Having suffered the largest economic contraction in modern times, the UK now looks set to grow in a manner this year that will also break records.  But as is so often the case, concentrating on growth rates masks the underlying level.  And it is the level of income and the associated quality of life that matters in a country.  In our recent Occasional Paper on fiscal frameworks, we argued for policy to be assessed against the metric of robust and inclusive economic growth as a way of re-focussing the debate away from the most recent numbers or political milestone.  To be clear we do not want income to be targeted, like inflation, as it is largely the product of firm level innovation which cannot be well predicted.  But we do know that institutional and government capabilities matter and so we want to focus more attention on the progress of households, regions and sectors.  Indeed, policy needs to be systematically concerned with the progress of the nations and regions that comprise the UK.   

This Spring we have revised up our central forecast for economic growth in 2021 to 5.7 per cent, compared to 3.4 per cent in February. The immediate economic effects of the virus, which have been concentrated in the low-waged service sector, are expected to wane, while the negative consequences of Brexit will make themselves felt over the longer run and largely in sectors less affected by Covid-19.  The good news is that the third national lockdown has seen the adaptation of much of the economy to pandemic conditions, meaning that a smaller fall in first-quarter GDP than previously forecast provides a strong basis for the rest of the year. This is followed by the projected re-opening of the remaining affected sectors, thanks to the success of the vaccination programme.  The principal downside risk remains a resurgence of the Covid-19 virus, through adaptation or the failure of vaccines, and as an open economy the UK will not be physically or economically protected from a failure to control the virus globally.

The immediate issues facing policymakers are how to redesign the furlough and other support measures to encourage workers who have lost their jobs to retrain or locate new careers.  We note that firm birth has been strong but perhaps not in the sectors that have in the past shown high levels of productivity.  And this may act to limit the development of strong regional pockets of demand, which underpin the creation of good jobs.  Many existing firms may be saddled with high levels of debt that will tend to crimp investment and hence productivity in the recovery.  The impetus for much of the recovery will come from a household sector that has undergone a period of “forced savings” and there will be positive spill-overs to the manufacturing, private traded services and construction sectors. But the tourism and hospitality sectors may continue to suffer for as long as international travel remains subdued.

As ever the aggregate can mislead on the granular.  The overall improvement in the household sector net worth from higher house prices and some escalation in asset prices masks considerable levels of spatial and income inequality.  Our work shows a prospective increase in household level destitution with many of the attendant social problems closely aligned.  But one further implication may also follow should government policy not succeed in levelling up.  We also project more jobs and higher incomes in London and the South East than in the rest of the country.  If not carefully managed with a careful re-examination of our political institutions, this crisis has the propensity to further the centralisation of activity in the United Kingdom, which may ultimately question its very existence.