Ravaged by the pandemic, 2020 likely saw the UK economy suffer its steepest fall in GDP in more than three centuries. But we expect 2021 to see a strong recovery, pushing the UK close to the top of advanced economy (AE) growth rankings. Four themes will shape UK prospects this year:
1. Speedy vaccine rollout will allow a rapid lifting of Covid‐related restrictions. The government plans to vaccinate all vulnerable groups by the end of Q1. This should allow a meaningful relaxation of social distancing restrictions from Q2, triggering a strong, consumer‐led, recovery.
2. Services will outperform industry. 2020 was a rare year when industry has fared better than services. But the lifting of social distancing restrictions should spark a strong revival in sectors relying on social consumption. Industry will also be more heavily affected by the introduction of the new UK‐EU trading relationship, with increased costs and supply‐chain disruption likely.
3. Policymakers will stay on the accelerator. Chancellor Rishi Sunak has already loosened the fiscal stance by 2% of GDP this year relative to pre‐pandemic plans, and we think chances of more support are greater than of premature tightening. Similarly, the BoE has already committed to £150bn worth of gilt purchases this year, and the MPC's bias is towards further loosening, even though base effects will likely push inflation back to target by end‐2021.
4. Brexit will remain in the news, particularly in early‐2021. Notwithstanding the UK‐EU trade deal, the realities of life outside the single market and customs union will quickly become apparent in the early part of this year. Goods trade between the UK and EU will take longer and involve a substantial increase in bureaucracy. This will help keep Brexit in the public eye, even if the short‐term macroeconomic impact is limited.