What could coronavirus vaccinations from next week mean for the UK economy?

The news that the Pfizer/BioNTech coronavirus vaccine has been approved by the UK’s independent medicines regulator and that the first doses will be administered from next week has profound implications for the battle against the epidemic.  

Yet could the economic implications be just as significant?  

It’s the pandemic that has driven the UK economy into its biggest slump in some 300 years, so this news also arguably represents some of the best economic news since the crisis began.

How soon can normal economic life return? And just how much of a shot in the arm for the UK economy will a rollout of the vaccine this month be?  

Economic forecasts, particularly at the moment, are bedevilled by uncertainty; but we can get a rough indication of the thinking of the government’s own independent forecaster, the Office for Budget Responsibility (OBR), when it comes to the implications of an earlier vaccine rollout from its projections at the time of last week’s spending review.

The OBR put out three scenarios. It’s central one, which showed unemployment rising to 7.5 per cent next year and a long term hit to GDP of 3 per cent, assumed vaccines becoming widely available only from the middle of 2021 and “high-medium” public health restrictions in place until then.

But its upside scenario assumed vaccines widely available from spring next year and “medium-low” restrictions in place until then.

The economic difference between the two scenarios was significant. In the second scenario the unemployment rate rises only to 5.1 per cent (with peak jobless lower by around 700,000) and there is no long-term scarring to the economy.

This would, incidentally, suggest that the need for tax rises or spending cuts to reduce the deficit and the public debt in the wake of this crisis will be lower.  

In the central OBR scenario the deficit was projected to be around 4 per cent of GDP in 2024-25, but just 1.7 per cent in the second scenario.

Essentially, the OBR’s thinking is that a rapid vaccine rollout, and the lower public health curbs that it facilitates, allows more economic activity to return more rapidly after this year’s slump, which keeps people in jobs. This curbs the spike in joblessness that would otherwise damage the long term productivity growth of the workforce.  

The more rapid return of economic activity also encourages businesses to spend on investment – new equipment and technology for instance – which also limits the damage to our national productivity growth that would otherwise occur.

Private-sector economists are thinking along the same lines.

Simon French of the stockbroker Panmure Gordon thinks that a full rollout of vaccines by the end of the first quarter of next year could boost GDP growth in 2021 from around 5.5 per cent to 7.5 per cent as the rebound in consumer spending is brought forward.

And, perhaps most importantly, he thinks the long-term economic scarring could also be lower.

There is, of course, considerable uncertainty and many caveats about such calculations.

The nationwide rollout of vaccines will create logistical challenges. The Pfizer vaccine needs to stored at minus 70C.

And though the vaccine has been very effective in trials we still don’t know how long the immunity it confers will last.

Yet there are upside risks too. Other vaccines may get approval for early rollout too. Indeed, this is quite likely given Moderna and the AstraZeneca/Oxford vaccines have performed well in trials. The medical eggs are in more than one basket when it comes to vaccines.

There could, we should not forget, be shocks to the economy unrelated to the vaccine. For instance, a premature removal of fiscal support for what is still an extremely depressed economy, by the chancellor, Rishi Sunak, could undercut the benefits of an early vaccine rollout.

Yet there’s no question that the vaccine news, even with all those caveats, is a welcome upside surprise for the economy and living standards in an otherwise record-breakingly terrible year.