The UK economy - better days are coming

Can you see the light yet?

The Covid alert level has been moved down from four to three, meaning there’s a lower risk of a rising level of transmission compared to earlier this year.

Across the UK indoor hospitality has reopened, and here in England household mixing has returned – as well as some foreign holidays.

Things seem to be going in the right direction.

The UK economy so far in 2021

It’s not just what we can do on a day-to-day basis that’s looking up either. After more than a year of uncertainty and – quite frankly – some gloomy predictions, the UK economy is improving too.

Across the first three months of 2021 the UK economy shrank by 1.5%. Although this is still a contraction, the numbers are significantly better than the 4% slump forecast in February – especially as the first quarter of the year was tarred by the toughest restrictions seen since those brought in during the first wave of the pandemic.

It’s also encouraging to see that the reopening of schools and strong retail spending helped the economy grow 2.1% in March – the fastest monthly growth since August 2020.

A turning point

Whilst the economy is still 8.7% smaller than it was before the pandemic, March’s data could finally signify that a well-needed boost is on the way for the economy. In May, the Bank of England (BoE) stated that for 2021, Britain is on track for its strongest growth since World War II.

As things stand, the country’s vaccine-led recovery from the sharpest hit to the economy in over 300 years is going at a faster-than-expected pace. And if things carry on moving as they are, the Bank expects growth of 7.25% during 2021 – up from the 5% growth previously forecast.

So what’s changed?

First off, the roaring success of the vaccination programme should – fingers crossed – allow all restrictions to be lifted earlier than the BoE previously thought at the start of the year. And with this in mind, it’s believed that consumer spending will be the main driver behind the recovery.

Households have saved more than £150 billion in extra savings over the past year, and the BoE expects people to spend an estimated 10% of these savings – paving the way for a strong rebound in spending.

If all goes well, the sectors that have suffered the worst impact of lockdowns expect to see an uplift as the economy fully reopens.

Second on the list is the government’s decision to extend the furlough scheme from April to September.

Before the extension was announced, there could have been a scenario where wage support ended before restrictions were lifted – leading to workers in sectors such as hospitality and leisure facing the threat of unemployment.

But with the extension of the scheme it’s thought this will be largely avoided, which is why the forecast for the peak number of people to be unemployed has been cut sharply from 7.75% to 5.5%.

What about inflation?

There are some concerns that a spike in inflation is on its way.

Stable inflation is a good thing for stock markets, as this is usually a sign that economies are growing. But we don’t want too much of a good thing.

As an investor, one of your aims is to beat inflation on the returns you make. For example, if your investments grow 4% in a year and inflation is at 2%, then you’ve beaten inflation and made a real return of 2%.

The big question is then, if a spike in inflation occurs will it be temporary or here to stay?

There’s a general consensus that as consumer spending increases, inflation will rise above the BoE’s 2% target. But this should only be short-term.

With stimulus spending still in full flow, the government are as keen as possible to keep inflation and interest rates low for the time being – meaning long-term and overly high inflation shouldn’t be something to worry about just yet.

Expert view - How have markets reacted?

Mark Butterworth

Quarter one of this year saw the trends that were established in the last months of 2020 continue.

Mark Butterworth, Head of Financial Advice Planning and Research.

"Investors are still favouring the types of companies that tend to do well as the economy improves, such as retail, leisure and industrial – those value style companies we discussed in April’s Skipton Insight.

“Off the back of the Bank’s predictions for the economic recovery, the FTSE 100 hit a 14-month high, and over in the US markets continue to hang around their all-time peaks.

“But it’s important to remember that economic performance doesn’t always match-up with market performance either. Once markets have got over their initial optimism, they could remain at roughly the same value or even begin to fall.

“And yet, it’s just as possible that markets will continue to go from strength to strength as post-pandemic optimism continues to spread as the final restrictions are lifted.

“The truth is, nobody knows. Not only are markets unpredictable, but the route out of the pandemic is a complete unknown to governments, markets and investors alike.

“Which is why as a long-term investor it’s important you hold a diversified portfolio – to be as prepared as possible for all scenarios.

“There are also several other factors to consider going forward, not just the economy. The full effects of Brexit have yet to make themselves known – something we’ll keep you updated on.

“There are still virus-related risks to consider, with high infection rates in India and other countries. And the furlough scheme – which is supporting 4.2 million people who could otherwise be unemployed – has yet to come to an end.

The main thing to take away from here is that most indicators show the economic recovery is in full swing and is outpacing expectations – something we should take great encouragement from.”

Please bear in mind that our comments should not be considered as advice, and the economic and market conditions of the past may not be repeated in future.

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