A faster and fuller recovery within sight

Our view that the economy will return to its pre-pandemic size in Q1 2022 and that it won’t be permanently smaller due to the pandemic is a more optimistic take than that of most forecasters. It implies that the government doesn’t need to tighten fiscal policy to reduce the budget deficit from 20% of GDP in 2020/21 back to pre-pandemic levels of around 2% of GDP and that the Bank of England won’t need to launch more QE or resort to negative interest rates this year or next. The latter is consistent with market interest rate expectations and gilt yields rising this year.