The green shoots that emerged in the UK towards the end of 2020 – first the initial rollout of the COVID-19 vaccines and then a last-gasp Brexit deal – have now given way to the reality of another national lockdown.
The economic hit is likely to be smaller than it was in spring 2020, partly because sectors such as construction and estate agency that were closed down then remain open this time around. The lesser impact also reflects the fact that other sectors have adapted their offer to consumers, whether through a more comprehensive online presence or providing click-and-collect services where possible.
That said, there can be no mistaking that the shuttering of the economy will still be damaging for many businesses and painful for some households, notwithstanding the latest financial interventions from the chancellor.
Initial forecasts point to a drop in UK GDP of between 4% and 5% over the first quarter of this year; this compares with a fall of around 20% in the second quarter of last year. However, with infections higher than ever at the time of writing, it is not inconceivable that even further restrictions might be considered that would exacerbate the impact.
As has been made clear by the prime minister, early relief is unlikely. The government will review the need for a lockdown on 15 February, but the associated legislation runs until 31 March, which provides a clue as to its thinking.
Meanwhile, the Trade and Cooperation Agreement (TCA) put in place with the EU in the final few days of 2020 avoids the dramatic consequences of a no-deal Brexit that many businesses had feared. However, the general consensus is that the agreement will leave UK–EU trade more complicated than before.
Critically, the TCA provides for zero tariffs and zero quotas on all goods traded between the UK and the EU. The rules do create a new administrative burden, however. Some products will not qualify for duty-free trade without changes to the sourcing of their components or processing, a point highlighted by high-street stalwart Marks & Spencer in its recent trading statement.
It should be noted that amid the present downbeat mood, there remains a high level of confidence that things will get better as we move towards the spring. Of course, the vaccination process is critical in this regard but with further initiatives being taken to drive inoculation, we believe that it is right to build an uplift in economic activity into second quarter forecasts.
And on the assumption that there are no further health challenges beyond this, the consensus forecast for economic growth – currently in the ballpark of up to 5% for the whole of 2021, compared with a 10% contraction last year – seems reasonable for businesses and government to work with at this point.
What the post-pandemic economy might look like beyond this initial rebound is, however, a matter for rather more conjecture. References to the roaring 20s – the 1920s, that is – have become increasingly frequent in much of the more positive commentary, with parallels being drawn with the period following the Spanish flu pandemic.
Without wishing to deflate this optimism, the hard data that is available – for the UK at least – shows any such comparisons warrant a degree of caution. UK economic growth actually averaged just more than 1% in the 1920s, something that can barely be described as "roaring".
The decade was also a period of significant policy mistakes that arguably contributed to this relatively uninspiring performance. Most notable were the return to the gold standard at a significantly overvalued level for the currency, and material cuts in public spending in an attempt to balance the books following massive spending during the First World War. It was, perhaps rather predictably, also a time of rising, excessive and disruptive inequality.
Although the question of sterling is probably not one that will command too much attention from policymakers over the coming years, addressing the fiscal challenge of the pandemic is likely to prove rather more problematic. There is no getting away from the fact that Chancellor Rishi Sunak will have tough choices to make, with some difficult trade-offs as he attempts to deal with the legacy of COVID-19.
Even before the pandemic, the Office for Budget Responsibility – the body with formal oversight of the government finances – was warning about the longer-term trend of rising costs for social care, health and pensions. This threat has effectively been intensified, as the proverbial magic money tree has been shaken to its roots to help address the fallout of COVID-19.
Public debt currently stands at around 110% of GDP, and while this significantly below where it was at the end of the Second World War, it is worth bearing in mind that as recently as the mid-2000s the debt ratio was little more than 25% of GDP.
The temptation to begin to address this issue as soon as the pandemic's impact starts to lessen will inevitably be strong. However, there is a risk not only that such steps would undermine the recovery but also that it will affect the government's levelling-up agenda.
The OECD – speaking in general terms rather than specifically about the UK – recently warned against reining back fiscal support prematurely. Significantly, the fact that interest rates remain so low provides the chancellor with some breathing space; the costs of servicing public debt are projected to fall to their lowest level in more than 50 years.
Even assuming that Sunak does follow the recommendations of the OECD for now, it will still be hard to avoid taking steps to remedy the fiscal challenge at some point over the next few years. My sense is that austerity 2.0 isn't a runner, though. The lessons of the pandemic have already increased the case for building sustainable, good-quality health provision. Meanwhile, many local authorities are now teetering on the brink of bankruptcy and likely to require cash injections. There will be numerous other demands on the public purse alongside these.
All of this points to more pressure falling on the tax system to help rebalance the public finances. This was clearly not part of the government's plans when it won the general election just over a year ago, and it doesn't sit easily with its underlying philosophy. However, taking account of the broader perspective, I am not sure there are too many other options.
"The lessons of the pandemic have already increased the case for building sustainable, good-quality health provision"