.
Alfie Stirling: It depends on the indicator being used to measure regional inequality. Spatial inequalities in terms of labour market activity, economic output, incomes and wealth (respectively) will all be affected in different ways by the pandemic. The sectoral effects of pandemic and Brexit will push regional trends in wealth and income in one direction, while increased remote working and de-urbanisation may push them in another. There are reasons to expect that inequalities will grow faster within regions next year, than across them. But local economies that depend disproportionately on sectors worse affected by pandemic are likely to see the gap with other parts of the country grow.
Gary Styles: Greater use of centralised policy initiatives rather than more devolved regional policies make even wider regional inequalities likely. Talk of levelling up is exactly that, talk rather than action to reduce structural regional inequalities. The pandemic and Brexit have made policy even more London centric and the pull of the centre has never been more powerful or damaging for the health of the wider UK economy.
Suren Thiru: The legacy impacts from coronavirus, including high structural unemployment, rising private sector debt and anaemic business investment, are likely to be distributed very unevenly across different regions and therefore risks exacerbating longstanding inequalities.
A long-term strategy to “level up” must be shaped by business knowledge of local and regional needs and be accountable to local communities. An approach to levelling up should not mean “levelling down” in other areas and existing devolved funding needs to be protected and strengthened.
Delivering on major infrastructure projects, including delivering HS2 in full, are critical to achieving sustained increases in growth, productivity and living standards across all regions and nations of the UK.
Phil Thornton: There will be a lot of political noises about levelling up. But the reality is that negative impacts of Covid-19 (by hitting industries in which the North/Midlands depends vs Southern office work) will lead to a levelling down. There is already evidence the education attainment deficit has widen between North and South. Brexit is also likely to lead to a levelling down as a thin deal or no deal will hit sectors and activities related to exports of goods that are primarily carried out in the regions.
John Van Reenen: Levelling down.
Konstantinos Venetis: Levelling down, if anything. It will take years for levelling-up policies to have a meaningful impact.
Daniel Vernazza: Next year should be a year of modest “levelling up”. The pandemic has increased regional inequality, both because the virus has been more prevalent in the north of England and because the crisis exacerbated existing income inequality, with lower-income groups disproportionately impacted. As the direct impact of the virus wanes, some of the pandemic-induced impact on inequality will likely unwind, but not all. Set against this, Brexit is likely to exacerbate regional inequality, particularly if there’s no trade agreement with the EU, which will see tariffs imposed on UK goods exports to the EU. The government’s “levelling-up” agenda, with increased public investment for the north, will likely take years to show results.
David Vines: Levelling down, through the crisis for the car industry in the North created by Brexit.
Ross Walker: Modest “levelling down” via post-Brexit hit to professional services. Genuine “levelling up” requires money, a strategy and time — there appear to be acute post-Brexit shortages in all of these.
Martin Weale: I doubt that regional inequalities will decline.
Simon Wells: The government will want to press ahead with its policy agenda, despite the soaring debt. However, with data showing London’s economy being hit hard by Covid-19, it needs to be careful that by turning its attentions to the North and Midlands, it does not neglect London and the South East, which provide a lot of tax revenue.
Peter Westaway: Given the hugely adverse distributive effects that the pandemic has caused, it is hard to imagine that prospects could get much worse for the disadvantaged areas of the country. Scarce fiscal resources will likely be channelled into the levelling up agenda but that will only make small inroads into the legacy of levelling down caused during 2020.
Mike Wickens: Nothing much will change in 2021. It will be a period of getting back to where we were.
Trevor Williams: Levelling down for sure. London and the South-East will recover the fastest: the other regions/nations slower, especially in the short term.
Tony Yates: Covid-19 has been a regressive shock to society, and since some of the distributional pathologies of society have a regional component, it is, and will continue to aggravate regional inequality too. The govt’s levelling up agenda will prove mostly hot air, partly because of spending constraints, and partly because the problem concerned is intractable.
Linda Yueh: Levelling up but within the context of the pandemic worsening regional inequalities so the climb will be steeper than before.
Is there anything else you would like to tell us?
Angus Armstrong: For the past decade or so, it has been major unexpected events which have derailed us. We need to think about possible “off equilibrium” paths for the economy and ensure we are resilient to such risks. One such path is deflation and what that would mean.
Nicholas Barr: All predictions are subject to greater uncertainty than usual: outcomes will depend on (a) type of Brexit, (b) speed of Covid-19 vaccine rollout, (c) rate of decline of Covid-19 infection rate which in turn will depend on weather and on individual behaviour, both of them subject to profound uncertainty.
Ray Barrell: An embarrassing year for those who believe policy in Britain is well run. The Covid-19 response has been among the worst in Europe. The Brexit debate has been revealing for an international macroeconomist. The decision to drop the Northern Ireland Agreement reached in 2019 was particularly interesting. First, a minister said the North could face a food blockade, and that under the current agreement a Tesco lorry would have to deliver different goods to shops in Northern Ireland than the rest of the Kingdom. Perhaps they had not checked that the Tesco depot just north of Dublin (the fourth largest building in the world) which delivers to the whole of Ireland is only an hour from Belfast. That is less time than it takes on the ferry from the rest of the UK. Food would flow freely and quickly under the agreement. Then suddenly in December that part of the Single Market plan was dropped. Naturally, this had nothing to do with the Agreement being trade related and beaching it might give the Commission the right to impose punitive tariffs if we had a no deal Brexit. Of course, they might lose their case at the WTO appellate court, but that cannot sit at present. And there was more.
David Graham Blanchflower: More uncertainty than ever before. Brexit looks to be disastrous. The only issue is whether there will be backtracking so it is in a weaker and less disastrous form.
Philip Booth: Nearly all of the discussion around post-Covid-19 is about how we manage fiscal policy and monetary policy and yet this is not a demand or monetary shock. There needs to be a total reshaping of thinking around major infrastructure projects (which will be obsolete given changing patterns of demand) and radical deregulation if we are going to get the productivity growth and innovation that is necessary to rebuild following the crisis. One obvious area is in land-use planning, especially to allow the reshaping of town centres.
Erik Britton: There are very large risks in both directions — new strains if the virus, low take up of the vaccine, lower than expected efficacy of the vaccine on the downside: a splurge pent up demand on the upside. There are always risks but they are genuinely much larger than usual in 2021.
Jagjit Chadha: The government seems to be out of bandwidth a year after its election. The economy needs a sustained post-Brexit plan. Where is it? Disruption for its own sake will not lead to a more prosperous future.
Mark Cliffe: The pandemic and Brexit are the perfect storm for traditional macroeconomic forecasting techniques. They are fallible enough in good economic weather, but faced with exponential, asymmetric and binary shocks, linear and equilibrium based models based on past behaviour are wholly inadequate and dangerously misleading. You know the game is up when forecasters start talking in terms of letters rather than numbers. “K-shaped” recovery anyone? For more on this, check out my “Confessions of an economic forecaster“.
David Cobham: There’s also Brexit . . . and even if they finally clinch the “thin and precarious” deal which is all that is left, the effects are not going to be helpful in the short run (and they’re lead to a lower growth rate in the long run). And there’s also the likely break-up of the UK which won’t do anybody any good in the short or medium run.
Brian Coulton: The spatial aspects of the pandemic shock have been striking with a relative shift in activity and spending away from urban to suburban/rural areas due to increased working from home, the rise in online retail spending and closure of many metropolitan-based arts, entertainment and cultural activities. It will be interesting to see quickly this gets reversed if we see the health crisis subside later in 2021.
Diane Coyle: The questions omit the B-word. The interaction between Brexit and pandemic explains why the UK outlook is likely to be worse than elsewhere.
Paul Dales: The legacy of the Covid-19 crisis may prove to be higher inflation. If in a few years’ time the economy has recovered in full and policy is still loose, inflation may rise above 2 per cent. The government will then have to choose between sticking with the inflation target and abandoning its fiscal/political plans (as interest rates would be raised) or accepting higher inflation to achieve its fiscal/political aims. It’s not hard to imagine it choosing the latter and raising/or abandoning the inflation target.
Richard Davies: Expect volatility. Everything discussed here that can be measured at relatively high frequency — especially inflation — will continue to see swings up and down. The economy is stuttering as the lockdowns switch on and off and the tiers rise and fall.
Michael Devereux: Right now, still without any Brexit deal, this is arguably the worst time for the UK economy in decades.
Peter Dixon: Worth qualifying the inflation projection: The starting point is extremely depressed so when I look for “much higher” inflation this is more a normalisation towards target than a sustained pick-up. After all, a 1.5 per cent-plus rate is a long way from the latest 0.3 per cent reading.
We have also largely avoided mentioning the B-Word. Things will likely look even grimmer in the absence of a trade deal.
Noble Francis: Forecasts and scenarios currently have an unprecedented number of major uncertainties: the strength and length of social distancing restrictions, the timing of mass use of vaccines, the impact of Brexit disruptions, the impact of structural changes in working and spending patterns as well as the extent and impact of government policy mitigation. Forecasting was an extremely challenging task in 2020 and is likely to be just as challenging a task in 2021. Perhaps one that is more fun and less exhausting to read about in a history book than to live through.
Mark Gregory: Provided the UK can avoid a no-deal shock, prospects for 2023 are better than consensus. There is pent-up demand, no need to start fiscal consolidation and a potential productivity surge building on the success of life sciences, health and logistics during the pandemic. There is a once in a generation chance to reset the UK’s economic model, giving wellbeing, place and the planet more importance.
Brian Hilliard: The emergency use of QE in March was touted as a monetary policy easing but in reality was a macroprudential intervention to ensure the continued smooth functioning of the financial markets. Moreover, it was monetary financing because it was introduced to gulp down the massive surge in gilt issuance resulting from the surge in Covid-19-related spending at a time when the gilt market was unwilling to buy it all, indeed was selling when faced by a dash for (dollar) cash.
Andrew Hilton: The pandemic — and the government’s response to it — is a once-in-a-generation event, which is coming on top of all the uncertainties around Brexit (which include the potential break-up of the UK, which really has to be top of any responsible government’s agenda). And then we have China, which seems set on destabilising East Asia (remember Quemoy, now Kinmen, and Matsu?) — and on which we will be forced to choose. And a tech revolution that is only just beginning, but that is already in danger of leaving a good 40 per cent of the population behind. Cleavages in UK society are deepening and widening — and, what is really scary, is that they are starting to align (in that those who are disadvantaged in one area are disadvantaged in a whole spectrum of areas). I do wish we could have moved Parliament to York and the Treasury to Edinburgh, and the smug buggers in the Foreign Office to Rotherham.
Dave Innes: The policy choices made next spring will determine what happens to living standards and poverty in 2021. In 2020, the chancellor put in place bold measures to protect low income families — most notably the furlough scheme and increasing the universal credit standard allowance by £20 per week. These policies have most likely successfully prevented a rise in the poverty rate during the first 9 months of the pandemic (we will have to wait until early 2022 to check this with official data), although there has been plenty of hardship for families who have slipped through the gaps in this support.
But without further bold policies in 2021, poverty will rise. Because of the sectoral nature of Covid-19, the rise in unemployment will be more concentrated on people already at risk of poverty than the 2008 financial crisis. Withdrawing the universal credit uplift next April — as is currently planned — would be a mistake and would pull a further half a million people into poverty.
Gerard Lyons: I believe Brexit will be positive for the UK economy, but it is not just leaving the EU, but the policies we adopt once we have left that are key. The UK, like much of Western Europe, needs to reposition itself post the pandemic, in a changing and growing global economy.
In the wake of the pandemic and Brexit there is a case for a strong, pro-growth economic strategy. Ideally, this should form the centrepiece of any post-crisis policy reset. Although the UK has many world class sectors and firms, it is a low productivity and low wage economy. Ideally, what is needed in 2021 is a three arrowed policy of: continued fiscal activism: supportive monetary and financial policy: and an increased focus on a supply-side agenda of boosting infrastructure, investment and innovation, and a focus on getting the incentives right, through taxes and regulation, thereby reducing inequality.
David Miles: Will work and business patterns be transformed? To some extent — but not in a way that seems particularly likely to boost productivity. But it might make people feel better because non-material benefits — you spend more time at home where you have greater scope to work flexibly — may be of significant value. And maybe for those countries like the UK, with a crowded big city like London that is expensive, there is a land and house price reaction that is helpful to the young and they need some compensation for taking the brunt of costs to date.
Patrick Minford: I would like to see the Treasury lengthening the maturity of public debt, preferably by issuing perpetuities, to lock in current low interest rates and so maintain the favourable situation for fiscal expansion as above for as long as possible.
John Muellbauer: We are morphing almost seamlessly from the global pandemic crisis to the climate crisis. One of my biggest worries is that the sheer ineptness of the PM’s leadership regarding the pandemic will carry over to the leadership he should be displaying on climate change and the COP meeting in Glasgow. It is bound to undermine his credibility.
David Owen: We write this in a period of heightened uncertainty, not just because of Covid-19 but Brexit. Significant structural change is inevitable. Negative rates may be necessary to help support the flow of credit to non-financial corporations. But much of the heavy lifting will have to be done by fiscal policy. Climate change will clearly also be on the agenda in 2021. When it comes to Brexit 2021 will be the year when we find out the extent to which leaving the single market proves to be a problem for the important UK services sector.
Jonathan Portes: Far from “fixing the roof while the sun was shining”, austerity left us far worse prepared, as an economy and society, for this pandemic. Cuts to benefits, in particular to disabled people and low-income families, and to local services meant that the most disadvantaged were also the most vulnerable to both the health and the economic impacts of Covid-19. Tackling this legacy should be the government’s first priority.
Vicky Pryce: I am quite pessimistic about prospects for the economy. The support given so far was absolutely necessary, both by the Treasury and the Bank of England but the stopping and changing and the constant U-turns have been bad for confidence and business investment which will in my view mean that we will continue to underperform our trade rivals. That isn’t going to be good news in an environment where we are cut loose from the strong ties of the EU single market and customs union and the loss of free movement of people. In the longer term, competitiveness will suffer and the only way it will be maintained is through a weaker sterling that will have to take the strain. But it still means lower growth in the short, medium and longer term than would otherwise be the case and lower productivity growth than many of our closest competitors due to persistently lower levels of investment in skills, technology and innovation.
Ricardo Reis: My answers to question 6 on expectations are prone to be misinterpreted. Because of the furlough scheme, 2020 had a very low official unemployment rate, and it is arithmetically impossible for that to be “much lower”. Hours worked is a better indicator of the state of the labour market right now, and I expect 2021 to have much higher hours worked than in 2020.
As for inflation, in the same question, I answered “not sure” because I think uncertainty is high. Inflation could significantly rise, or it could significantly fall. On average, I guess I expect it to be the same because I put roughly same weight on both the upside and the downside. But answering “no major change” would be misleading, as I put a significant probability on there being major changes: it is just that I do so symmetrically.
Philip Shaw: We are inclined to the view that it should not be difficult for 2021 to be a better year. However, we have lingering concerns over how the authorities would respond to another left-field shock to the global economy, bearing in mind that there is relatively little policy space to provide stimulus. Let’s hope that it does not happen!
Andrew Simms: There may be no magic bullet for all our problems (although enough are now aware of an actual magic money tree to unnerve conservatives) but there is for once an economic direction that is not only necessary and agreed in principle but speaks to them. Substantial public investment to set the UK on a path compatible with meeting the 1.5°C climate target can underpin recovery, levelling-up and building back a better, greener, more equal Britain.
Andrew Smithers: Our future depends on policy. Short term this means sufficient stimulus to limit the rise in unemployment to the rise in the NAIRU. This should be fiscal not monetary (i) because more public sector debt is less dangerous than more private sector debt. (ii) because the NAIRU for 2021 is unknowable and it is important that inflationary expectations should be kept in check by prompt action when needed and this can only be monetary. Inflationary expectations must be contained so that we do not suffer again, as we did post-oil crisis, to persistent high unemployment. For the longer term, private sector fixed tangible investment needs to rise sharply. This can be done by a tax credit for tangible investment. (Not accelerated depreciation, which fails to raise EPS and thus does not avoid the anti-investment bias of the bonus culture.) Higher private sector investment is essential (a) to raise growth so that the fiscal deficit does not cause debt/GPD ratio to rise unsustainably and (b) to end the ex-ante net private sector investment dearth which is structural and cannot therefore be sustainably offset by either monetary stimulus, which boosts private sector debt, or fiscal stimulus, which boosts public sector debt.
I am sadly pessimistic about good long term policies being introduced as the problem caused by the bonus culture is not discussed and thus not understood.
Gary Styles: I am just relieved you have not asked any questions about the housing market and house prices this year.
David Vines: Brexit will create a need for structural change which will take between one and two decades to bring about, will greatly worsen inequality, and will cause levelling down in the North. It will also lead to a gradual decline in the strength of the UK as a financial centre.
Dr Sushil Wadhwani: The shorter-term outlook remains clouded with uncertainty related to the pandemic (eg mutations of the virus, the rollout and efficacy of the vaccine etc).
However, assuming that we have robust growth by 2022, I fear that we are setting up for higher-than-expected inflation on a five year time horizon. I fear that this government will be tempted to amend the marching orders of the Bank of England and may well introduce an implicit increase in the inflation target by, say, setting a nominal GDP target at 4 per cent. Over the medium-term, this is likely to backfire.
Ross Walker: Short-term Brexit frictions and any lingering damage from Covid-19 are likely to cause some modest near-term disruption but will be viewed, over time, as “rounding errors” on GDP. The most disconcerting aspect of the Brexit process remains the absence of what George H.W. Bush termed “the vision thing” — what is the UK’s economic model and strategy to replace the void left by Brexit?
Tony Yates: To the long list of structural problems in the UK — in housing, education, health, transport . . . we have now the issue of how to grapple with the long-term impact of Covid-19. I feel confident that this government, severed as it is from rational discourse in so many ways — hence the worst form of Brexit — will prove completely unable to grapple with any of this.