The UK is rebounding from Covid and defying Brexit scare stories, as Goldman predicts we could grow faster than the US
Britain looks set to bounce back strongly from Covid-19. With the fastest vaccination programme in Europe and the lifting of restrictions, the Bank of England now expects the world’s fifth biggest economy to recover quickly, opening the door to a potentially exciting decade ahead.
There is no doubt that Britain was one of the hardest hit by the pandemic and that the Conservative Party fumbled its response during the early months of the crisis.
A full inquiry into the handling of the pandemic, recently announced, will almost certainly raise potentially damaging questions about Boris Johnson’s leadership and some of the decisions that led to the UK experiencing one of the highest excess death rates in Europe.
This was compounded by the riveting testimony given by Johnson’s former chief advisor, Dominic Cummings, who accused both the Prime Minister and his senior ministers of fumbling the response and making a series of mistakes during the early weeks and months of the crisis.
Cummings reminded everyone in Westminster that he likes to bring a bazooka to a knife fight. Yet step back to look at the economic landscape, and things are now rapidly moving in the right direction. The Bank of England expects the UK economy to return to its pre-pandemic size by the end of 2021, much earlier than initially expected.
The forecast growth rate of 7.25 per cent in 2021 would be the most impressive since the Second World War. Unemployment has remained low, and businesses proved to be far more resilient during the second lockdown than they were during the first.
There are also tentative signs that, after a remarkable collapse at the start of the year, the volume of trade between Britain and the EU is now returning (exports to the EU jumped by 47 per cent in February).
‘What these and other numbers are telling us’, notes respected analyst Wolfgang Münchau of Eurointelligence, ‘is that even this bit of the Brexit scare stories will not come true.’
As Münchau points out, many of the forecasts about the economic impact of Brexit had been based on shaky foundations and often ignored the country’s fastest-growing sectors, such as data.
Such optimism is shared by financial institutions that have started to point to a strong recovery against the backdrop of both Brexit and Covid-19. Recently, the International Monetary Fund (IMF) raised its forecast for UK growth in 2021 to 5.3 per cent, which is quicker than the eurozone and Germany.
As I wrote this column, other institutions were upgrading their forecasts: the EY Item Club, JP Morgan, UBS, Deutsche Bank and the OECD, to name only a few.
Remarkably, Goldman Sachs forecasts that Britain could even grow at a faster rate than the United States. Much of this is being driven not only by the successful vaccination rollout but also by the expectation that Britain’s households are about to go on a major spending spree, with the Bank of England estimating that households have stockpiled £125 billion.
This will have profound political implications.
A strong recovery from Covid-19 will almost certainly conceal any short-term friction arising from Brexit, making it difficult if not impossible for analysts to make the case that exiting the European Union – the signature piece of Boris Johnson’s premiership – has fundamentally weakened the economy (although over the longer term some banks estimate that even with a strong 2021, Brexit could reduce the UK’s gross domestic product by about 3.5 per cent over the next few years).
Nonetheless, growth rates above 6 or 7 per cent will make it extremely hard to convince the British electorate that leaving the EU really has been a major act of self-harm, which will help Johnson.
Indeed, among the wonks, pollsters and politicians in SW1 there is now a widespread expectation that the Conservatives will almost certainly remain in power after the next election, currently rumoured to be held early in 2023.
A recent strong performance by the Conservatives in local elections in the spring and their shock victory in the old Labour fiefdom of Hartlepool (last won by a Conservative in 1955) have also fuelled predictions of a decade-long premiership for Johnson.
While Labour’s Sadiq Khan was comfortably re-elected as mayor in London, the Labour Party fundamentally failed to demonstrate a recovery in areas that it does not already control, raising difficult questions about Sir Keir Starmer’s embryonic leadership.
Unless this changes rapidly, then Britain looks set for the longest period of Conservative Party rule since the early 1800s, before the arrival of mass democracy and eclipsing even the achievements of Margaret Thatcher.
I would say that I am shocked, but given the topsy-turvy nature of British politics over the past five years, extraordinary scenarios have become par for the course