United Kingdom

In the UK, the grand reopening will allow pent-up demand equivalent to at least 3% of GDP to materialize in 2021 and push GDP up by +6%, one of the highest European growth rates. The rapid pace of vaccination allowed the economy to reopen, with mobility data improving and economic data strongly recovering since April, notably within the sectors that faced heavy restrictions during lockdowns. We expect companies to invest actively in 2021 (+11.8% followed by +8.9%), supported by excess cash (GBP122bn or more than 5% of GDP). The hyper-amortization scheme until end-2023 should support business investment and sectors such as manufacturing, transportation, food and accommodation stand among those most willing to use the tax break in view of their higher share of total assets accounted for by the plants and vehicles to which the scheme applies. In the short run, a demand catch-up and the reduction in spare capacities will drive a business investment recovery. However, it could take up to four years to return to long-term growth trends: Credit conditions during the recovery phase may be tighter and excessive levels of corporate debt could limit companies’ ability to borrow once state-support schemes are phased out.

Bottlenecks to the recovery are more and more visible and probably exacerbated by Brexit. This is particularly visible in the form of labor shortages in transport, construction and sectors such as tourism and catering and hospitality. Hence, pressures on wages are rising and we expect overall growth to accelerate up to +2.9% on average in 2022. In 2022, we expect GDP growth to slow down to +4.9% as fiscal assistance mechanisms will fully end and the UK will be one of the first countries to start fiscal and monetary consolidation: in total, GBP30bn (1.3% of GDP) through a rise in personal income tax in 2022, followed by the rise in corporate tax to 23% in 2023. The Bank of England is also expected to raise the key interest rate as soon as September 2022 (+15bp), embarking on an early, but timid monetary normalization cycle.

In the medium-run, Brexit will continue to have a negative impact on trade flows with the EU. In Q1 2021, the impact on imports from the EU fell by more than -20% against monthly flows in 2019 while imports from outside the EU remained in positive territory despite the increased supply-chain disruption. Hence, the increase in import prices from the EU of about +5% due to non-tariff barriers after Brexit is not so far from the tariff barriers for imports from China, i.e. 6.5% excluding exchange rate effects. The question of the trade rotation remains high if trade hurdles are not resolved, notably when the UK will also implement border controls on imports from the EU from October onwards. In addition, the end of the transition period for EU derivative products clearance in the UK in mid-2022 could bring more downside risks to the sector, given the tough negotiations on ‘equivalence’. - June 2021