Britain has rebounded, but long Covid hangs over prospects

Before the omicron variant hit, although the demand for office space undoubtedly suffered, it seemed pretty clear that the office wasn’t going to die and, in the same way, cities were going to remain attractive poles for human activity.

The scale of the supply shortages came as a surprise. Certainly, the shortages and disruptions due to Brexit had been well announced by the Remainer camp.

But in this case, Brexit played a relatively minor role, as evidenced by similar scenarios around the world, ranging from mainland Europe to the United States and China. It is the Covid that has done the big damage.

The strength of the UK labor market has been truly surprising. At the start of the year, it was widely believed that the unemployment rate would rise from 5% to over 7%. It has fallen steadily and now stands at 4.2 pc.

Given the strength of aggregate demand, spurred by huge government spending and borrowing – financed and therefore monetized by the Bank of England – it is hardly surprising that inflation has picked up. Yet many observers, including the Bank, were taken by surprise.

At the start of the year, inflation stood at 0.7 pc. In November, it had reached 5.1 pc. Nevertheless, in the current economic circumstances, it was not surprising that the Bank kept interest rates at their historic low of 0.1 pc until it felt compelled by the surge in inflation. to increase to 0.25 pc last week. But even after this hike, real rates, adjusted for inflation, are still negative at nearly 5pc.

As expected, the government continued to pump massive amounts of bonds to finance its deficit, although the rapid economic recovery significantly reduced the rate of new borrowing. Huge debt issues were absorbed with remarkable ease, aided of course by the Bank’s bond drawdown as part of its quantitative easing program.

Yes, gilts’ yields have increased a little, but not by much. The yield of 10-year gilts only increased from 0.2pc to about 0.7pc. Thus, the implicit short-term real yield of these bonds is strongly in negative territory, at minus 4.4 pc. The real explicit return on 10-year indexed gilts is minus 3.2 pc.

Rapid money creation and extremely low interest rates and bond yields, negative in real terms, are surely at the root of one of the most notable characteristics of 2021, namely the strength of most of the prices of the active.

During the year, the UK’s main stock index, the FTSE 100, rose by around 11pc. This figure is small compared to the rise in stock prices in many other countries, particularly the United States.


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