The U.K. public appears to be winning its race with the pandemic. Newly reported cases of COVID-19 infections have plunged since January’s post-holiday surge and are now averaging 5,200 per day. The number of deaths has dipped as well, to 62 per day. These are encouraging signs that the public has taken safety measures to heart.
As virus cases drop, the economy is poised for a robust expansion.
The decline in cases and deaths is creating the preconditions for what we expect to be a robust three-year economic recovery in the United Kingdom. This is captured by the recent improvement in domestic financial conditions to just under one standard deviation above neutral.
All of these indicators point toward improved risk appetite and the potential for the normalization of social and economic interaction by the public in the near term.
Helping fuel this growth are the monetary and fiscal authorities, who have completed the groundwork for a recovery from the pandemic-induced economic downturn.
Because economic policy efforts (and adverse shocks such as the pandemic) are transmitted to the economy through the financial markets, there has been a worldwide effort by the monetary authorities to maintain liquidity that facilitates long-term investment. At the same time, the fiscal authorities have taken extraordinary steps to maintain income streams and to support the public’s propensity to spend.
As such, the RSM UK Financial Conditions Index continued to move higher over the weeks after the introduction of the latest U.K. budget statement. The index is approaching 0.9 standard deviations above what is considered to be the normal level of risk in the financial markets.
Our financial conditions index is a composite indicator of the risk and perceptions of economic growth priced into several financial assets.
Over the past four weeks, there has been decreased volatility in financial asset prices and increasing confidence in an eventual recovery, reflected in increasing return in the equity market and a steepening of the yield curve in the bond market.
Because of the increasing level of accommodation in the financial markets, we anticipate that financial conditions are conducive to a reflation of the U.K. economy and growth rates at or above 4% this year, In addition, we see the prospect of a quicker pace of growth above 7% next year should the vaccination program overcome reported supply issues.
Economic progress report
The service sector remains the soft spot in the recovery. Consumer confidence is still underwater as of the latest data, and we expect that to dampen households’ propensity to spend until vaccinations among the younger population are prevalent.
But as vaccinations increase and herd immunity is reached, firm managers, investors and policymakers should anticipate a quick recovery in consumer confidence and an explosion of household spending later this year.
If there is a bright spot in the economy, it’s in the manufacturing sector, where output continues to outpace the consumer sector and the overall growth of gross domestic product. This is an encouraging development considering reports of Brexit’s impact on trade.
Coronavirus update
Throughout the pandemic, we have maintained that V stands for vaccine and that a true economic recovery would depend upon progress in the mass vaccination of the public and the attainment of herd immunity.
Based on the most recent data, the U.K. is quickly moving toward that critical milestone. While we are aware of the risks associated with variants of the coronavirus as well as with the lockdowns in Europe and elsewhere, middle market firms should begin preparing for a breakout in economic activity this summer and fall. They should begin to think about the hyper-competitive economic landscape that will define the post-pandemic economy.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
