Deloitte: ‘vaccines could turbocharge the recovery’
3 December 2020: Deloitte’s chief economist in the UK has labelled the Chancellor’s prognosis for economic recovery “overly pessimistic” and forecasts the next two years will see some of the strongest economic growth in decades.
In last week’s Spending Review, Rishi Sunak warned that the UK’s “economic emergency has only just begun”. However, Deloitte’s chief economist in the UK Ian Stewart says a return to growth is in sight, with indicators supporting an unusually strong rebound in activity in 2021. Stewart is urging a focus on some of the more positive underlying economic indicators, while at the same time warning “we are not out of the woods yet.”
OBR forecasts that the economy will expand by a hefty 5.5% in 2021 and 6.6% in 2022. While it will take almost two years for the economy to return to pre-crisis levels of GDP, this represents a faster recovery than after the global financial crisis, when it took five years to regain lost ground, Stewart explains.
A cut in the OBR’s forecast for the peak in unemployment from 12% to 7.5%, would represent the lowest recessionary peak in unemployment since the 1970s. Although unemployment levels are set to mount in 2021, significant government intervention and support has succeeded in mitigating the impact, Stewart adds.
Meanwhile, low financing costs mean soaring public sector debt - likely to run at well over 100% of GDP for several years - is more manageable than it looks. “Lower interest rates mean that the cost of servicing this debt has declined and next year is likely to hit a new post-war low,” Stewart says.
“None of this is to say that we are out of the woods,” continues Stewart. “Even so, the fact this recession was caused by a virus offers hope about the coming recovery. A successful vaccine deployment would halt the recession in its tracks.”
However, Stewart says a no-deal Brexit remains one of the biggest risks to recovery. According to OBR estimates, this could knock 2% off growth next year. Similarly, delays to, or failures in, vaccines could hit growth much harder. “But, equally, a successful and swift deployment of vaccines could turbocharge the recovery,” Stewart says.
During his Spending Review speech, the Chancellor highlighted figures from the UK Insolvency Service, which show insolvencies in October were 42% lower than a year ago, despite a huge contraction in the economy. However, these figures are almost certainly masked by the continuation of the government’s various grant schemes into 2021 and beyond.
The government’s Business Impact of COVID-19 Survey highlights the difficulties facing some corporates. It shows that 8.4% of UK firms have less than one month of cash reserves and 14% of businesses have little or no confidence they will survive until February.
A huge uptick in insolvencies is inevitable, Stewart warns, as the financial support extended to the private sector comes to an end, enforcement activity by HMRC and the courts picks up and some temporary protections from creditors expire on 31 December. “The government has done a pretty good job of trying to preserve the fabric of the economy for the recovery but there are some fine judgments to be made about how far you can extend that support and some sectors and jobs will simply cease to be viable in the long term.”
Emerging from the crisis presents an opportunity not just to recover but to reset and tackle the UK’s poor track record on productivity, Stewart urges. He says there is a particularly strong case for government intervention on vocational training, which could help tackle regional economic differences, help improve social mobility and raise productivity and growth.
“In this kind of economy where human capital matters more and physical capital is less important, investments in skills is a really crucial area,” he concludes.