Heading towards a partial rebound, mainly driven by consumption

The British economy will only partially rebound in 2021, after having been among the most affected in terms of health and economy in 2020. As the government was forced to introduce a lockdown in the spring and again in November to curb the spread of the pandemic, the country experienced, in 2020, a peacetime recession on a scale never before seen. The rebound in activity, which will gradually accelerate in line with the health situation, is expected to be driven by household consumption after it was hampered by travel restrictions and the closing of shops. The recovery in consumption should provide all the more driving force for growth as household purchasing power has been relatively unaffected during the crisis, thanks to support measures such as short-time work and the allowance for the self-employed. Concomitantly, business investment, which has also benefited from unprecedented support from the government - via state-guaranteed loans, the deferral of tax deadlines (income tax for the self-employed, VAT) or the abolition of corporate tax for the most affected sectors (retail trade, hotels, leisure) -, is also expected to pick up, but in a less dynamic way. Affected by the health uncertainty at the beginning of the year, businesses will also have to face the repayment of maturities and loans, after a 12-month grace period. Moreover, despite the signing of a trade agreement with the European Union (EU) in December 2020, conditions will become less favorable in 2021. In addition, the government will support the recovery with additional public spending, notably on infrastructure (transport, environment, fiber), amounting to an estimated GBP 27 billion (1.2% of GDP). After falling in 2020 (-30%), due to support measures and the impossibility for creditors to open proceedings, making the procedure de facto voluntary, the number of insolvencies is expected to rise sharply in 2021, and exceed the level recorded in 2019 by a third.

Large public deficit, largely financed by the Bank of England

The public deficit will remain very large, after having soared in 2020 due to successive emergency measures taken by the government totaling GBP 280 billion (13.6% of GDP, a third of which is due to the short-time work scheme alone). While the support measures are expected to be phased out in 2021, in line with the health situation, most of them will be extended to (at least) the beginning of the year, meaning that their cost will decrease, but is expected to reach at least GBP 50 billion (2.3% of GDP). In addition to these measures, there will be continuing high health and capital expenditure, which cannot be offset by freezing the salaries of half the best-paid workers in the civil service (excluding health workers). Simultaneously, the reduction in the deficit will be made possible in particular by the rebound in tax revenues, linked to activity. Public debt is expected to continue increasing, after having exceeded 100% of GDP. In this context, the Bank of England should continue to finance public spending by engaging in the mass buying of government bonds. In November 2020, the monetary authority increased the amount of its asset purchases from GBP 745 billion to 895 billion, of which 98% were bonds issued by the UK government.

Although external accounts improved in 2020, due to the fall in imports of goods and services (tourism) - linked to domestic demand - exceeding that of exports, the current account will remain in deficit in 2021. On the one hand, the balance of goods is constantly in deficit (4.3% of GDP over the first three quarters of 2020). On the other hand, the balance of services is still in surplus (5.8% of GDP), thanks to financial and insurance services (two thirds of the surplus). At the same time, the income balance is structurally in deficit (2.5% of GDP), due to the repatriation of income from substantial foreign investments in the country. As the country will settle part of the financial commitments stipulated in the EU exit agreement in 2021, the balance of transfers will remain largely in deficit (1.5% of GDP). As a key player in the global financial system, the United Kingdom easily finances its current account deficit through foreign investment, mainly portfolio investment.

Tension in the majority and declining popularity of the Prime Minister

Prime Minister Boris Johnson, who has been in power since his election as leader of the Conservative party in July 2019, succeeded in his gamble to dissolve Parliament, strengthening his majority in the December 2019 election, winning 365 seats out of 650 (50 more than in the 2017 election). Although this large majority allowed him to finally affect the exit of the United Kingdom from the EU in January 2020, he then faced the rebellion of several dozen MPs during the deployment of 5G (from which Huawei was ultimately excluded) and the implementation of health restrictions at the end of 2020. Moreover, after reaching a peak in April, his popularity rating halved in the following months, reaching 34% at the end of November 2020, with an overall negative opinion among Conservative voters, due to management of the health crisis that has been deemed a failure.