Tough measures put in place to control the spread of a new Covid variant in the UK could lead to slower economic growth next year than first predicted, a leading think tanks has today warned.
The Resolution Foundation says the economy could be six per cent smaller by Easter than first forecast by the UK’s budget watchdog last month.
It says economic growth for 2021 will be slashed from 5.5 to 4.3 per cent as a result.
The foundation warns of ‘tighter, longer lasting and more widespread’ restrictions due to Covid-19 next year and said unemployment could ‘rise sharply’.
And it urges the Government to target support measures towards the hospitality and leisure sectors until a recovery is secured.
But, in a ray of hope, the foundation also predicts the vaccine roll-out will lead to a ‘rapid recovery’ in people rushing back to pubs, bars and restaurants once restrictions are lifted.
The report says the lifting of restrictions could spark a 1920’s-style economic boom – similar to that seen in America after the Spanish Flu outbreak.
In the report, it says: ‘The New Year looks set to have a distinct 2020 feel to it.
Britain is the world’s fifth-largest economy again, league table shows
Britain has become the world’s fifth-largest economy once again, despite suffering a deep recession as a result of the coronavirus pandemic.
According to the annual league table produced by the Centre for Economic and Business Research (CEBR), the UK has leapfrogged India and is set to push further ahead of seventh-placed France in the decade after Brexit.
Britain had fallen behind India to be the sixth-largest economy last year but the Asian nation has been pushed back below the UK in dollar terms following a deep recession related to the coronavirus pandemic and a steep fall in the rupee.
The UK’s climb back up the league table is despite a cumulative fall in GDP in the first half of 2020 of 21.2 per cent as the first national lockdown – imposed in March – hammered the economy.
The leading CEBR also forecast that China would overtake America as the biggest economy in the world in 2028, five years earlier than expected.
‘With a new variant of coronavirus raising the infection rate markedly, restrictions will need to be tighter and longer lasting than expected even a few weeks ago.
‘The restrictions could mean the economy being six per cent smaller by Easter than forecast by the Office of Budget Responsibility just last month, reducing growth for 2021 as a whole from 5.5 to 4.3 per cent.
Video: Optimistic Outlook For New Year, IG Asia’s Pan Says (Bloomberg)
‘Policy makers should target support on firms and households affected, particularly in the hospitality and leisure sectors, to bridge the gap to the vaccine induced return to normality.’
Relying on Boris Johnson’s previous promise that normal times could return by Easter – due to the roll-out of a Covid vaccine – the report urges the government to continue its support measures for businesses until restrictions are lifted.
Hospitality, leisure and the non-essential retail sector, which it says will remain the hardest hit, will need the most support until then, the report adds.
It also warns that when the pandemic is over, lower-income families may be the most cautious about spending again – due to significant losses in traditionally low-income jobs such as retail and hospitality.
But the report says that once restrictions are lifted, the UK economy could enter a 1920s-style economic boom.
The report says Britons have squirrelled away more than £186billion throughout the pandemic, with those on higher incomes in particular ‘boosting their financial buffers’ – having been unable to spend as usual.
The report says: ‘Because less has been spent in 2020, we’ve been saving like never before.
‘The extra cash is being held by the very same people that drive hospitality spending (higher and middle income families).
‘Not only do the top devote a greater share of their consumption to non-essentials like hotels and restaurants, they do more consuming full stop.
‘A key judgement for later in 2021 is how quickly social spending will bounce back once a semblance of normality returns. Our answer is: very quickly indeed.
‘As was the case with America’s roaring twenties following the Great Influenza pandemic people are desperate to get back to some social contact.
‘Some will (at least temporarily) actually want to spend more time in restaurants and bars than they did pre-crisis: there’s a lot of lost ground to make up.’
But while the report says the hospitality boom will lead to an increase in employment, the foundation warns it will not solve the wider economic issues.
The foundation says the government must continue its support ‘well into the second half of next year’ to keep the economy moving.
It says: ‘Even if there is a strong bounce back in social consumption in the second half of 2021, this does not mean all will be plain sailing.
‘A robust recovery will therefore need to be much broader based.
‘As the economy reopens with vaccine rollout and the labour market unfreezes itself as the Job Retention Scheme (JRS) is phased out, the crisis will become a much more typical downturn: across a broad range of sectors unemployment will rise and incomes will fall.
‘Policy therefore needs to adjust – in particular, fiscal policy will need to transition from targeting support at closed sectors to more broad-based support for that recovery.’