TRUE: The UK economy is a service economy. The service sector contributes to approximately 80% of UK GDP and employs 75% of the labour force. This is one of the factors why the UK was expected to be the hardest hit. The service sector, particularly, has and continues to suffer from the impact of lockdown restrictions.
Furthermore, the UK was gripped by the uncertainty surrounding Brexit which did not help. Additionally the UK has had one of the worse death rates which has led to much stricter restrictions for a longer period relative to other major economies. Conversely, the UK now leads with its swift and successful vaccination programme which looks hopeful for an earlier economic comeback than others.
FALSE: There have been a number of concerns raised on the prospects of ‘face-to-face’ service sectors, that continue to be negatively impacted as consumer attitudes take a step change due to COVID-19. This pandemic has accelerated the trend of moving all things online, from the way we work, shop and socialise. Some of this was already underway, but other aspects have only just come to light.
Structural change is often referred to as permanent change. The last time the UK economy experienced a structural change was in the early 1980s – transitioning away from manufacturing and production, towards becoming a services-orientated economy. It is too early to say whether the impact of COVID-19 on consumer attitudes to the way we work, travel and play is permanent, and therefore for now, at least, this change cannot be classed as a structural change.
FALSE: During 1991-2001 the Bank of Japan trialled what would be known as quantitative easing (QE) to lift the Japanese economy out of its low growth rut or what is now referred to as the ‘lost decade’. QE in effect causes bond yields to fall and flattens the yield curve, pushing investors to invest in the economy as returns are limited elsewhere. QE was always seen as a temporary measure, but here we are almost ten years on, and it continues to dominate. These measures bring about their own challenges, which is why policy makers have to weigh up if and when they should deploy QE. One such challenge is fostering an environment that could bring about the ‘Japanification era.’
Japan has been battling against deflation, anaemic economic growth and low bond yields for almost three decades now. During COVID-19 investors became worried that Japanification will define more of the world economy. However, the UK has not become a victim of Japanification and the fears it will be are to a certain extent misplaced.
COVID-19 and the subsequent government measures that followed such as ‘Eat Out to Help Out’ and VAT reductions led to inflation hovering just above zero (0.2% Aug 20). This is what was required at the specific time.
When the UK economy begins its recovery trajectory those fiscal and monetary measures will help drive up demand, placing upward pressure on prices. The good news is that UK inflation is on the rise (0.7% Jan 21) and could pass the Bank of England’s 2% target later in the year. The rapid vaccination rollout is bolstering the outlook for growth prompting the rise in bond yields. Therefore all the factors at play point towards inflation and not Japanification or deflation.