Is the UK economy ready to rebound like a ‘coiled spring’?

The Bank of England’s chief economist thinks the UK economy is primed to bounce back powerfully later this year. Ben Chu examines whether he’s right or not

There are no specific forecasts in Andy Haldane’s article but he does suggest that the UK annual GDP growth ‘could be in double-digits’ this time next year

The Office for National Statistics confirmed on Friday that the UK economy suffered its most disastrous year in three centuries in 2020, contracting by almost 10 per cent thanks to the pandemic and the various lockdowns it compelled.

But the news coincided with the arrival of an argument from the Bank of England’s chief economist, Andy Haldane, who wrote in the Daily Mail that the UK economy is like a “coiled spring”, ready to bounce back powerfully later this year when vaccines have been rolled out and restrictions lifted.

So is this optimism justified? Or is Haldane – who has been persistently bullish about the UK economy’s prospects over the past year, only to be contradicted by the outcome – going too far?

First, it’s useful to establish what we know about where the economy is at the moment.

The latest official data suggests that in December the level of activity was around 6 per cent lower than it was when the pandemic hit the UK in February, after rising slightly in the final month of last year.

December’s performance was better than expected, but it’s very likely that there will be a return to contraction in the first quarter of this year, as a result of the reimposition of a nationwide lockdown.

Last week the Bank of England projected a 4 per cent drop in the first quarter of the year. This would leave the economy still down around 9 per cent below its level in early 2020 – an economic hole still roughly double the size of that which was created by the global financial crisis in 2008.

It took the UK five long and painful years to crawl out of that hole and regain its pre-crisis level of activity – one of the slowest recoveries on modern record.

The Bank of England thinks this recovery should be more rapid. It sees the economy getting back to its pre-pandemic peak in the first quarter of 2022 – so a recovery time of just two years.

The bank sees the economy growing pretty strongly in the second and third quarters of this year thanks to the vaccine rollout, which allows the economy to reopen and activity to resume.

There are no specific forecasts in Andy Haldane’s article but he does suggest that the UK annual GDP growth “could be in double-digits” this time next year.

This would be consistent with the bank’s latest projections, but his article suggests that he thinks the recovery could actually be considerably stronger.

He cites two main reasons for his optimism. The first is psychology – that after a year of being unable to eat out and socialise people are going to want to make up for that by consuming more than they normally would.

“That might mean two pub, cinema or restaurant visits a week rather than one,” he says.

The second reason is forced savings. Unable to spend, but with their income still rolling in, many households have been accumulating savings since last year – around £125bn in total over 2020 according to the bank’s calculation. Haldane thinks this will give them considerable firepower to spend when restrictions are lifted.

Many businesses have also racked up large cash balances in this crisis – around £100bn over normal levels according to the bank – which he also thinks will give them a war chest to spend on investment when the restrictions are lifted – and which he thinks they are more likely to do if consumer spending is coming back strongly.

So is all this plausible? Most economists agree there will be some kind of bounce back in consumer spending later this year, presuming that the vaccine rollout continues successfully and the economy is permitted to open up steadily from March.

But the bank and Haldane seem to expect a stronger rate of growth than many analysts this year.

It’s by no means obvious that people will consume more than they normally would in order to catch up on foregone consumption in 2020. People might eat out more, but will they have twice as many haircuts, for instance?

And many less well-off households, which have taken on debt in the crisis, will not be able to.

I would liken the ‘coiled spring’ to my old Ford Fiesta that tended to kangaroo away from the toll on the Humber Bridge

Simon French, Panmure Gordon

And sectors that see a surge in demand might well struggle to cope with it, forcing them to put up prices. Think of popular wedding venues.

The economist Simon French of the stockbroker Panmure Gordon expects sporadic and mini surges rather than an unbroken boom.

“I would liken the ‘coiled spring’ to my old Ford Fiesta that tended to kangaroo away from the toll on the Humber Bridge as I showed my inability to change gear,” he says.

Nor is it clear that businesses, many also laden with extra debt taken on to survive (with more than £70bn borrowed from government emergency schemes), will be prepared to drive an investment boom. Scarred by the biggest slump in three centuries, managers might want to retain relatively large cash balances as insurance against future shocks.

As for government spending and support, the planned withdrawal of the furlough scheme from April could yet impart a negative shock to households and businesses. Unemployment is currently projected by the bank to remain higher in the second half of this year than it is now, peaking at 7.8 per cent in the third quarter.

And on top of all this there’s talk from the government that some distancing restrictions will have to remain in place well into the year, which may hinder activity.

Hopefully, Haldane will be proven correct about the latent springiness of the UK economy.

But if economic policymakers have learned anything from the crisis it should be that preparing for the worst is better than hoping for the best.