February/March 2021

A tale of two economies – recovery expected at a ‘rate of knots’ in 2021

Analysis from Dr John Ashcroft on the economic impact of Covid-19

Andy Haldane, Chief Economist at the Bank of England, expects Britain’s economy to recover ‘at a rate of knots’, from the beginning of the second quarter this year. It should not be too difficult. The comparative figures for last year, are not much to beat. The economy collapsed by just over 20% in Q2 last year. The recovery in the economy will appear to be pretty dramatic, from April onwards. Growth of over 15% in the second quarter is probable. This will change the mood and outlook for the year as a whole. We assume an easing of lockdown as Easter approaches, and a successful rollout of the vaccine, as the year progresses. Despite the setback to the start of the year as lockdown was imposed once again, growth of 5% for the year as a whole seems a likely outcome.

The unemployment rate is expected to peak at around 6.5% in Q2, with some 2 million out of work. The extension of the furlough scheme into the second quarter is set to mitigate the increase in job losses. Rishi Sunak and Treasury stepped into the breach once again. Government borrowing is set to increase to around £375 billion this year. The covid bill will rise to £300 billion. The Bank of England will continue the ‘monetary financing of the fiscal deficit’. The Old Lady will boost her balance sheet to meet the increase in spending.

“It was the best of times, it was the worst of times…”

As we returned from our winter break, our headline in the Saturday Economist was ‘It was the best of times, it was the worst of times, and that was just week one…’ The famous opening lines from Charles Dickens’ Novel ‘A Tale of Two Cities’ were most apposite in our ‘Tale of Two Economies’.

Sector losers during the pandemic have been clothing and retail, travel and tourism, food and accommodation, leisure and entertainment. Sector winners have been, food, home entertainment, online retail and logistics. Online food sales have doubled. The share of online sales overall has increased to over 30%. Digital acceleration online and into cloud, has become the ‘modus operandi’ for all. Boohoo have recently announced the acquisition of the Debenhams brand. ASOS emerged as the front runner for Topshop and Miss Selfridge. The old order changes. Online sales were up by 60% in December. Excluding fuel, retail sales were up by 6.5% in the final quarter of the year. Food sales were up by 5%. Gardening products up 9%. Household products were up by 15%. DIY goods were up over 35%. Consumers are spending on retail, especially online. They cannot spend in pubs, restaurants, hotels and travel, for the moment. They will spend on homes and households. Housing activity in December, was the highest end of year performance since 2006. House prices ended the year up 7.5%.

Non-food online sales now account for almost 40% of overall transactions. Brands with a strong retail franchise were the victims in 2020. A record number of shops closed in the year. This was an acceleration of a trend over the past five years. New car sales were down by 30% in 2020. Diesel sales were down by over 60%. Hybrid sales, on the other hand, were up by almost 90%. The charge for battery capacity is the main challenge now for the car industry. Four mega battery plants are required within a five year time frame if the future of domestic car manufacturing is to be secured. 10,000 pubs and restaurants ‘called time’ permanently last year, a 15% increase on the previous year. There were 4,000 new site openings, a net 6,000 loss for the year as a whole and a 5% reduction in capacity.

Of the 2.4 million on furlough at the end of October, approximately one million were from the retail, accommodation and food sectors. A further 200,000 were involved in arts and entertainment. We would expect a swift bounce back in the leisure sector as the economy recovers. Structural problems in the retail sector will present more of a challenge. In travel and tourism, staycations will provide a boost to the domestic holiday market. Some 80 million annual visits abroad will not be made anytime soon. International travel will be slow to recover. According to the head of IATA, the International Air Transport Association, the world’s airlines have need of a further $80 billion to survive the crisis caused by the pandemic. Central bankers may be obliged to heed the call. In our ‘Tale of Two Economies’, we no longer need to worry about Boris and Brexit, Trump and Tariffs.

The UK readjusts to life outside the EU. In the US, adult supervision is back in the White House…

Dr John Ashcroft

Dr John Ashcroft specialises in economics, strategy and financial markets. He is author of The Saturday Economist, great updates every week on the UK and World Economy. The Saturday Economist Live is now available as a podcast and on Zoom. “Fast Moving, Content Rich and Fun.” Find out more…  www.thesaturdayeconomist.com