The ongoing economic effects of the pandemic and the publication of the first data showing the impact of the end of the Brexit transition period on UK trade paint a grim picture of the UK economy.
But the UK’s vaccination programme and the first stages of the Government’s roadmap to ease lockdown restrictions offer glimpses of cautious optimism.
Government borrowing to reach a record high
Rishi Sunak’s second budget as Chancellor included an extension to various covid-related support measures, which had been due to close in March or April 2021. The Coronavirus Job Retention Scheme (CJRS) and Self-Employment Income Support Scheme (SEISS) were both extended until September 2021.
Office for Budget Responsibility (OBR) forecasts, published alongside the Budget, showed lower estimates for the 2020/21 cost of pandemic-related measures, such as the CJRS and SEISS. The OBR’s estimate of £280 billion for pandemic-related measures, published in November, was revised to £247 billion, as several schemes cost less than expected.
Despite this, public borrowing remains on course to reach a record high in cash terms in 2020/21.
Public borrowing was £19.1 billion in February, the highest February figure since comparable records began in 1993. At the time of the Budget, the OBR forecast public borrowing would reach £355 billion in 2020/21 (equal to 17% of GDP), though its latest estimate stated borrowing “looks set to undershoot” this figure.
Lockdown restrictions continue to hit service industries
Growth in GDP between November and December 2020 gave way to a fall of 2.9% in January compared to December, as lockdown restrictions curbed economic activity.
This contraction was particularly felt in the services sector, where output fell by 3.5% between December and January, reflecting restrictions on service industries such as the retail, hospitality, and accommodation sectors.
There was also a fall in the quantity of retail sales of 8.2% between December and January.
One sector to grow in January was construction, where output increased by 0.9% due to new work. January’s fall in GDP was lower than many economists predicted and considerably lower than GDP fall during the first lockdown. This suggests the economy has begun to adapt to lockdown restrictions.
The end of the transition period and a new era for UK trade
Data for January 2021, the first month following the end of the Brexit transition period, show that the overall value of UK trade fell, and the value of trade with the EU did so dramatically.
The value of UK goods exported to the EU fell by 40% between December 2020 and January 2021, while the value of goods imported from the EU fell 29%. Trade with the EU represented 44% of the UK’s trade in goods in January 2021, the EU’s lowest monthly share of UK trade since comparable records began in January 1997.
Despite a small increase in the value of UK goods exported to non-EU countries, the overall value of UK goods exports fell 18% between December 2020 and January 2021, and the value of goods imported fell by 23%.
While monthly trade data can be erratic, and growth in UK trade values towards the end of 2020 suggests stockpiling before the end of the transition period, this is a marked change. Compared to January 2020 and pre-pandemic levels, UK goods exports to the EU fell by 39%, while goods exports to non-EU countries fell by 14%.
Reasons to be cheerful
As of 24 March, 28.7 million people in the UK have received their first dose vaccination, while 2.4 million have also received their second. Lockdown restrictions have also begun to ease, with pupils returning to school in England on 8 March.
In light of these developments, there is some room for optimism. The OBR have forecast UK GDP growth of 4.0% in 2021 and 7.3% in 2022. Considering increased vaccine production and rollout, the OECD has projected world GDP growth of 5.6% in 2021, describing increased vaccine production and rollout as: “the best economic policy available today to boost growth and job creation.”
The OBR forecasts unemployment will peak at 6.5% in the last quarter of 2021. This is lower than the November forecast of 7.5%, owing to the Government’s extension of job support schemes.
The unemployment rate rose slightly in November 2020-January 2021 to 5.0%, from 4.9% in the previous quarter. Employment fell to 75.0%, down from 75.2% in the previous quarter, its joint lowest rate since 2017.
High levels of household savings combined with a growth in consumer confidence could create a potential spending boom when lockdown restrictions ease. Levels of aggregate household savings have grown since March 2020, as consumption fell and incomes remained stable.
The Bank of England Monetary Policy Committee estimates household savings grew by £125 billion more than might otherwise have been the case, between March and December 2020.
There is also evidence of growing confidence in the housing market. Mortgage approval levels have grown significantly from the slump seen in mid-2020, during the first lockdown.
There were 98,994 mortgage approvals in January 2021, 40% more than in January 2020. Mortgage approvals in November 2020 reached their highest level since 2007. This is a trend the Chancellor seems keen to continue, following the extension of the stamp duty holiday to June 2021 announced in the Budget.
Economic Indicators, March 2021, House of Commons Library
About the author: Matthew Ward is a researcher at the House of Commons Library, specialising in economic policy and statistics.