2021 will be tougher than 2020 for many, think tank warns

Resolution Foundation says Treasury must prepare for economy to be 6% smaller than OBR prediction by Easter

By Jim Dunton

04 Jan 2021

The Resolution Foundation has said the latest wave of coronavirus restrictions could leave UK economy 6% smaller in the first quarter of 2021 than the Office for Budget Responsibility forecast just seven weeks ago.

According to its latest Macroeconomic Policy Outlook report, the think tank said the introduction of tier 4 restrictions and strengthened social-distancing rules following the emergence of the new variant of the virus could downgrade the OBR’s annual growth projection from 5.5% to 4.3%.

The foundation, which focuses on improving the lives of people on low to middle incomes, said that while the rollout of effective vaccines would aid some industries in 2021 – particularly the hospitality sector – many people in the UK would find it a tougher year than 2020.

It said higher unemployment would come with the ending of the government’s Job Retention Scheme – also known as the furlough scheme – at the end of April, along with other support packages for the self-employed and businesses. Labour market churn would also increase, it added, driven not only by the end of support schemes but also by firms adjusting to life after the end of the EU transition period.

The report urged chancellor Rishi Sunak to ensure that fiscal policy shifted from targeting support at closed sectors to more broad-based support for recovery that would last well into the second half of the year. 

Resolution Foundation chief executive Torsten Bell said that while 2021 offered light at the end of the tunnel in terms of the pandemic, it would be a “bumpy ride” to get there. 

“Efforts to contain the new strain of Covid-19 mean that the first few months of 2021 will, if anything, require tougher lockdowns,” he said.

“By Easter that could mean the economy being 6% smaller than was hoped just a month ago.

“Government should better target support on the firms most affected, and urgently allow workers required to self-isolate access to the furlough scheme.

“As the vaccine rolls out, death rates will fall swiftly. The gradual lifting of restrictions means a hospitality boom is likely, fuelled in part by the trebling of saving rates led by richer households.”

However, Bell said that the “return of a ‘roaring 20s’ feel to hospitality” – reminiscent of the response to last century’s Great Influenza Pandemic – did not mean that the whole economy would automatically return to full health.

“Rising unemployment means household incomes may actually fall even as GDP recovers,” he said. 

“Government will likely need to use fiscal policy to continue supporting the economy for longer than is currently planned.”

Last month, Sunak set 3 March as Budget Day in an announcement that also confirmed the extension of the furlough scheme until the end of April. 

The chancellor said the timing would give firms space to consider their staffing needs and the opportunities presented by replacement schemes well in advance of statutory notice periods for making workers redundant.   

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