Will the UK’s economy recover in 2021?

January 4, 2021

2020 has been a difficult year for the global economy. That is down to lack of productivity and demand caused by the restrictive lockdown measures imposed around the world since March. Different countries have weathered the pandemic in different ways - trying to find the right balance of people’s health and safety, with the longer term effect that lockdown restrictions have on the economy. 

Britain has been one of the hardest hit countries in Europe in terms of deaths from COVID19, but it has also seen its economy dive to levels that the then new Chancellor, Rishi Sunak would have winced at. But what does 2021 look like for the UK’s economy? Will it bounce back? Or will it continue to have a lacklustre performance? Here, we look to answer those questions to provide a brief economic outlook of the UK for next year.

Will the UK’s economy bounce back in 2021? 

Economists diverge on how much the economy will grow in the UK in 2021, but they do largely agree that it will at least start its recovery from the pandemic caused recession. However, while it is obviously good news that there is a recovery - it is imperative to realise just how bad the figures got in the Spring and Summer of 2020. The GDP of the UK retracted by 20.4% in the second quarter of this year. So while the vaccine gives hope around the world that life may be able to return to normal, it won’t vaccinate against the huge losses already made. 

The drags on the UK economy

In fact, the growth potential of the UK is reduced due to a number of factors - despite the rollout of the vaccine. They will cause considerable headwinds to the GDP in the coming year and beyond. They are: 

  • Brexit uncertainty

Brexit continues to trouble the UK’s economy. That is down to the uncertainty that surrounds it. Currently, the transition period is due to end very shortly with no trade agreement in place.

  • Lack of investment

While the lack of a trade agreement provides a great deal of uncertainty for the future for the UK and the EU, the uncertainty has also already affected the amount of investment in the past four years. Very little business investment has been made in the UK, while companies wait out the Brexit negotiations to see whether the UK remains a good prospect. 

  • Coronavirus pandemic

Just because the vaccine has begun to be administered in a number of countries across the world, does not mean that the Coronavirus will not continue to act as a drag on the UK economy. The vast amounts of spending that the Government made this year was largely done by borrowing money which will, at some point, have to be paid back - lessening infrastructure spending which could help ignite the economy. 

The UK’s economic recovery - key takeaways

The UK’s economic recovery has already begun to happen and it should continue into 2021 and beyond. However, the pace at which it can do so is materially hampered by so many difficulties it has in its future. Unemployment is rising due to the pandemic, while uncertainty still looms thanks to Brexit. So while there will be growth, it certainly will not be a sudden bounce back to ore pandemic levels.

Rachel Lee
Having worked at Morgan Stanley and BNYMellon for over 10 years in pensions and investments, Rachel now works as a full-time business and financial writer.

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