Brexit. Coronavirus. Tiered lockdowns. Trade relations. Regional friction. Where to from here for the UK?
The ophthalmological term ‘2020 vision’ historically implied near perfect acuity. A global pandemic blindsided all economic forecasters’ views on the year. Peering into the mist to gain clarity on the United Kingdom (UK) in 2021 poses something of a challenge, particularly while so much uncertainty persists around both the coronavirus (COVID-19) and the potential unfavourable trade relations with the European Union (EU).
So, the best place to start is by looking back.
How important is the UK to the global economy?
At its peak 100 years ago, the British Empire covered a quarter of the world’s surface. Today the UK remains a hot-bed of innovation and culture, is home to some of the most highly prized academic establishments in the world and a well-respected legal system, the country is one of five permanent members of the United Nations Security Council and boasts a number of wonderful organisations from the National Health Service to the British Broadcasting Corporation (BBC). Indeed, the BBC is so popular globally that the diminishing importance of the UK to the global economy is easy to underappreciate.
Two world wars left the country with debt to gross domestic product (GDP) of around 270% which, along with self-determination of controlled countries such as India, ultimately saw the collapse of the empire. While still the sixth largest global economy, the UK itself has seen its relative importance fall from close to 10% of global GDP to just 3% currently. The UK’s representation in global equity indices is slightly larger, at a little under 4%. This is due to the high level of corporate governance, law, lack of corruption and London’s role as a major financial centre. So, still of significance though not the dominant superpower some might still believe.
UK historic public Debt-to-GDP
Source: House of Commons Library
The Brexit curveball
In a surprise to pollsters, economists, politicians and even many Brexit voters, the British public voted to leave the EU in June 2016. While the island nation formally left the EU at the end of January 2020, they entered an 11-month transition period ending on 31 December 2020. The idea was to use this period to agree a trade deal, without which the UK would be left trading with the block on World Trade Organisation terms. Thrashing out a trade deal during a global pandemic did not prove particularly easy. There were many false deadlines to agree a deal and the major sticking points included tariffs, state aid rules, fishing rights and the Irish border.
Relationships with non-EU nations may be headline grabbing but trading with one’s neighbours has tended to be more mutually beneficial than long-distance relationships. To this day, the EU remains the UK’s largest trading partner. According to the House of Commons Library, in 2019 UK exports to the EU totalled £294 billion (43% of all UK exports), while UK imports from the EU were £374 billion. At an individual country level, therefore, striking a sensible deal would have seemed important to all European nations. Indeed, German Chancellor Angela Merkel’s comments that a Brexit trade deal was “in the interest of all” highlighted the value of a trading partnership in which the UK accounted for 6.6% of German exports and 2.6% of GDP. A deal, though, was widely regarded as being much more vital to the UK – potentially necessitating concessions around emotive issues such as fishing rights which are economically insignificant when weighed up against maintaining London’s position as the major European financial centre.
Maintaining this position has been so important that, in late-2020, UK Chancellor Rishi Sunak set out his ‘Future of the City’ vision. In this post-Brexit document, Sunak set out equivalence decisions for the EU and European Economic Area member states. It was hoped that this, along with London’s established position, would help to defend the status quo.
A sensible deal, even considering the bounce back from the COVID-19 lockdown recession, would likely see the UK delivering modest real GDP growth.
COVID-19 and the vaccine hope
In the near term, however, the UK will continue to deal with the fallout from the COVID-19 pandemic. The UK economy is forecast to decline more than 11% during 2020, a decline not seen since 1709. Recognising the economic impact of lockdowns, the UK began working with vaccine developers at an early stage to secure more than five potential vaccine doses per capita.
By late-2020 the positive news coming from drug makers Pfizer, Moderna and AstraZeneca suggested that COVID-19 vaccination programmes should be in full swing by the middle of 2021.
In comparison to other nations, the UK looks poised to deliver vaccines to the highest risk patient populations in short order. An unknown currently is whether any of the vaccines in trials reduce the amount of virus spread to others. News on this might enable an even more rapid end to lockdown measures.
Economic support measures
Measures to support the UK economy through the COVID-19 pandemic, both from the government and the Bank of England, have been substantial and look set to continue until vaccination programmes enable lockdowns to end. Monetary support is expected to continue in the form of quantitative easing and ultra-low interest rates. A ‘no deal’ with the EU would probably lead to increased quantitative easing with negative interest rates likely being unpalatable.
On the fiscal front the ‘furlough’ scheme has been extended into March 2021. Direct spending to tackle the virus while supporting jobs and businesses during 2020 is expected to have cost in the region of £280 billion, 13% of GDP.
A new infrastructure plan spending £100 billion over the next five years has also been announced. Again, should we see the UK leave the EU with no deal, this will likely lead to further expansionary spending and efforts to lift business confidence. A no deal outcome could result in concerns over the level of government debt. But with interest rates so low, especially in comparison to history, even this seems manageable.
Best and worst supplied
The United Kingdom has pre-ordered enough vaccines for fives doses per person.
* 92 low and middle income countries and economies eligible to receive doses through the COVAX international facility; some, such as India and Indonesia, have also ordered doses separately.
Source: Data from Airfinity, up to 21 August, 2020
United States President Joe Biden’s first conversations with UK Prime Minister Boris Johnson stressed the need to maintain the Good Friday Agreement and hence peace on the Irish border; although trying to please all relevant parties in Northern Ireland, as well as the EU, proved a major sticking point during the EU trade negotiations. Former Prime Minister Theresa May was reliant on the support of the Democratic Unionist Party, which would likely have prevented a deal in which Northern Ireland had a different customs arrangement to the rest of the UK. Given Johnson’s majority, he can now probably impose a border between the island of Ireland and the rest of the British Isles. This could ultimately lead to a break-up of the UK.
The UK in 2021
The UK is stepping into a year in which the country’s relationship with the EU will look quite different to the situation over the past 48 years. This brings with it a level of uncertainty.
As we know of course, equity investors tend to dislike unpredictability. Investing in an uncertain environment is uncomfortable, so UK companies can expect to be the subject of scrutiny from international investors.
However, the UK goes into 2021 with both monetary and fiscal policy on hand to provide support to the economy throughout the difficult COVID-19 lockdown winter. In addition, the country looks well positioned to come out of the pandemic more rapidly than other nations due to the advance purchases of several vaccines that have proved to be successful.