UK Economy "Stands to Benefit the Most" from a Vaccine says Capital Economics

- UK hit hardest by covid-19 crisis
- "horizon is starting to glow" says Capital Economics
- UK economy could recover the fastest

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The UK economy has shrunk by a greater amount than the United States and its major peers in the Eurozone, but the deeper decline could be matched by a greater vaccine-fuelled recovery in 2021 according to independent economic research house Capital Economics.

"Given that the UK economy has been hit hardest by the COVID-19 crisis, it stands to benefit the most from vaccines," says Paul Dales, Chief UK Economist at Capital Economics. "The economy is like a trampoline – the lower you go on the way down, the higher you go on the way up.

It was reported on Thursday that UK GDP rose by a record 15.5% in the third-quarter as the economy reopened from the shutdown imposed between March and July, partly reversing the upwardly-revised 19.8% fall seen in the prior period.

But growth of just 1.10% month-on-month in September showed the recovery was rapidly running out of steam. For the 12 months to the end of September, GDP was still 9.6% lower than at the same time one year ago and -9.7% beneath the level observed in February 2020.

This is a substantially deeper decline than that experienced by peers:

Image courtesy of Capital Economics

"To quote the phrase attributed to the theologian and historian Thomas Fuller, 'the darkest hour is just before the dawn'. And the news this week that Pfizer may have found an effective vaccine suggests that the horizon is starting to glow," says Pugh.

As a result of the developments Capital Economics this week told clients an effective COVID-19 vaccine would dramatically improve the country's economic outlook.

It may allow GDP to rise to its pre-virus level a year earlier than otherwise and mean that the unemployment rate peaks at 7% next year instead of 9%.

Pfizer announced on Monday that their vaccine candidate developed with BioNtech is 90% effective in combating COVID-19 and they could finish assessing safety data during the third week of November, and are currently on track to seek regulatory approval as early as November.

The UK preordered a substantial amount of the Pfizer vaccine ahead of any other country and it is believed this early move puts it at the 'front of the queue' for the vaccine's rollout, should the vaccine achieve final approval.

BioNtech have said they are optimistic that immunisation effect of its vaccine will last for at least a year, although it is not certain yet

The UK was the first country to make a "binding agreement" order with Pfizer and BioNtech for their vaccine candidate back in July, a decision that appears to have paid off and placed the country at the front of the queue. "It’s the right thing to be doing to be at the absolute front of the queue to make sure we’re in a position to get those vaccines first when they become available," Education Secretary Gavin Williamson told the BBC in July when the Pfizer deal was agreed.

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However, Dales cautions that we need to know a bit more about the Pfizer vaccine, about other possible vaccines and about the timings of production and distribution to the public before concluding social distancing restrictions will no longer hamper economic activity from some time next year.

Indeed, the Pfizer vaccine looks to be an incredibly challenging candidate to roll out in a mass vaccination programme, due to 1) its cost and 2) the temperatures it must be stored at.

1) The cost of the Pfizer vaccine is said to be around the £29.47 mark for two doses, which contrasts to the £2-3 being cost being touted for the AstraZeneca candidate.

2) The Pfizer vaccine must be stored at around -70c, which makes for a significant and expensive logistical challenge when it comes to roll out.

This is why the AstraZeneca really could be the 'silver bullet' the world needs - for sure, developing countries can only really expect to roll out a vaccine that is both cheap and robust.

News from AstraZeneca is expected soon and media reports suggest UK ministers are optimistic on the news that will be announced.

The developments concerning a vaccine are still however not enough to shift expectations for further easing at the Bank of England which will likely maintain an accommodative policy stance that should limit the yield paid on government bonds, as well as Sterling's upward ambitions.

"Even if there were effective vaccines, the Bank of England probably wouldn’t tighten policy for many years," says Dales.

The Bank, on November 05, downgraded UK economic growth forecasts, while pointing to a more gradual recovery in growth towards pre-Covid levels over 2021.

According to the Bank's Monetary Policy Report, UK GDP growth in the fourth quarter of 2020 is now forecast to decline by 2%, having previously been expected to rise by 3.5%.

GDP forecasts for the third quarter show growth of 16.2%, which is lower than the 18.3% previously assumed.

GDP growth in 2020 is now expected to fall by a larger 11%, which is deeper than the previously forecast -9.5%.

This is a more severe forecast than that made by the European Commission which on Thursday released their Autumn economic forecasts for the Eurozone, EU and UK. EU Commission forecasts show an expectation for growth to decline 10.25% in 2020, meaning the UK is expected to suffer the second-deepest recession in Europe this year, behind Spain.

The economic rebound in 2021 is forecast to be slower than previously assumed owing to renewed lockdown measures that will impact growth in November, with the Bank's economists now seeing growth of +7.25% in 2021 against the +9% forecast previously.