The nation is feeling good, lockdown is nearly over. Elections have taken place and we can go on holiday to a small list of destinations.

However - what does the next 12 months look like for the UK economy?

According to Andrew Bailey all is well and we are finally getting over the pandemic as he is forecasting economic growth of more than 7% this year, due in part to the successful vaccine rollout in the UK.

The Bank reported that during 2020 there were net repayments of £16.6bn of consumer credit, presumably of those who continued to work or were furloughed and unable to spend as normal. However, there is a sector of the economy who suffered during the pandemic being many self-employed; those in the hospitality, leisure and entertainment sectors and small limited company directors who were not eligible for Government support.

What the next 12 months hold for the economy is uncertain, but here at SKSi, Alistair Dickson, who heads our Banking and Finance Team has been mulling over the different possibilities and would be interested to hear other views and opinions.

Scenario 1:

The Bank of England analysts have got it right and we all go out and put money back into the economy; business booms and the future is rosy. Tax revenues from increased economic activity will rise, enabling the Government to start paying down the record increase of £300bn of debt.

Scenario 2

We would caution that the Bank’s perceived growth is actually “bounce back” towards pre-Covid GDP activity levels as opposed to normalised economic growth. A number of businesses were probably heading for failure pre-Covid and have only survived because of the Government financial and legislative support schemes. These businesses will now be looking at severe cashflow issues as they try to trade out of their predicament. There will inevitably be failures which will hit tax revenues and increase unemployment. Although, hopefully, with most of the population having paid down debts and so feeling “wealthier” their renewed economic activity will see the UK economy gradually recover.

Scenario 3:

What if those that have paid down debts and saved money decide not to go on a spending spree? What if they have concluded that “frivolous” spending on meals out, holidays and “treats” is just that – frivolous and unnecessary? What if instead of adding that all important boost to the economy the majority of the population decide that being financially sensible is the new normal? Research conducted by Ipsos MORI supports this view, with 79% saying they want to save enough money, so they don’t need to worry about losing their job.

So what if all the zombie companies do not see a recovery and collapse unable to repay creditors? We cannot underestimate the knock-on effect of thousands of businesses closing on unemployment, the secondary fall-out of their creditor companies and falling tax revenues. Previous recessions have proven this!

Under this scenario will the Government be forced to continue to prop up the economy and, if so, for how long could they afford to do so? Might there be a government “magic carpet” to prevent a raft of insolvency?

Perhaps they will park all the CBIL and BBL debt into a government vehicle such as UKAR in the UK & NAMA in Ireland as they did with distressed property debt in the banking crisis of 2008? Such a scenario would likely see the continuing of the prevention of taking action against your creditors which will have the same detrimental effect on businesses as debts remain unpaid and so impact the cashflow on a raft of otherwise healthy businesses. This economic Armageddon is hopefully just a worrying figment of our imagination because the Bank are right in their forecasting.

Obviously, we sincerely hope that scenario 1 is what plays out but what do you think? We are really interested to hear other opinions on where the economy is heading.

Which one would you choose?

• Scenario 1 - The Bank of England analysts have got it right
• Scenario 2 - Renewed economic activity will see the UK economy gradually recover.
• Scenario 3 - Economic Armageddon

Please head to SKSi LinkedIn page to vote in our poll.