The coronavirus vaccine will help the UK economy recover more rapidly than most experts think, according to economists at consultancy Capital Economics (CE) who predicted Covid will barely affect growth in the long-run.
The respected economics consultancy predicted the economy would grow by about 7.5 per cent in both 2021 and 2022, after shrinking by a record 11.5 per cent this year.
That is a much quicker recovery than most economists expect. The government’s official forecaster last month predicted growth of 5.5 per cent in 2021 and 6.6 per cent in 2023, after an 11.3 per cent contraction in 2020.
Capital Economics said vaccines “are a gamechanger”. The UK started giving the Pfizer/Biontech vaccine last week, and the consultancy said it thinks the jabs will help life return to normal relatively quickly.
The UK economy will therefore recover to its pre-coronavirus size by the first quarter of 2022, CE predicted. The UK’s Office for Budget Responsibility (OBR) thinks it will take until the end of 2022.
“We think the Covid-19 crisis will lead to minimal long-term scarring,” Paul Dales, chief UK economist at Capital Economics, said today in a note to clients.
“Later this decade GDP will return to the path it would have been on if Covid-19 never existed.”
Again, this prediction runs against received wisdom. The OBR said the UK economy will be three per cent smaller by 2025 than it would have been had Covid never happened.
Vaccine to help heal economy’s supply capacity
CE said it thinks that the economy’s supply capacity – that is, the ability of firms to keep producing – will not suffer over the long run.
“Permanent hits to supply are most likely to happen after recessions associated with financial crises and wars, as they reduce the supply of credit or destroy large parts of the capital stocks. Neither of those things have happened this time.”
The consultancy’s predictions were based on the UK signing a trade deal with the EU, however.
Yet it said that even if a deal is not reached, the hit to the economy will be less than expected because of many “cooperative” agreements already in place.
It said the strong growth would mean the Bank of England does not have to inject more stimulus.
And it predicted chancellor Rishi Sunak will not start thinking about raising taxes or cutting spending next year or the year after.