British recovery shows lesson of Dante’s Paradiso

The UK has regained its prepandemic levels of GDP long before Germany, Italy and Spain, and slightly before the eurozone as a whole. It is ahead of Japan and Canada.

This is a remarkable outcome when you think that the OECD forecast a year ago that Britain would limp into 2022 with output still 6.4pc below its pre-covid peak, an economic basket case languishing along with Argentina at the bottom of the developed world’s league table.

The IMF also predicted that the UK would be left behind in perma-slump through 2021 and into 2022. The global institutions got it seriously wrong. Why? It certainly looked terrible in the blackest days of mid-2020, when the UK seemed to be suffering the worst economic contraction of the major Western economies, even as it was recording (or seemed to be recording) one of the worst tolls of excess deaths from Covid – another illusion of timing and misused data as we now know.

The UK downturn appeared to be an outlier in relative terms because of the purist way that the Office for National Statistics measured public sector output, as did the French data office, which made France look worse than it was.

The UK’S coiled-spring recovery (and the French recovery) was the predictable flip-side of this distortion. The UK economy has grown 8pc over the last year, more or less as predicted last Easter by Capital Economics, Investec, Jefferies and Goldman Sachs.

Output in November was 0.7pc higher than before the pandemic. Omicron will take a bit back in December but the light-touch response of the Government, vindicated by booster vaccination and widespread immunity from past T-cell memory, ensures that any economic hiccup will not seriously hold back recovery.

German output is still far short, even though we are not quite comparing like with like. The German data agency warned that the economy faces contraction this quarter of minus 0.5pc to 1pc. There are growing fears of an outright recession over the winter.

This is an extraordinary reversal of fortunes. Germany was universally praised in the first wave of Covid for limiting the economic damage.

Its Kurzarbeit system designed to help companies keep workers employed part-time was hailed as a model.

But whether it is because of a shortage of semiconductor chips for the car industry, and overreliance on Chinese supply chains, or whether it is a deeper malaise that has coincided with Covid and has yet to be fully diagnosed, the German recovery has been strangely weak.

It is noteworthy that the UK saw a record £25.5bn last year of technology start-up funding from venture capital, more than in Germany and France combined.

This has lifted the number of British “unicorns” to 75, mostly in areas such as AI, digital tech, biotech and blockchain. People see what they want to see in Brexit, according to their ideological bias. This infects analysis.

Italy has not done too badly thanks to Mario Draghi’s Bidenesque New Deal spending but the Italian economy probably ended last year 1pc below pre-covid levels nevertheless. Spain is still almost 5pc lower.

Yet the rise in public debt across the Club Med bloc is vertiginous, and remember that these states are sub-sovereign borrowers without a currency and central bank of their own – ie they cannot unilaterally print their way out of trouble in extremis.

All told, the euro area is unlikely to recoup lost output until early 2022. “I think it is fair to say that eurozone GDP was probably still just short of its pre-pandemic level in the fourth quarter,” said Andrew Kenningham, chief Europe economist at Capital Economics.

Caution is in order. The UK has in a sense pulled forward its recovery and flattered the picture. Rishi Sunak’s “super deduction” cut the effective marginal rate of corporation tax to zero, enticing companies to invest their bloated corporate savings, which reached £100bn during the pandemic, 50pc above normal levels.

The Bank of England has been running an extremely loose monetary policy with the lowest real rates in the rich world, and perhaps the lowest in peacetime history.

It is rocket fuel for overheating. The current account deficit is running at 4pc of GDP.

But there again, a bad recovery is better than no recovery. As for the sequence of events, one is reminded of Canto XIII in Dante’s Paradiso:

“Nor yet shall people be too confident In judging, even as he is who doth count

The corn in the field ere it be ripe.

‘The OECD forecast a year ago that Britain would limp into 2022 with output 6.4pc below its pre-covid peak’

For I have seen all winter long the hawthorne

First show itself dried and sterile, And then bring forth its flower in the Spring ;

And I have seen a ship direct and swift Run o’er the sea throughout its course entire,

To perish at the harbour’s mouth at last.

For one may rise, and fall the other may.”