The vaccine is a game changer. And the economy could revive fast. But will this lead to inflation

November 16, 2020

I opened a bottle of champagne to celebrate the news that Pfizer had discovered a vaccine. The past year has been a nightmare. On a personal level, far too many friends have died. In economic terms, we at Cebr have kept our heads above water, thanks to the commitment of our staff. But many acquaintances in the hospitality industry have been forced to shut down. Others, who invested heavily in organising events, particularly in arts, culture and sports, will never get their investment back. For many it will be the end of their hopes and dreams and they will have to reconcile themselves to a more prosaic future.

 

That’s why I thought the now infamous Rethink. Reskill. Reboot advertisement featuring the ballerina retraining into IT was so insensitive. Even in normal times the vast majority of those who hope for careers in arts or in sports eventually have to accept that they will not be able to earn a living in that way and this year’s damage to the finances of both the creative and the sports sectors will increase the number further. It is always painful when people have to make a decision which means abandoning their dreams. The advert seemed to be unpleasantly making fun of an issue that can often be heartbreaking. I’m grateful that my fast bowling skills were nowhere near good enough to make the decision to become an economist difficult.

 

But, though it seems reasonably clear that the worst of the nightmare is over, how long will it take to get back to some kind of normal?

 

Our take is that although the current lockdown may stay in place till 2 December, there is unlikely to be another lockdown. The vaccine should be powerful enough to ensure that medical measures rather than economic or social ones will be sufficient to handle the spread of the disease once it is available. Some of the social distancing measures may continue for a few months but serious restrictions lasting beyond Easter are unlikely.

 

Christmas this year will be a lot more cheerful, since we all think we can see the end of this pandemic. Our fear as recently as a couple of weeks ago that it would be highly subdued has turned out to be wrong, though full blooded office parties won’t happen. I wonder how many will regret the end of the office party? I’ve a feeling that they won’t come back, at least in such a bacchanalian style as before.

 

Third, the recovery of travel, tourism and hospitality could be pretty dramatic. Restaurateurs I’ve talked to think they will be fairly fully booked in December. And bookings for ski holidays have soared.

 

Fourth, Cebr has calculated considerable savings have been built up by consumers during lockdown that have not yet been spent. This could finance a strong revival in consumer spending, with a fairly euphoric mood. And the activity in the housing market, which probably won’t now disappear until interest rates rise, should stimulate furniture and other sales.

 

On the negative side, many companies have haemorrhaged cash and won’t be in a position to invest for a while; more than 300,000 have lost their jobs since April and a similar number are likely to do so before the Spring despite the renewed furlough scheme. Those whose jobs are precarious will hold back their spending. And exports will depend on other markets which may prove less consumer friendly than the UK. Government support will have to be reined in to avoid a sterling crisis. And Brexit, though a deal is well neigh inevitable, will surely prove disruptive for a while.

 

We are fairly optimistic that spending will recover quite fast with GDP in the second half of 2021 pretty close to where it was at the end of 2019. But the problems may start then, with inflation starting to rise leading to higher interest rates at the same time as the government has to tighten fiscal policy.

 

For more information, please contact:

Douglas McWilliams dmcwilliams@cebr.com phone: 07710 083652​