The U.K.’s vaccination and shutdown programs are an apparent success. The percentage of the most vulnerable people, ages 50 and over, who have received at least one dose of the vaccine ranges from 87% in London to 98% in Scotland, and the results speak for themselves.
The index shows that the appetite to take risk is supporting economic growth and recovery.
Newly reported COVID-19 cases have dropped from 60,000 a day in January to 2,000 in the first week of May, and deaths have plunged from 1,250 a day in January to single digits.
The benefits to the economy are becoming evident in the latest RSM UK Financial Conditions Index, a composite indicator of the risk and perceptions of economic growth being priced into several financial assets.
The index, at roughly one standard deviation above neutral financial conditions, shows that the appetite to take risk is supporting economic growth and recovery.
While there may be some volatility around the outcome of domestic elections on Thursday, the core conclusion that one should draw from the index is that the economy is ready to emerge from its more than yearlong hibernation.
The path is clear for the U.K. economy to begin accelerating into recovery this year and expansion next year. The U.K. economy, bolstered by household spending, fixed business investment, monetary and fiscal accommodation, is going to grow faster than 6% this year and possibly 7% next year.
That optimism must be tempered by the human toll that the nation has endured. The U.K. ranks seventh in the world with 4.4 million cases of COVID-19 infections and fifth with 127,000 deaths, according to data compiled by Worldometers.
On the cusp of a robust expansion
With the focus now shifting to vaccinating those under 50, the preconditions are in place for what we expect to be a robust three-year period of economic recovery and expansion in the United Kingdom.
The monetary and fiscal authorities have completed the groundwork for a recovery.
Domestic financial conditions—which turned positive in February after a year of increased risk in the asset markets—have settled into just below one standard deviation above neutral for the past six weeks.
These conditions point to an improved risk appetite among the investment community and confidence in the normalization of social and economic interaction.
The monetary and fiscal authorities have completed the groundwork for a recovery. Because economic policy efforts (and adverse shocks like the pandemic) are transmitted to the economy through the financial markets, there has been a worldwide effort by the monetary authorities to maintain liquidity necessary for commercial transactions and to reduce risk.
At the same time, the fiscal authorities have taken extraordinary steps to maintain income streams and to bolster the public’s propensity to spend.
As such, the RSM UK Financial Conditions Index continues to signal the potential for growth in the coming quarters as the government and the public gain confidence in the vaccine.
Over the past four weeks, volatility has eased in the equity and currency markets amid signs of confidence in the fixed-income markets. This relative calm is reflected in the sustained shape of the gilt yield curve and the decreased risk of default priced into corporate bond yields.
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. We also see the prospect of growth above 7% next year as the vaccination program takes hold.
We should point out that our financial conditions index assumes that the markets have factored the upcoming election into asset prices.
Economic progress report
We expect the Bank of England to maintain its policy of accommodation for the rest of the year. Although the production sector is likely to gain from the economic progress in the United States, it is still underwater as of the latest data in February and the service sector remains the soft spot in the recovery.
Consumer confidence is increasing, but has still not fully recovered. We expect that to dampen households’ propensity to spend until vaccinations among the younger population are prevalent.
Nevertheless, as 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.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
