Vaccines inject a fresh dose of optimism in UK economy

Covid injection

Growing optimism about the vaccination programme has lifted public confidence to its highest level since March, a survey has suggested.

The household confidence index from GfK, the market research institute, jumped five points to -23 this month as Britain raced ahead of many of its international peers to vaccinate 15 million people.

The success of the inoculation drive and falling case numbers have raised hopes that the economy will be released from strict curbs. Boris Johnson is expected to announce a path out of lockdown on Monday, which is likely to begin with schools reopening on March 8.

The positive developments boosted household confidence to its highest level since March last year, when the index was -9 per cent and Britain was on the verge of its first lockdown. It fell to -34 in the weeks after the lockdown was imposed. Although it has now partially recovered, confidence remains close to its lowest level since the financial crisis in 2008.

The change was driven by increased optimism about the economy. The sub-index for the economic outlook over the coming year rose by 14 points to -30. It is now nine points lower than it was in February last year. The index for personal finances rose by two points this month to +4 — only two points lower than in February last year.

Although the pandemic has taken a heavy toll, the government’s income support schemes have helped to protect jobs and incomes. As the economy shrank by a record 9.9 per cent last year, unemployment rose only slightly to 5 per cent, considerably lower than initial estimates of a 12 per cent increase.

As a result, people remained relatively sanguine about their personal finances even as confidence in the economy plummeted.

However, economists warned yesterday that household finances would come under pressure when the support schemes were withdrawn in the spring. Unemployment is forecast to rise sharply to 7.5 per cent in the coming months, which will weigh heavily on household incomes.

Joe Staton, client strategy director at GfK, said: “We need to be cautious because the positive tailwinds of the vaccination rollout are being met by the very strong headwinds of unemployment, the threat of inflation and the difficulty that many face in affording day-to-day living costs — all serious issues that can dampen consumer confidence.”

The economy is likely to suffer a painful readjustment when support is withdrawn, as some of those people coming off furlough will be made redundant. Finding jobs elsewhere will depend in part on how quickly economic demand recovers when restrictions are eased — analysts are hoping for a surge in economic activity once they are. Households, particularly those on higher incomes, have built up a record amount in savings that could help to fuel a boom in spending.

GfK’s major purchase index, which measures people’s propensity to spend on expensive items such as holidays and cars, rose by five points to -19 in February. The index is 25 points lower than it was in February last year. The savings index rose one point to +19 in February, a point lower than this time last year.