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UK economy set for record growth in 2021 — but it won't feel like it

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3-min read
DECEMBER 20th 2020: Emergency lockdown restrictions are imposed in The United Kingdom during the worldwide coronavirus pandemic as health officials take measures to prevent a new variant of the virus from affecting greater Europe. - File Photo by: zz/KGC-247/STAR MAX/IPx 2020 12/5/20 General views of Christmas holiday shoppers on Oxford Street and Regents Street in London on December 5, 2020 - the first Saturday after lockdown restrictions were lifted in The United Kingdom during the worldwide coronavirus pandemic. Many retailers have struggled to stay in business during the financial storm caused by the pandemic - long lines were seen at stores such as Debenhams and Topshop and Topman who recently went into Reorganization Administration and face possible bankruptcy and are offering clearance sale prices on all merchandise just in time for the Christmas holiday shopping season. (London, England, UK)
Christmas holiday shoppers on Oxford Street and Regents Street in London on December 5, 2020. Photo: KGC-247/STAR MAX/IPx/AP

2021 is set to be a historical year for economic growth in Britain — but it won’t feel like it.

Private sector economists expect the UK GDP to expand by an average of 5.4% next year, according to forecasts compiled by the Treasury. That would mark the biggest leap forward for the economy in modern history. The Bank of England is even more bullish, forecasting growth of 7.25% in 2021.

Forecasters believe the roll-out of COVID-19 vaccines will allow everyday life — and the economy — to get back to something like normal. That will allow GDP to rapidly bounce back, a little like taking the hand break off a car and rolling down hill.

READ MORE: From £12bn to £280bn: How UK spending on COVID spiralled

For most people, though, it won’t feel like a banner year. Unemployment is forecast to keep rising and house prices are expected to fall.

The apparent contradiction lies in the context. Britain’s bumper growth in 2021 will largely be driven by the size of its economic collapse in 2020.

“We’ve actually performed the worst amongst all of the European economies and that includes Spain as well,” said George Buckley, Nomura’s chief UK and Eurozone economist. “The ones that stand out like a sore thumb are the UK and Spain.”

READ MORE: European banks hope for better 2021 after year to forget

Britain’s economy is forecast to shrink by around 11% in 2020. Compare that to Germany, where GDP is on track to fall by roughly 5.5%, or France, where the economy looks likely to contract by around 9.5%.

“The UK has a huge service sector, it’s worth about 80% of GDP,” said Buckley. “That means that we’ve probably taken more of a bigger hit because services have been more impacted than manufacturing.”

Britain has, in effect, fallen down a larger hole than other countries. It gives us more wall to climb to get back to ground level. While the numbers on both the way down and up will be larger, the end result will be the same.

“If you have a bigger deeper fall in one year, you’re probably going to get a much quicker rise the next,” said Buckley. “That’s how it works.”

READ MORE: Goldman Sachs predicts big rebound for UK economy in 202

Rather than comparing national growth rates, a more important measure is how long it takes a country to get back to pre-pandemic levels. On this point, economists are divided. The Bank of England expects the UK to reach 2019-levels by late next year, while the Office for Budget Responsibility thinks it won’t happen until late 2022.

Nomura is even more bearish, forecasting a return to pre-pandemic levels only by the end of 2023.

“We think it’s going to be prolonged recovery, a recovery nonetheless but a prolonged one,” Buckley said.

After a rollercoaster 2020, economists are less sure than ever that their forecasts will come to pass. Recovery next year depends on a smooth roll out the vaccine and the hope that the pandemic doesn’t take any more unexpected turns. Recent news of a more transmissible COVID-19 mutation makes this far from certain.

“The best of forecasts could end up being scuppered by something that is ostensibly unpredictable,” Buckley said.

Watch: Why can’t governments just print more money?