The year will open with a trade shock as Boris Johnson’s government at last fulfils its
pledge to “get Brexit done”: Britain’s transition period in the European single market
and customs union comes to an end on December 31st 2020. The difference between
the once-feared no-deal outcome and the kind of thin trade arrangements that the
government has sought to negotiate is relatively minor in the longer run. And in the
short term both will lead to disruption. Carmakers and the aerospace industry, whose
just-in-time processes were built on the assumption of easy cross-border movement in
Europe, will for a while struggle to adapt. Retailers will face shortages of some goods as
customs-clearance procedures take time to smooth out.
But whereas Brexit dominated British political and economic discourse from 2016 until
2020, it will be the recovery from the recession caused by covid-19 that takes centre
stage in 2021. Britain experienced its deepest recession in at least a century in the first
half of 2020. Although the initial bounceback was relatively rapid, the recovery slowed
towards the end of the year. The government’s furlough scheme, which ran from April
to October, helped keep unemployment down through the early stages of the pandemic.
But as job losses mount and hiring remains low, unemployment will head to its highest
level since the early 1990s.
With labour-intensive industries such as (physical) retail and hospitality both suffering
from social-distancing regulations and the rise of working from home, joblessness will
remain stubbornly high throughout 2021. The “kick-start” scheme introduced in the
autumn of 2020 to help young people into work will be followed by more job-creation
schemes in 2021 as the Treasury fights to bring unemployment down.
A persistently high government deficit will lead to much angst, but little action to sort it
out. As long as borrowing costs remain low the chancellor of the exchequer, Rishi Sunak,
will be content to talk about the need for tough action later in the parliament. No
serious discretionary fiscal tightening will take place before 2022 at the earliest. Instead
both the spring and autumn budgets in 2021 will be preceded by the usual briefing on
the need for tax hikes on pensions, the self-employed and high-earners, before the
chancellor rules them out for the near term. But one focus for the government will be
infrastructure spending, with the chancellor and prime minister both keen to get their
“levelling-up” agenda, to help Britain’s disadvantaged regions, back on track.
Another big issue for policymakers in the second half of the year will be a rising tide of
defaults on government-backed “bounce-back” loans. This scheme, under which the
Treasury offered a 100% guarantee on loans of up to £50,000 ($65,000), was
introduced in May 2020 to support small and medium-sized firms. With a government
guarantee, banks felt less need for detailed due diligence, and stepped up their lending.
Some £38bn was loaned out in the scheme’s first five months, to 1.6m businesses. The
first interest and capital payments will be due in May 2021—and bankers fear that as
much as 40% of the loans will go bad quickly. The government will either have to
pursue hundreds of thousands of small businesses through the insolvency courts, or
write off billions of pounds by converting the loans into grants.
Despite pandemic- and Brexit-related supply disruptions, inflation will stay low. The
weak jobs market will hold back wage growth, and demand will remain soggy. The Bank
of England will leave interest rates at 0.1%—and is more likely to expand its