ANDY HALDANE: Britain is ready to fire on all cylinders
Britain is ready to fire on all cylinders after a year to forget, writes Bank of England Chief Economist ANDY HALDANE
The rapid rollout of the vaccination programme across the UK means a decisive corner has been turned in the battle against Covid.
A decisive corner is about to be turned for the economy too, with enormous amounts of pent-up financial energy waiting to be released, like a coiled spring.
With 13 million of the most vulnerable people already vaccinated, the risk of death or hospitalisation in the UK has already probably halved.
With 13 million of the most vulnerable people already vaccinated, the risk of death or hospitalisation in the UK has already probably halved
By the end of March, based on the current pace of vaccine rollout and government data on vulnerable groups, this risk may have been reduced by as much as three-quarters and by the end of the second quarter it will be even smaller.
As health concerns fall and restrictions lift, people are expected to return to spending and socialising. But how quickly and how much?
We have no similar historical experience on which to base a precise forecast. But two reasons lead me to expect the turn in sentiment, spending and the economy to be rapid – a light-switch being flicked rather than a dimmer-switch being turned.
First, household psychology.
Having been bottled in for a year, most people are desperate to get their lives, including their social lives, back.
When given the opportunity to do so safely, they will seize it. Shared social experiences – from pubs to sports to cinema – will I think be a big beneficiary of this pent-up demand. We had an early glimpse of this last summer when people chose, with only a small amount of financial encouragement, to eat out to help out.
And that was before the significant reduction in health risks brought about by vaccination.
Having been bottled in for a year, most people are desperate to get their lives, including their social lives, back
Second, household finances.
Unlike past recessions, many UK households have strengthened their finances significantly due to forced restrictions on their spending. By the end of last year, this savings nest-egg had probably reached over £125billion.
If recent saving trends continue, it might well be over £250billion, or 20 per cent of annual household spending, by the end of June. As this nest-egg hatches, no one knows for sure how much of this cash will be spent.
The Bank of England, in our quarterly report last week, conservatively estimated around 5 per cent. I think there is the potential for much more, perhaps even most, of this savings pool to leak into the economy, fuelling a faster recovery.
Why? Because people are not just desperate to get their social lives back, but also to catch up on the social lives they have lost over the past 12 months.
That might mean two pub, cinema or restaurant visits a week rather than one.
It might mean a higher-spec TV or car or house.
There were glimpses of this last year as people used their savings as a down-payment on a mortgage, helping fuel a mini housing boom.
If households spent, say, a quarter of their savings this would boost growth by more than an extra £50billion.
People are not just desperate to get their social lives back, but also to catch up on the social lives they have lost over the past 12 months
And the potential for a savings-led boost to demand is not confined to households.
While many companies have faced difficult times over the past year, a significant number have amassed a war-chest of cash, currently running at around £100billion. Will this be spent?
Business investment has been laid low over recent years by the uncertainties around first Brexit and latterly Covid.
But with the risks from both now diminishing fast, and with consumer demand set to rise rapidly, the conditions are in place for businesses to splash some of their cash, too. That would be good news for jobs, helping to recover some of the million lost so far in this crisis.
And it would be good news for business investment too, helping companies boost their performance and productivity – and, ultimately, the pay of their workers.
There is a one more ingredient to add to this recovery mix – government spending.
Because at the same time household and company spending will be picking up, the effects of the already announced government spending will be providing significant support to the economy.
So come the Spring, we can expect the UK economy to be firing on all three cylinders – households, companies and government.
While today the economy is shrinking and inflation is well below target, a year from now annual growth could be in double-digits and inflation back on target.The economy is poised like a coiled spring. As its energies are released, the recovery should be one to remember after a year to forget.
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