Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
It looks to me as if the UK economy is going to perform markedly better than currently, generally forecast – provided, that is, there are not further unwanted lockdowns.
The IMF forecast is also positive, forecasting an upturn from a 3.5 per cent contraction for Global GDP last year to a 5.5 per cent expansion this year. Again, this does of course hang on a successful Pan EU, vaccine rollout. With the 2020 downturn twice as deep as that which followed the Lehman collapse, so the 2021/22 recovery should be all the greater.
The strongest growth forecast remains the US at 5.1 per cent growth, reflecting particular massive stimulus support from government. Japan’s growth forecast increased marginally to 3.1 per cent with 8.1 per cent and 11.5 per cent, respectively, for China and India. The relatively smaller but faster growing Asian economies – Indonesia and Malaysia – will grow at 8.3 per cent – with the Asian economies now representing a third of the world economy.
In the case of the UK, however, the IMF forecast continues to understate. The IMF is the global lender of last resort and the single most influential institute of economic governments. Last year the IMF forecast the UK economy contracting by 10 per cent – the biggest fall of the G7 countries.
It is correct the UK was particularly susceptible to the Coronavirus pandemic, reflecting the international nature and population density of London. But the key factor responsible for the misleading figures is that the UK public sector includes in its GDP growth data, in a way relating not to spending, as with other nations, but to outcomes.
This means that when schools are closed and NHS operations are down, as during the lockdown, government consumption expenditure – a huge chunk of any advanced economy – drops off a cliff for GDP measurement purposes – even though State spending as a whole is growing fast.
As a result, the irony is that this is why the UK public sector registered a double-digit percentage contraction in our 2020 GDP numbers, while growing fast across the Eurozone.
For purposes of comparison, an expansion of 10 per cent should have been allowed for. The outlook for the real economy for the coming year should therefore be substantially positive. The IMF forecast of 4.5 per cent, and not adjusted for the public sector distortions is only marginally ahead of the Eurozone at 4.2 per cent. The actual, comparable rate allowing for these distortions looks to be of the order of 10 per cent – reflecting the vast vaccine rollout occurring and the fulfilment of massive pent up demand.
The IMF numbers do not acknowledge this conceptual wrinkle stemming from Britain implementing internationally agreed methodological changes before other major economies: and if they did the UK’s 2020 GDP contraction would be near the middle of the G7 pack. The IMF estimate is that the UK economy will expand by 4.5 per cent this year, only slightly faster than the Eurozone. With lockdown continuing into 2021 the same statistical anomaly relating to GDP, when school and health services were disrupted is impacting on current growth numbers as viewed by the IMF.
Of particular importance in accommodating economic recovery is that the G7 can now apparently live with much higher levels of public sector debt, post the Coronavirus crisis. Fiscal rules clearly need some rethinking. But for the next two years, measured meaningfully, the UK should be the fasted growing of the G7 economies. Also, the world will realise that Brexit is no disaster but rather a big positive which could harness growth.
It is forecast that an early end to Covid rules would lift the economy by £26 billion on top of the stimulus from the UK’s advanced vaccination programme.