Almost every indicator is pointing in the same direction. Footfall on the high streets is up. Payments by debit and credit card are rising. The strongest business surveys since 2013 suggest that the Brexit hangover was short-lived. Firms are starting to hire. The housing market is red-hot.
Growth estimates are being revised up sharply amid signs that consumers didn’t even wait for lockdown restrictions to be lifted before going on a spending spree.
As things currently look, it would come as no surprise were the UK to post its highest postwar growth rate this year, beating the previous record of 6.5% in 1973. Not only was the hit to the economy in the first quarter much less severe than originally expected, it also seems as if the bounceback in the spring and summer will be stronger, too.
The forecast prepared for Rishi Sunak by the Office for Budget Responsibility at the time of the March budget pointed to 4% growth this year. That estimate is already out of date. Earlier this month the International Monetary Fund pencilled in a 5.3% increase in UK gross domestic product this year. That looks a bit pessimistic as well. According to Thomas Pugh of Capital Economics, Britain will rise from the bottom of the European super league GDP table in the early stages of the pandemic to the top by the end of 2022, when he forecasts output to be 3.7% above its pre-pandemic level.
It is not only Britain that is beating expectations; the same is true across the developed world. It has been a while since the US grew more quickly than China but it is on course to do so this year. The eurozone will be slower to recover, given the faltering start to its Covid-19 vaccine programme but looks set for a spurt in activity from mid-2021 onwards. Vaccines and lots of stimulus are combining to unleash pent-up demand.
Rapid recoveries are what is needed to limit the long-term scarring from the pandemic, since they will tend to limit the business failures and job losses as support measures are withdrawn and companies have to once again survive on their own. China has already exceeded its pre-pandemic peak; the US will be next, followed by Britain. If, as some forecasters expect, the UK grows by 5% in the second quarter of this year, it would be on course to recover all the lost ground by the end of 2021.
A degree of caution is called for, though. Booms in Britain have a tendency to end in busts, and the bigger the boom the bigger the bust. Even before the end of 1973, the economy was slowing down as a result of the fourfold increase in oil prices triggered by the Yom Kippur war, and by early 1974 Britain was on a three-day week. The strongest year of postwar growth was quickly followed by a combination of higher unemployment and rocketing inflation: stagflation.
It took another 15 years for boom conditions to return, and once again they proved short-lived. The sky-high interest rates deemed necessary to counter inflation led to record bankruptcies and home repossessions.
There are some crucial differences between the state of the economy today and how things were in previous booms. Until the oil shock of 1973, the global economy had experienced 25 years of strong growth and inflationary pressure had been steadily rising even before energy prices shot up. Similarly, the economy had been growing strongly in the five years up to 1988. In both instances, there was much less spare capacity than there is currently.
But there are similarities, too. In both the early 1970s and the late 1980s, excessively strong growth prompted a green backlash. Now, as in 1973 and 1988, large amounts of stimulus are being provided via cuts in interest rates, higher government spending and tax cuts. If consumers spend freely, can the productive side of the economy keep up? If not, the economy will overheat.
It is, of course, perfectly possible that this boom will be different from the others and that the economy will, in due course, settle down to a period of steady, sustainable growth. That, though, is based on a number of key assumptions.
The first is that the desire to spend will persist and is more than a brief spasm of activity that will fizzle out when the novelty wears off. Currently, this doesn’t look all that likely because many consumers have spent the past year paying off their debts and seem confident enough to splash the cash.
A second assumption is that rising bond yields are nothing to worry about. In the US, the country that really counts, the cost of borrowing for the government has been rising as the economy picks up speed. This can be seen either as a natural response to stronger growth or as a precursor of an inflation problem to come.
The third – most important assumption – is that vaccines will tame the coronavirus. Not sufficiently to claim total victory but enough so that something like normal life can be resumed. Economic activity is picking up fastest in advanced countries because they are vaccinating fastest. Even so, there was an air of unreality last week when news of Britain’s spending spree coincided with reports of record Covid-19 cases in India and hospitals running short of oxygen.
None of which is to say that another recession is inevitable or imminent. The consumer spending spree may well continue. Policy may be perfectly calibrated. The housing market may not be a bubble. Rich countries may ensure vaccines arrive in poor countries that badly need them. It would be wise to enjoy the good times while they last, that’s all.