All being well a large measure of normality will return to daily life at the end of June. By around that time those aged over 50 should have received two doses of vaccine, with the government aiming to offer one dose to all adults by the end of July.
The re-opening process last summer was characterised by a good deal of reluctance on the part of consumers, on account of not feeling safe. With the protection afforded by vaccines, that shouldn’t be such an issue this time around. It can therefore be hoped that those services which have been hardest-hit during the past year, especially non-food retailing, hospitality, accommodation, tourism, and entertainment will experience a strong rebound in activity. Unfortunately, the prospects are more uncertain for any activities related to international travel, at least until a consensus is reached on how people can safely cross borders.
The revival will be propelled by pent-up demand, a strong desire to resume something akin to normal life, and powerful stimuli from the government, the Bank of England, and, perhaps most important of all, the savings of ordinary people.
For its part the government won’t be taking away the support measures overnight, with most of them scheduled to run until the end of September, and the VAT cut for hospitality and leisure services to run until April next year. In his recent Budget the Chancellor also offered a generous tax break for businesses in the form of the “super deduction”. This measure, which expires in April 2023, is designed to encourage firms to invest in their businesses, and to do so now, rather than waiting several years as happened after the financial crisis. For its part, the Bank of England is committed to preserving easy monetary conditions. Although negative interest rates have been taken off the table, the first interest rate hike is still a few years off.
Savings: the impetus for recovery
But it’s the savings accumulated by households during the past year that will provide the greatest impetus for recovery. During the latest lockdown, bank deposits have been expanding at a rate of nearly £20 billion a month, so that by the spring the amount accumulated will run to around £200 billion. Much will depend on how much of this money is spent, what it’s spent on, and how quickly.
Given how much new debt the government has taken on in order to support the economy through the crisis, the ideal outcome would be if households used a large chunk of those extra deposits either to pay down some of their existing debts or as an alternative to taking on new ones. People have already made a start on this process, running down debt on credit cards, for instance. Once the outlook becomes more certain it’s likely that they’ll opt to run down other borrowings, such as mortgages and student loans. Most people buy their cars on Personal Contract Plans (PCPs), but when current contracts expire, they may opt to put in a bigger deposits, or even pay cash.
Assuming that just a tenth of this accumulation of savings is spent on current consumption between now and the end of next year, that’s still consistent with an economy expanding by nearly 5% this year, and by a little over 5% in 2022. That will be plenty enough to ensure that publicans, restaurateurs, and entertainment venues all enjoy a strong revival. If businesses also embrace the new “super deduction” the rate of growth could be even stronger.
But it’s the savings accumulated by households during the past year that will provide the greatest impetus for recovery.Mark Berrisford-Smith, Head of Economics for HSBC UK, Commercial Banking.
Changes to the business landscape
This period of recovery is likely to bring considerable changes in the business landscape. To begin with, many firms will need to adjust to market conditions that won’t be the same after the pandemic as they were before. Knowing quite how consumer and business customers will behave after such a massive shock is fraught with uncertainties. What it boils down to is whether people want to get back to life just as it was, or whether some of the innovations of the pandemic will become permanent features of life. Second, for all the help that has been on offer from the government, some businesses, especially those involved in close contact services, will have little option but to restructure. Even if conditions in their markets return to pre-pandemic normal, they may well find that they are carrying too much debt and so will need to sell some assets. These sales will provide opportunities for other businesses who are looking to expand into these areas.
Then, there is the aftermath of Brexit, which will continue to ripple through the economy for the next few years. The abrupt change in the trading relationship between the UK and the EU means that many supply chains will need to be configured differently. British firms may find themselves cut out of some EU supply chains, on account of higher costs and greater complexity, and vice versa. The government is negotiating trade agreements with other countries, but these won’t replace the EU’s Single Market, and although they may provide worthwhile opportunities for individual businesses, they won’t register on the UK’s economic growth dial.
But provided that the recovery endures, one thing is for certain. There will be plentiful opportunities for merger and acquisition activity, as businesses adjust to the post-pandemic and post-Brexit worlds. Certainly, there is already evidence that the lifting of Brexit uncertainties has already prompted keen interest in UK assets from overseas buyers, a process helped along by the relatively cheap valuations of British listed companies.