UK Recovery: Shops are open but is it all going K-shaped?

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UK Recovery: Shops are open but is it all going K-shaped?

For anyone who has been keeping an anxious eye on the UK’s finances, the images of people queuing to get into shops on Monday morning was a welcome sight. But with our latest lockdown keeping us at home since January, will the return to the high street have any real effect on the UK’s recovery in 2021?

As non-essential shops opened after the first UK lockdown in the summer of that fateful year 2020 (you may remember it; the year of zoom fatigue, online quizzes and banana bread) economists were starting to discuss whether we would see a V-shaped recovery to the UK’s finances (quick) or a U-shaped one (slow). Andy Haldane, the Bank of England’s chief economist, pointed to private-sector data suggesting a more rapid recovery. However, others argued that the bump in spending as non-essential shops opened up was temporary, caused by the novelty of being able to leave the house, rather than a lasting increase in household expenditure. High hopes cooled a little as the new strain of Covid-19 was discovered in Kent, causing numbers to rise sharply, and ultimately leading to the autumn lockdown-light, and eventually the post-Christmas return to full lockdown.

In December, PwC published an economic outlook for January 2021, outlining two different scenarios. A V-shaped recovery dependent on a fast vaccine rollout and the easing of social distancing rules in the first few months of 2021, making it possible for customers to return to shops in a post-Christmas spending spree. A sluggish U-shaped recovery would be due to a slower vaccine rollout, causing social distancing to remain until the end of the year, and potential fallout from new trading agreements with the EU.

In the early weeks of 2021, as the UK was getting to grips with the new restrictions, new letters started to appear more often in the public discourse on recovery. Some experts thought that we could expect a W (double dip recession), others spoke of K (different parts of the economy recover at different rates, times, or magnitudes) being much more likely.

Fast forward to April, and we are seeing a quick vaccine rollout, but of course lost the first few months of potential retail revenue in 2021 to the national lockdown. Social distancing is set to continue in some form until at least June – but that’s a few months shorter than predicted in PwC’s slow recovery scenario. With regard to the trading agreements, a recent FT article points to a return to growth due to a partial rebound in trade with the EU in February.

Earlier this year, chief economist Haldane likened the British economy to “a coiled spring”, ready to burst out and make this year’s recovery “one to remember.” Haldane received mixed reactions to his predictions, with some hailing his Daily Mail article as long awaited positive news, while others thought that he was overpromising on issues such as inflation.

Whether Haldane is right or wrong about the UK economy being ready to fire on all cylinders, figures from the Bank of England from February showed that consumers had saved some £125bn more than they would normally have set aside. A few months on, that figure is likely to be higher. While it is likely that we will see an initial surge in spending, the question is will this last or will the accumulated money enter the market more slowly, over the course of the next few years?

Charlie Bean, a former Bank of England deputy governor, argues the latter. In March, he predicted that only 5% of the accumulated savings will be spent each year, nixing Haldane’s coil simile.

To look at the first week of a reopened high street and try to make predictions about the future is futile. There are already green shoots to the economy out there, and with the reopening of non-essential shops, these are likely to grow. However, it is also likely that different sectors will experience different rates of growth (pointing to a K rather than a V) and just like after the last lockdown, any lasting effects on retail will be highly dependent on the continued fight against Covid-19, on whether footfall reflects purchases, and if a potential surge in household spending will be lasting or temporary.

Bec Martin, Client Services Director, Innesco

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