What is the Economic Outlook for 2021?

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It’s a tumultuous period for the UK. Unsettled by back-and-forth Brexit negotiations and a global pandemic, the economy has taken a serious hit. Across the board, numbers are dropping to the lowest they have outside the second world war at best, and the lowest they have in centuries at worst. GDP has contracted by 11.3 percent in 2020.

The new trade deal saves the country from an otherwise truly bleak situation heading into 2021, but recovery will still be a long and challenging road. Some experts predict that the economy is not likely to return to pre-COVID levels before 2024. Below, we focus on factors that will heavily impact economic growth next year.

Closures Will Still Affect Business

The Pfizer-BioNTech vaccine is a tangible light at the end of the tunnel for many and with the recent approval of the Oxford-Astrazeneca vaccine (which is far cheaper and can be stored at far lower temperatures) this light has grown even brighter. However, the return to normality isn’t here yet, with the rollout prioritising the elderly and health care workers first, which means the majority of the population will need to continue practicing social distancing to minimise risk before they get a jab.

That means contending with rolling lockdowns and business closures well through the spring. While companies can expect another economic dip, data suggests that businesses in some sectors are more resilient this time around, and consumer spend is less flighty. For instance, the drop in retail growth due to the second lockdown is 2.6 percent lower than where it was in the aftermath of February’s lockdowns.

Consumer Spend Is Changing

While sweeping unemployment and closures left in the wake of COVID have reduced consumer spending power, it hasn’t gone away entirely. People are still spending and purchasing, albeit from different platforms and on different commodities. Consumption has been increasing by 2 percent a week since May.

E-commerce and online retailers have been big winners during this period. Shoppers spent 47 percent more on online shopping last November than they did the previous year, according to data from the British Retail Consortium. However, the change is not expected to carry onto next year. The retail ecommerce market is set to decline by 6.3 percent in 2021 as things stabilise.

Real Work Remains After the Trade Deal

The UK’s economic woes were further compounded by years-long uncertainty over Brexit. But the uncertainty has finally come to an end, with a trade deal passing through just seven days before the end of the transition period.

The deal releases fears over leaving the EU without tariff-free access to their single market, and paves the way for recovery. The value of the pound has already risen following the deal. However, the instability of the last four years is expected to cast a long shadow and uncertainty remains about how severely the extra regulatory and customs checks will affect businesses reliant on exporting to the EU. Analysts predict it will be some time before the UK market bounces back to pre-referendum numbers.

Businesses will also have to scrabble to implement new processes around documentation and procurement, as the last minute deal did not afford much time to prepare.

Unemployment Will Continue to Rise

The pandemic has cleaved through the job market across every sector. Over 370,000 people have been made redundant, cutting unemployment rates down to 75.2 percent, the lowest it's ever been in a decade. Jobs are expected to dip through 2022.

The situation is expected to further be exacerbated by the end of furlough subsidies. Amidst increasing pressure, chancellor Rishi Sunak has extended the furlough scheme another month into April next year. While that helps curb the unemployment rate, the announcement may have been made too late to prevent some layoffs.

Further, while the scheme brings temporary relief to millions of businesses and their employees, some see the worrying implications behind it. “Realistically if it's extended until April, this means we're not going to get back to work until at least May,” says Holly Muldoon, the owner of London-based staffing agency RubyLemon.

The Year of Recovery

Hampered by uncertainty over rolling lockdowns and protracted Brexit negotiations, this year has plummeted the UK’s economy to its biggest drop in GDP since 1709. Recovery will be an uphill and slow slog, but fortunately GDP growth is expected to start the climb as early as next year. Experts forecast a 6 percent growth rate in 2021.

The next year will be focused on recovery and supporting businesses and workers. Further support is needed for businesses and employees who have run out of road to run, even with the furlough scheme. Much of the heavy lifting coming into next year will need to be done by the government. The International Monetary Fund believes the country has the capacity to extend support further. “We welcome that the authorities have committed to deliver it as long as necessary to boost expectations and confidence. The policy space exists to do this,” says Managing Director Kristalina Georgieva.

The IMF also said that raising taxes will be inevitable and necessary, but should not immediately be the focus coming into 2021. Some semblance of economic stability should be orchestrated first before cutting spend on support and adjusting tax rates.

Several factors will help prop up the economy even further. The development of more viable vaccines will help kick start consumer spending and restore business trust in the coming year. These vaccines help businesses plan a little more optimistically than when they were measuring against a nebulous, undefined “end” to the pandemic.

2020 was a year shrouded in uncertainty. Yet with COVID vaccines finally getting rolled out and Brexit finally coming to a resolution, we can at least now look forward to a clearer picture of the way forward, difficult as that may be.