TIT BIG the reopening of Nando’s, a chicken-focused restaurant, in Stevenage Leisure Park on May 17 was a quiet affair. There was no ribbon cut and no long queue. But the young crowd was happy to eat inside for the first time since December, when the government ordered restaurants to close. About a third of the indoor tables were occupied, more than you would normally expect on a Monday lunchtime. Staff don’t think the restaurant will be full again until the multiplex cinema and bowling alley reopen later this summer. But a busier-than-normal chain of restaurants at an amusement park that currently has no leisure activities suggests Britons are ready to go out and spend.

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If the restaurant business was having a good day, the pubs had a great day. By mid-afternoon, all the tables at the cavernous local branch of Wetherspoons, a chain of pubs, were occupied. At a table, the manager interviewed a teenager in continuing education who was looking for a job in the kitchen. Among the questions were: “when can you start?”

The UK economy is quickly recovering from its biggest decline in three centuries – so quickly, indeed, that some people are starting to worry about the risk of overheating. Labor market statistics released on May 18 show declining unemployment and a resumption in wage growth. The next day’s inflation figures revealed the largest monthly increase in the annual rate of consumer price inflation (CPI) in more than a decade. Headline inflation fell from 0.7% in March to 1.5% in May.

But talking about overheating is premature. Global energy costs rather than national developments are at the root of most of the rise in consumer prices. There is so far no sign of a “post-reopening service inflation surge,” according to Samuel Tombs of Pantheon Macroeconomics, a consulting firm.

The higher-than-expected wage figures included in the labor market statistics are also less surprising than they appear. The National Statistics Office (ONS) reported that the average growth in regular compensation was 4.6% in the three months ending in March. But statisticians warn that the average is affected by a decline in the number of low-paying jobs compared to the pre-pandemic norm. Removing this composition effect suggests that wages are increasing at an underlying rate of 3%. Indeed, a recruiting website makes little mention of the salary growth advertised for low-paying jobs.

Many hotel bosses are worried about the labor shortage, but this industry is not typical. It has been particularly hard hit by the departure of European immigrants and by the changing economic geography brought about by the increase in homework. Many potential hospitality workers are now found in the wrong parts of the country. Slightly higher wage rates should help the market readjust. A labor shortage seems unlikely to derail the recovery.

The 2020 recession was not only the steepest in centuries, but also one of the strangest. The government absorbed much more of the economic crisis than in a typical recession with its holiday program, tax cuts and concessional loans. Despite a decrease of about 10% GDP, unemployment never exceeded 5.1%. Business bankruptcies were rarer than in 2019.

Household balance sheets have rarely been healthier. Last year, the household saving rate – the percentage of disposable income that people save rather than consume – jumped to its highest level on record (see Chart 1). Office workers found themselves saving a small amount on travel expenses and sandwich meals, and had fewer opportunities to spend the extra money. Around £ 145 billion (6.9% GDP) was added to household bank accounts in 2020, although the Bank of England believes the increase was mainly due to higher incomes.

How quickly the economy recovers will depend on what households choose to do with this treasure. Although overall consumption fell sharply in 2020 (see graph 2), transport and leisure activities accounted for most of the decline. Households are unlikely to make up for lost trips to the hairdresser in 2020 by reshaping their hair more often in 2021, but they could go out to pubs and restaurants slightly more than in 2019. Consumer confidence measures indicate a big rebound in spending. Services will likely benefit.

Healthier bank balances should support higher spending this year, even if cash is not drawn. Consumers with higher deposit levels than usual should feel less compelled to set aside as much of their income as usual, thereby reducing their flow of new savings and increasing their consumption. The National Institute of Economic and Social Affairs, a think tank, makes predictions GDP 5.7% growth for 2021, assuming the savings rate falls to more normal levels. If households choose to spend the accumulated cash balances, NIESR estimate that GDP growth could be about three percentage points higher.

Like a coil spring, the UK economy is rebounding as the government eases restrictions. Patrons of pubs and restaurants in Stevenage and across the country brace for a summer of fun as people make up for lost opportunities. Despite all the optimism, most analysts still expect the economy to be smaller at the end of the year than it was on the eve of the pandemic. This suggests that there is still enough slack in the system to absorb the rebound in demand. Britain’s economic summer seems to be typical of British summers in general: great fun, but not much risk of overheating.â– 

This article appeared in the Great Britain section of the print edition under the headline “Hot but not overheating”


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