Britain’s tennis ball bounce will put us on top of world

SPRING has sprung for the UK economy. This year it is set to grow at its fastest pace since the Second World War. It is easy to see why. As Covid infection rates have fallen sharply and the vaccination programme has been rolled out, the health risks facing us have plummeted.

This is encouraging people to return with gusto to shops, pubs and restaurants as restrictions are lifted in line with the Government’s roadmap.

Retail spending is already above preCovid levels. Travel, footfall and restaurant and pub bookings are recovering rapidly towards those levels.

This is boosting households’ confidence and encouraging them to splash more of the £150billion in cash they stockpiled during lockdown.

Surveys suggest a growing fraction of these savings are now being spent, contributing to the 8 per cent growth in household spending the Bank of England now expects in the second quarter of this year – the second fastest quarterly growth rate ever, only behind the third quarter of last year, which came from a much lower base.

Some of these savings are also being used as a deposit for a house.

The UK housing market is currently going gangbusters, with transactions and prices rising at pace in all parts of the country, supported by the extension of the stamp duty exemption in the Budget.

This bounce in confidence and spending is not confined to consumers.

Businesses, too, are putting their accumulated £100billion of savings to work, with investment intentions picking up and firms’ hiring intentions, as reflected in posted vacancies, rapidly approaching pre-Covid levels.

With hiring strong, and with the extension of the Government’s furlough scheme to September, it is possible that as many new jobs will be created as are lost this year, leading to little or no further rise in unemployment.

In its latest forecasts, the Bank revised down its estimate of peak unemployment from 7.75 per cent to less than 5.5 per cent. It is currently around 5 per cent.

AYEAR from now, it is realistic to expect UK growth to be in doubledigits, activity to be comfortably above pre-Covid levels and unemployment to be falling.

Such a tennis ball bounce in the UK economy would put it at the top of the G7 growth league table.

It is possible this could be the high- water mark for the UK economy.

There are certainly still some large risks, including from the virus and from the debts accumulated during lockdown, that could slow or even derail the country’s recovery.

But my own view is that it is more likely the UK economy will power through, rather than relapse, in the months ahead, moving swiftly from bounce-back to boom.

Having regained their spending and socialising habit, and with money in their pockets, households and businesses will, I suspect, maintain the momentum in demand.

Indeed, as long as health and unemployment risks remain low, they will be encouraged to put even more of their savings to work.

This could generate a virtuous circle of higher spending, boosting jobs and incomes in ways which support further spending.

The key, policy-wise, will be to ensure this boom does not turn to bust.

The most likely cause of such a bust, history tells us, is an unwanted bout of inflation.

Inflation inflicts collateral damage on our finances, squeezing the purchasing power of our pay and causing rises in the cost of borrowing.

And experience during the 1970s and 1980s demonstrates that, once out of the bottle, the inflation genie is notoriously difficult to get back in.

By the end of this year, inflation is likely to be above its 2 per cent target, largely due to the temporary effects of higher energy prices.

At that point, the UK economy is likely to be growing rapidly above its potential. This momentum in the economy, if sustained, will put persistent upward pressure on prices, risking a more protracted – and damaging – period of above-target inflation. This is not a risk that can be left to linger if the inflation genie is not, once again, to escape us.

That is why, at last week’s meeting of the Bank’s Monetary Policy Committee, I voted to begin throttling back the degree of support provided to the economy.

To BE clear, this is not a case of slamming on the brakes, but rather gently taking our foot off the accelerator. doing so now reduces the risk of a handbrake turn – for borrowing costs and the economy – down the road, with all of the disruption this would entail for our jobs and finances.

By the end of this year, close to £1trillion of extra liquidity will have been provided by the Bank to the UK economy since the global financial crash, almost half of it over the past 12 months.

This support has contributed importantly to putting the spring back into the economy’s step.

But with the economy bouncing back, and with inflation risks on the rise, now is the time to start tightening the tap to avoid the risk of a future inflationary flood.