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The economy will grow much faster than first thought - what will this mean for the UK?


A report emerging from The Bank Of England says that the UK’s economy will grow at its fastest rate since World War Two (1941). This is due to COVID-19 restrictions being lifted as a “faster than expected recovery” according to the guardian.


This has occurred coinciding with the relaxation of restrictions in April as well as the nearing of the June 23rd date which will see the banishment of the 1m distance rule. As pubs, bars, restaurants and out-door venues begin to welcome customers back to the stores once again, consumers have seen a huge surge in their confidence, and with money saved during the course of the pandemic, consumers are now looking to spend their savings, which will increase demand for goods/services, produced by firms. As a result, this will increase business spending too as they look to employ more staff members to match the increases of demand and also improve the shop floor and also online experience, for those less confident. Ultimately this will cause a large increase in aggregate demand for the UK economy and cause economic growth, along with inflation which has grown 0.4% from February to March 2021.


The economy has been forecasted to grow 7.25% this year, which is a drastic improvement from last year's figure of -7.3% as we underwent a national recession.


This forecast has seen an increase from February where it previously was 5%, which shows positive signs of successful recovery and exit. As well as this, the furlough scheme has also boosted the likeliness of economic rehabilitation, as this has reduced the predicted unemployment figure for 2021 from 8% to 5%, which has reportedly been estimated to save as many as 700,000 jobs.


This is a massive success for the UK economy as, if the predicted estimate was to materialise, there would be much less strain on the government (already in £2.4 billion of debt) to fund JSA as unemployed workers seek new employment.


This would be a benefactor for the government as this, an example of an automatic stabiliser, a form of fiscal policy implemented by the government, is a huge expense for them, and cannot afford to take on any more debt, in which loan interest repayment also stands at £56 billion for 2020 - This acts as a monumental opportunity cost for the UK government, and therefore relieves another strain on their overloaded shoulders.


However, it follows a large contraction of “almost 10% in 2020” (guardian), which is the “worst decline for more than three centuries”. This, therefore, criticises the current ‘hype’ over the economic rebound, due to the fact that that the UK and the whole world has seen economic pandemonium and never seen before devastation to the business cycle.


On the same point, the governor of the Bank of England, Andrew Bailey, said that: ”the recovery was "strong" but likened it to "more of a bounce-back" than a boom” (BBC) He then went on to say that it will only return the economy to the 2019 size. This illustrates fondly the true magnitude that corona-virus has had, therefore not only on public health but consequently reversing the economic stage of development to pre-covid levels. Andrew Bailey also mentioned: "That's two years passed with no growth in the economy." This has however been mitigated by the furlough scheme as many people have retained their jobs and so can now contribute to the UK economy. Bailey also said that the extension of Furlough has provided a “bridge of support that will last until the recovery is well underway” (BBC)


Furthermore, as we ease restrictions and phase out from lockdown, it has been said that furlough “Expected to fall to 2.75 million users in the three months up to June, from just under five million at the start of this year”


However, the BoE also said that: “The economy was set to return to its pre-pandemic size in the last quarter of 2021, three months earlier than previously thought” (Reuters).

One reason for this is due to the MPC of the BoE which has implemented both low-interest rates at a record low of 1%, in conjunction with increasing the money supply (QE) to as much as £895 billion so far. This is an example of loose monetary policy, which allows businesses and consumers to service debt, borrow money cheaply and also increases the marginal propensity to consume as consumers attain little interest with money in the bank. As a result, this has increased consumer, and business spending as firms borrow more money to invest and service debts, as well as consumers spending all of their lockdown savings. This has allowed the inflation rate from 0.4% CPI in February to 0.7% CPI in March.


However, another factor influencing a continual rise of inflation towards the governments symmetrical 2% target is a rise in energy prices. “The BoE said inflation was likely to slightly overshoot its 2% target later this year due to temporary factors mostly related to energy prices.” As energy and gas are necessities in nature, this means that consumers still buy per unit of the good, therefore they are perfectly inelastic. This means that due to the rising in prices, this will therefore increase consumer spending, composing 66% of aggregate demand, causing economic growth and so inflation. In the same aspect conversely, this can have damaging effects on the UK if inflation rises too high.


This will become a prevalent issue for people on fixed incomes if prices rise, as their incomes do not rise to match this. This means that they will lose purchasing power, buying more inferior goods, of fewer nutrients and quality. Resultantly public health will decrease and so more strain is placed on the NHS, which is already overwhelmed following the pandemic.


On the contrary, monetary policy has caused the economy to grow as aggregate demand does too, and helps the UK to be back on track to achieve macroeconomic objectives. “The MPC said the economy probably shrank by as little as 1.5% in the first three months of 2021 during the toughest restrictions since the first wave of the pandemic, significantly better than its previous forecast for a 4% plunge.” (guardian) This amalgamation of factors, therefore, show how the UK is indeed on the right track for economic recovery, but there's still a long road ahead. Hence, With the use of monetary and fiscal policies, from the BoE and government respectively, will increase the chances for economic growth and ultimately, allow the UK to rebound from one of the worst recessions on record.

 

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Written by Euan Taylor

Research compiled by Billy Ryan

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