At times like these it is really scary to study economic forecasts.
We all know that no economic forecast is ever fully accurate, but when the set of reasonably reliable forecasts is as consistent as is now the case, and as uniformly troubling, then it is time to sit up and take a fair modicum of interest.
Let us start with the UK’s Office for Budget Responsibility, generally respected as informed and relatively unbiased.
This is a good place to start, as the OBR’s forecasts provide the basis upon which the UK Government’s budgets are based.
The OBR expects the UK economy to contract by 11.3 per cent this calendar year. This is apparently the sharpest decline since 1709 when the Thames froze over – although the 1709 data may be even less reliable than today’s!
They then see growth for 2021 at 5.5% followed by 6.6% in 2022. That sounds superficially decent, but note two caveats.
First, UK economic output – GDP being the key number – would not be back at where we were pre-pandemic until the last quarter of 2022; we will be returning from a very low base.
Second, if there were to be no deal on Brexit – which sadly looks to be an increasingly high risk – then the OBR suggests that UK output would be reduced by 2% initially, and would still be 1.5% below their ‘with deal’ forecast in 2026.
Looking elsewhere does not bring relief. Consider the EY ITEM Club, another generally respected source.
They suggest growth in 2021 of 6.2%, marginally above the OBR figure, and 4.3% in 2022, significantly lower than OBR. On this basis, “the economy is not seen as returning to its Q4 2019 size until Q4 2023”.
This is based upon the assumption of wide availability of a Covid-19 vaccine in the first months of next year (fingers crossed) and – wait for it – a free trade agreement being reached between UK and the EU.
Failure to reach such an agreement would, in their forecast, knock 2021 growth down to 5% and 2022 to 3.5%. This suggests that the UK would be lucky to regain the end-2019 level of GDP by the close of 2024 – four full years from now.
Seeking international comparators does not ease concerns.
The Organisation for Economic Co-operation and Development – OECD to its pals – sees the UK’s recovery next year from the Covid-induced recession as slower than any other major economy save Argentina.
UK GDP will, according to the OECD, be 6.4% lower at end 2021 than end-2019, while the world is up by a bare 0.6% and China up by nigh on 10%. All other major economies will remain below last year’s peak, but barely so for the US, by 3% for the EU and just 1.7% for Germany.
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There is no escape from the clear expectation that economic times will remain tough for the next couple of years, and particularly so in the UK. In some crucial aspects the impact will be more severe next year than has been the case in 2020.
Remarkably, while unemployment has eased upwards, the relative proportions of “working” and “workless” households had changed little in the year up to the third quarter in 2020. According to the ONS the share of “workless” households had risen by only 0.2 percentage points.
But these are artificial figures, in that so many billions of pounds have been provided to households via the Job Retention Scheme. That has been hugely valuable, but will come to an end at some time in early 2021. Then unemployment will shoot up.
The OBR sees an increase from just under 5% to 7.5% in the middle of next year. EY suggest 7%, but there seems general agreement that the peak level of unemployment will have been put back a few months by the Chancellor’s interventions and that peak will now be lower than previously anticipated. (But – excuse the cracked record – a touch higher again if there is no Brexit deal!)
So what to do? The first answer is definitively not to tighten the strings on the public purse either soon or sharply; a big “No” to austerity.
The UK public sector deficit is set this year to hit nearly £400 billion or 19% of GDP – the highest ever in peacetime. Inevitably tax revenues have fallen catastrophically while spending has skyrocketed.
The stock of Government debt has sailed past 10% of GDP, but the cost of servicing this debt is remarkably low as interest rates stay at rock-bottom levels; and, with inflation low and stable, rates look set to stay low for a good couple of years yet.
Over that period some tightening of the public finances will be required, but with caution and with great care being taken over where to temper expenditure and where to edge up taxation.
This should, of course, be based upon economic and public welfare considerations, not party politics.
As the Fraser of Allander Institute has wisely stated: “The need to remain flexible in the face of huge ongoing uncertainty is inevitable.”
In Scotland the UK’s Spending Review should result in a healthy increase next year in our core funding, but there will be a major decline in the “Covid consequentials”. Those are the extra funds allocated to Scotland for special measures to cope with the impact of Covid on individuals and businesses, and they will fall sharply, meaning that difficult choices will have to be faced.
Again, economic and public welfare considerations should be paramount – and the Scottish Government could benefit from a careful read of the new report from Carnegie on Gross Domestic Wellbeing – as an alternative measure of social progress.
Didn’t someone say that we need to “grow back better”?
Source: Herald Scotland
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