UK Economy to Steam Ahead in 2021, Global Growth to hit 40-year High

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Economists at independent research house Oxford Economics are tipping the UK's economy to grow faster than other major developed market economies in 2021, as the biggest winners in the year ahead are anticipated to be those economies that have suffered the most severe restrictions in containing Covid-19 in 2020.

In a briefing to clients out on December 07, Oxford Economics say 2021 will see the world experience a boom, the likes of which have not been seen for decades, and Europe will be the engine for that recovery.

"The pace of global GDP growth in 2021 will be the fastest in over 40 years," says Ben May, Director, Global Macro Research at Oxford Economics. "But for many it won’t feel much like a boom. Instead the global recovery is set to be uneven, dictated by three key themes."

The three economic rebound themes identified by Oxford Economics for 2021 are: 1) there will be winners and losers in the vaccine race, 2) industrial production will shine, 3) growth in the private sector will outstrip that of the public sector.

May explains how each of the three themes will evolve:

1) "We anticipate a sustained relaxation of restrictions in some advanced economies (AEs) around March/April, triggering a mid-year mini boom. Vaccine rollouts in emerging markets (EMs) will generally be slower, but some, particularly ‘makers’, will benefit from positive spillovers from the AE pickup. While vaccines will inevitably help travel and tourism, the transition may be slow. Long-haul travel will recover more slowly than domestic and short-haul.

2) "Near-term prospects seem favourable as the sector continues to respond to pent-up demand and rebuilds inventories. But the second half of 2021 may prove tougher as these supports begin to fade, and consumers refocus their spending on services."

3) "This will mark part of the transition to normal, but it won’t be seamless. Past mistakes in rapidly moving to austerity won’t be repeated, but policy will be uncoordinated globally and the risk of governments doing too little outweighs the risk of them doing too much. Consequently, we’re still sceptical that underlying inflation will surge next year."

According to Oxford Economics, those countries that suffered the most under the covid-19 crisis are set to see the most aggressive recoveries in 2021. With both Spain and the UK experiencing the largest economic hits from the virus in Europe, it therefore stands they are likely to outperform.

"The UK and Spain have both recorded large falls in GDP and had persistently weak mobility, suggesting they may gain more than most," says May.

"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 November 12 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.

The ONS said the UK economy shrank 19.8% in the second quarter, with only Spain suffering a deeper contraction.

Oxford Economics expects many advanced economies to be able to vaccinate a high enough share of the vulnerable population to begin a meaningful and sustained relaxation of restrictions around March/April.

The UK will commence its vaccination programme on December 08, courtesy of the Pfizer-BioNtech vaccine being approved by the MHRA on December 02.

The U.S. could meanwhile approve the same vaccine around December 10, meaning a rollout could begin as early as the middle of December.

While it will take months before the most vulnerable are adequately vaccinated, most economists say it is possible that vaccination programmes will reach a stage in which economies can be truly unlocked by March-April 2020 in most economies.

Those countries that are ineffective in distributing the vaccine could therefore achieve this 'exit velocity' later.

Analysts at Goldman Sachs say the UK is well positioned to benefit from 'vaccine normalisation.

"While Brexit impacts will take years to play out, the UK economy is relatively well-positioned to benefit from a vaccine-driven normalisation next year," says economist Zach Pandl at Goldman Sachs.

Goldman Sachs economists reiterated their above-consensus forecasts for the UK next year on the grounds that "UK activity has been particularly hard hit by mitigation measures and thus stands to rebound by more, and the UK is very well-placed among its peers for quick and widespread vaccine distribution".