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Old demons will return to haunt the UK after its post-Covid economic recovery fades, former BOE deputy Charles Bean tells MNI.
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While predictions of consumers spending vast amounts of the involuntary savings built up during lockdowns look overblown, Bean, now a top official at the Office for Budget Responsibility, said in an interview. But the economy should recover as social distancing restrictions are removed before returning to the pre-pandemic world of low productivity growth with further damage due to greater friction in trade with the European Union.
The central projection of the OBR, which produces official fiscal forecasts, is for GDP growth of 4.0% this year and 7.3% in 2022, before it falls back to 1.7%, 1.6% and 1.7% in 2023, 2024 and 2025 respectively.
BOE Chief Economist Andrew Haldane has made headlines talking about pent-up demand. with households having built up GBP100 billion of 'excess savings' through the Covid lockdowns. But the Bank's own forecasts have assumed a fairly low proportion of these savings are spent, a view Bean endorses.
"You do get some people taking the view that 'Oh, you know, these savings are all going to be unleashed and spent in the next year'. Now, if that happens that would be a very big impetus to spending, I think about 6% to the level of consumption over the next year or two. But I think that is wholly implausible," Bean said.
Evidence suggests that when people have an unanticipated increment to their wealth they only spend it gradually.
"A lot of the extra savings will be by relatively better-off households, and I think it is plausible just to think they'll be spent gradually over time at the rate of about 5% a year," Bean said.
"Now it is possible that once the pandemic is over you may get a state of euphoria, 'let's spend like mad', and that is an upside risk," Bean said. But he added that this was a lower-probability scenario.
"The main reason consumption is going to bounce back has absolutely nothing to do with this. The main reason that consumption bounces back is that the economy is being re-opened and people can go out and spend again," he said.
Once this spending burst fades the UK will have face up to its pre-Covid demons, most notably the low productivity growth that has haunted it for more than a decade.
"The real story here is this underlying weakness in productivity growth since the financial crisis," Bean said.
"Then layered on top of that you have got a Brexit effect, of which I think about 40% is now in the data and 60% to come, about half of which is over the (five year) forecast period and half beyond … And that Brexit effect is knocking 4% off the level of GDP relative to where it would have been if we hadn't voted to leave the EU. So that is another drag," he said.
The OBR sees both supply and demand moving in tandem in the immediate future, which leaves Bean questioning whether the Bank of England Monetary Policy Committee's additions to QE, after it had dealt with the initial Covid shock, was justified. The OBR estimates the output gap at 1.1% in 2021 and just 0.4% in 2022.