Britain’s bounce will put us on top of the world
SPRING has sprung for the UK economy. This year it is set to grow at its fastest 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 road map.
Retail spending is already above pre-Covid 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 seeing transactions and prices rising at pace in all parts of the country.
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 hiring intentions rapidly approaching pre-Covid levels.
A year from now, it is realistic to expect UK growth to be in double digits, 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, that could slow or even derail the recovery. But my view is it is more likely the UK economy will power through, moving swiftly from bounce-back to boom.
Households and businesses will, I suspect, maintain the momentum in demand. 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.
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, if sustained, will put persistent upward pressure on prices, risking a more protracted – and damaging – period of above-target inflation.
That is why, at last week’s meeting of the Bank’s Monetary Policy Committee, I voted to begin throttling back the support to the economy. Gently taking our foot off the accelerator now reduces the risk of a handbrake turn down the road.
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.
With the economy bouncing back and inflation risks on the rise, now is the time to start tightening the tap to avoid the risk of a future inflationary flood.