The Candle of Hope is Burning Brighter … Turning Hope into Reality for all …
Matt Hancock’s “candle of hope” is burning brighter this week. News of the approval of the Pfizer vaccine has raised hopes of a way out of the current economic downturn.
Just weeks ago, the Health Secretary spoke of great advances in medical science coming to the rescue.
“While there is much uncertainty, we can see the candle of hope and we must do all that we can to nurture its flame” said the Health Secretary in November.
Nature or nurture, approval of the Pfizer vaccine suggests the vaccination program will begin as early as next week. Sir Simon Stevens, head of the health service in England, said the initial 800,000 doses will be administered before Christmas. Large scale vaccinations are likely to begin in the new year.
The candle of hope is also burning brightly in Paris, it would appear. This week, the OECD, based at the Château de la Muette, Paris, France, released their latest forecast for the world economy. News of vaccine development in China, the USA and Europe, is “turning hope into reality” for the world. Faster vaccine deployment will boost confidence and strengthen the pick-up. We can expect a “brighter outlook” but one in which the recovery will be gradual, the OECD stated.
World growth is expected to increase by 4.2% in 2021, following a negative 4.2% setback this year. The UK economy is expected to grow in line with the world average at just over 4%. The setback in 2020 is an 11.2% shock, in line with the latest OBR forecasts produced last week.
News of the vaccine does not change our outlook for the economy in the year ahead. It will almost certainly underpin our forecasts of growth and the mitigation of job losses into the new year. The OBR central forecast is for growth of 5.5% in 2021 and growth of 6.6% in the following year. It could well be higher, especially next year.
The positive outlook for growth is underpinned by and expansive monetary and fiscal policy. In the UK, government borrowing is expected to rise to over £400 billion in the current financial year. That’s almost 20% of GDP. In the spending review, the Chancellor promised more money for health, defense, police and education. He also promised a big commitment to infrastructure. The creation of a national infrastructure bank, a positive step. The government is committed to the levelling up agenda, across the U.K.
No talk of tax rises in the Spending Review, this was not a budget after all. No need for tax rises until the recovery is well underway. Spending on special measures for the pandemic is expected to be £280 billion this year. Clearly the high level of spending will fall in the years ahead.
In any case the Bank of England stands as the buyer of last resort, providing Rishi Sunak with his “Trillion Pound bank note". A promise to pay the bearer on demand. No need to worry about interest payments or gilt coupons, no need to worry about repayment either.
Last month Andy Haldane, Chief Economist at the Bank of England, delivered a speech to the UCL Economists’ Society Economics Conference entitled “What Has Central Bank Independence Ever Done for Us?
An appropriate attribution to Monty Python, with a hint of satire, he explained, the Bank of England creates a high level of central bank reserves to acquire government gilts.
“This is process is not a monetary financing of government deficits. It is a reflection of both policies [monetary and fiscal] responding counter-cyclically, as they should, in the face of a very large cyclical shock to aggregate activity.” Ah yes.
Central Bank Reserves have now increased to almost 50% of GDP. This is not officially “Monetary Financing” or “Fiscal Dominance”. We call it Dire Straits Economics, that’s “Money for Nothing, Gilts for Free”.
Just one more reason, the candle is burning much brighter, as we look forward to the coming year.
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