Vanessa Hale
Director, Research
A third national lockdown was announced on 4th January 2021. The roadmap announced on 22nd February 2021 allowed for gradual reopening of the economy from late March. In any event, the housing market has stayed open throughout this lockdown, with safety measures in place to reduce the spread of COVID-19.
Moving away from Coronavirus, the Brexit Transition period ended on 31st December 2020. On the 24th December 2020, the negotiators from the EU and UK reached an agreement on a new partnership which sets out the rules that apply between the EU and the UK as of 1st January 2021. This agreement has been approved by the EU member states and the UK Parliament and provisional application of the agreement took effect on 1st January 2021.
Global markets have fallen since the outbreak of COVID-19 and its expected effect on economic growth. The FTSE 100 markets rallied 10% over Q4 2020, ending the year 15% down compared to the start of 2020. The index remained reasonably flat over January and February 2021 but rallied by 4% over March 2021. Economic uncertainty remains a significant factor globally.
In Q3 2020, QoQ UK economic growth was 16%, bouncing back considerably from the Q2 falls experienced (-19%). In Q4 2020, QoQ growth was 1%. Over 2020, the economy is estimated to have contracted by 10%. In the OBR’s latest forecast (March 2021), growth for 2021 is projected at 4%, lower than the 5.5% which was forecast in the November 2020 forecast.
This is on par with the March 2021 HM Treasury consensus forecasts which have an average estimate of 4.8% for 2021. For 2022, OBR projects growth at 7.3%, which is more bullish than the HM Treasury consensus forecasts of 6.1%. The recovery predicted for 2021 and 2022 demonstrates that most forecasters expect the fundamentals of the economy to remain strong and for it to be able to return to growth once the current situation has passed.
The latest figures from the ONS show that inflation (CPI) as of February 2021 is 0.7%. This is 1.3 percentage points below the 2.0% target, which has not been hit since July 2019. The February 2021 inflation rate was well below the year before (1.7% in February 2020).
The Chancellor has announced an unprecedented package of Government-backed interventions aimed at supporting businesses and individuals through the current situation. This includes: a furlough scheme to pay up to 80% of employees’ wages, intended to minimise job losses; mortgage holidays agreed with lenders; business rates holidays and loan schemes. As of 28th February 2021, 15% of eligible UK workers were furloughed, rising to 17% of Londoners. The Chancellor announced in the new budget that the furlough scheme would be extended to September 2021. This date is after the final stage of the roadmap, which would provide some additional protection against any delays to the reopening of the economy or offer some transitional support as businesses scale back up to full operations.
As part of the Chancellor’s Winter Economy Plan, there will be a new six-month Job Support Scheme to protect viable jobs in businesses that are facing low demand due to the virus, an extension of Self Employment Income Support Scheme, and over one million businesses will get flexibilities to help pay back loans. Additional measures outlined in the March 2021 budget include widening access to grants to include 600,000 more self-employed people and additional funding for vaccine distribution. Importantly for the housing market, the Stamp Duty holiday has been extended until the end of June 2021, tapered until September 2021.
Despite the negative economic outlook, the economic interventions announced by the Government should minimise the rate of unemployment and cushion some businesses. The speed of the recovery will depend upon latent stressors in the economy, which will not be fully realised until all temporary measures (furlough, trading restrictions) are lifted. As a result, considerable uncertainty remains.