The road to recovery in the UK and Europe

Jeremy Hawkins, senior European economist at Econoday, provides an overview of the UK and Europe’s economic landscape two months on from the signing of the UK-EU post-Brexit trade deal and a year from the start of the coronavirus pandemic. He highlights the sectors likely to bounce back more rapidly and those that could struggle to regain lost ground.

What you’ll learn from this episode:

• The UK and Europe’s 2020 and early 2021 economic performance.
• Why there is UK optimism for the second half of 2021.
• The effect of the “stamp duty holiday” on the UK housing market.
• How the accommodation and food sectors could recover strongly.
• Impacts on sterling and the euro from vaccine roll-out rates.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.

Transcript:

Oliver Rowe: Welcome, Jeremy.

Jeremy Hawkins: Thank you.

Rowe: We are now two months after the UK and the EU signed the post-Brexit trade deal and we’re year on from the start of the coronavirus pandemic. Please can you describe the economic impacts of both for the UK. Is it possible to disentangle them?

Hawkins: Well, I suspect we should really take the second question first, and I think the honest answer to that has to be no. It’s extremely hard trying to disentangle the various effects at the moment. What we can say, however, I think, is that it’s definitely the case that COVID is by far and away having the dominating effect at the moment.

And, so where are we? Well, clearly the combination of Brexit and COVID has hit the UK economy hard, as indeed the COVID, the coronavirus crisis has hit the global economy very hard. For the UK in particular it’s been, I guess, and especially disappointing performance as far as 2020 is concerned. GDP, at the end of 2020 was down what 9.9% on the year. Now that’s about double the kind of rates of decline we’re seeing coming across the larger European economies and certainly amongst the industrialised group of countries as well. So to date, the overall macro impact has been particularly hard.

Rowe: And what has been the impact for Europe’s economy?

Hawkins: It’s been similar, but I think if we try and sort of abstract from this something that we can actually say about Brexit in particular is, if we look at the way just quickly going back to the UK economy. Take business investment. I mean if anything is going to be influenced by Brexit in the run up to Brexit itself, since the referendum back in 2016 it’s going to be what business is doing in terms of spending. So business investment in the UK at the end of last year was up just 0.3% versus where it stood before the referendum took place. And I think that in itself, putting COVID completely on one side, is an illustration of just how uncertain businesses were even before COVID struck about what the outcome of Brexit would be. Now we have seen a similar sort of pattern coming out of Europe as well. Yes, by all means, we see a really bad performance by the EU economy in general, higher levels of unemployment. We’ve seen record lows in terms of inflation.

So we’ve had the kind of macroeconomic implications from COVID we would expect, but I think also looking at how Europe as a whole has performed in comparison with the likes of the US, where of course the Brexit simply isn’t an issue, we’ve seen a general period of underperformance.

So I think we’ve had the Brexit uncertainty which has triggered to a loss of output from the UK, also from Europe as well, being compounded by the results of the coronavirus. So, as we stand at the moment, it seems almost certain we’ll see a contraction in UK GDP in the first quarter of this year. We’ll also probably see a second contraction in at least eurozone GDP in the first quarter, which of course would put the eurozone economy as a whole into a second double dip recession. And even though it now seems if the UK may avoid the double dip it’s still going to be a very weak start to the current year.

Rowe: And looking ahead, how’d you see the UK economy and Europe's emerging from this crisis period?

Hawkins: That’s a hard one, because I think it really is going to come down to how the COVID virus evolves over the course of the rest of this year, and indeed potentially going into future years as well. Now for the UK, the good news has been the speed of the vaccine rollout. And indeed I think that’s been reflected in performance or, particularly the likes of sterling, whereas, even though UK economic data of late, have not been particularly good. And indeed we’ve seen the UK underperforming its European counterparts, the pound is actually held up remarkably well and indeed made ground against the euro. And that, in large part, appears to be associated with the relatively speedy rollout of the UK vaccine.

So at current vaccination rates, the UK is running what about four times or so what we’re seeing in most of the larger European countries, and that certainly helping investors. Now, of course, if we continue to see the coronavirus mutate, and some of the existing vaccines are not so efficient and actually containing it then there could be some further problems down the road.

But putting that on one side, as things currently stand, I think there’s reasonable grounds for optimism about how the UK GDP, indeed the economy in general, will be performing second half of 2021.

We still got a massive amount of economic stimulus in place, both from monetary policy, courtesy of the Bank of England and from fiscal policy, courtesy of the chancellor.

That really suggests that, unless we get a nasty turn from the COVID front, second-half UK growth really could look pretty good. And there’s a lot of pent up demand out there which is really just waiting for the opportunity to be realised. So some sectors, in particular, really should benefit quite significantly.

Rowe: Thank you. And which sectors do you think will bounce back more quickly and which sectors will struggle to do that?

Hawkins: I think those which are likely to bounce back in many ways will be those which have been the hardest hit during the virus to date. So, if we look at a sector such as accommodation and food, for example, as of December last year the level of output in that sector was down more than 50% compared to where it stood back in February time just before COVID really arrived.

Other sectors such as arts and recreation, entertainment again we’re talking there about a current loss of output of around about 25% or so. So I think there’s plenty of potential to see those bounce back very sharply as and when we start to see consumer demand being realised again. We know that consumers would be spending a lot more than they are the moment were are they able to get out and do things. And clearly that’s been reflected in part by the huge increase we've seen in online sales. But I think there’s a lot of hard foot traffic, which we would see in the second half of this year, once you’re allowed to do that. So those sectors, I think, in particular stand to do pretty well.

The ones which perhaps may miss out a little bit, well for choice, I do wonder what the housing market’s going to look like. One of the best, I suppose, the best performing sectors for the UK economy over the course of the last what six to nine months or so has been the housing market. It’s stood up remarkably well during a period of what was at that stage, Brexit uncertainty, because we didn’t know whether or not we were going to get some kind of a trade deal. And, of course, the escalating coronavirus. Now as we start moving through the beginning of this year, once we get into April, we’ll see the end of the stamp duty holiday. And that's going to be, I think, very important. We’ve already started to see some early indications that the housing market is beginning to cool already. A lot of the purchases which might have been made second half of this year have been pulled forward into the back end of last year, in particular. And I think we could well see the housing market starting to cool perhaps significantly once we get into the second quarter and third quarter.

And it’s housing of course which has been the key support area as far as overall UK construction is concerned. If you’re looking at commercial building or civil engineering, they’ve been lagging well behind what's been going on in the residential side. So if we start to see the residential side coming off, it really could give the construction sector some real problems.

Rowe: And does this period give an opportunity for businesses to optimise their supply chains?

Hawkins: I think it does. I think already we’re seeing a fairly fundamental reassessment of what supply chains should look like for a whole range of industries. I think during a period when the global economy is doing really well, then globalisation has been a boon for helping to ensure efficient the efficient production line for all kinds of goods and services. However, when the global economy isn’t doing so well, we start to see some significant strains coming through. And it really does then start boiling down to a case of individual countries doing their best to look after themselves.

Now that’s been reflected quite clearly in the way the vaccine rollout has gone, notably with the recent problems concerning the Northern Ireland protocol. And I think it’s left industry in general that much more determined to try to protect supply in the event of future crises.

So I think, as you say, is it going to be a chance to optimise it? — well, it’s certainly a chance to change the way supply chains are going to work in the future, and I think there will be a shift to more domestic supply choices wherever that’s going to be possible. And that I think will be one of the features of the way the global economy is going to work as we go forward.

Rowe: Thank you. And finally, Jeremy, what would be your takeaways for management accountants from our conversation today?

Hawkins: I think there should be a fair amount of good news around really as far as that particular side of business is concerned. On just purely in terms of the economic outlook, if we do get COVID under control, then as we’ve already discussed there’s plenty of scope for the UK economy and indeed the international economy to bounce back very strongly during the second half of this year and increased activity is going to be good news for the sector.

There’s also going to be a lot, a lot of work I suspect on the downside to deal with those businesses which are currently being supported by the various government support programmes, without which let’s be honest, the whole economic picture would be a heck of a lot worse and bleak than it looks at the moment. And we look at the level of insolvencies, they really have remained remarkably low during the COVID crisis itself, and indeed with the introduction of Brexit. So it does seem that some of those insolvencies which have currently being protected as the support schemes are gradually withdrawn, the stimulus is withdrawn, we are, I think, in UK and indeed in Europe witnessing a fairly sharp increase in liquidations, in insolvencies, which are going to give the accountancy world of this business an awful lot of work to do.

So there’s going to be plenty of opportunities I think in terms of the way the direction of industry is going to go. But there’s always going to be a lot of work for those people working within businesses where perhaps they don’t have the cash flow situation of newly developing ones — going to start looking down new lines and see how they can manage the business in general.

Rowe: Jeremy, thank you.

Hawkins: Thank you.