Will vaccine save the UK economy?

Vaccines in general have saved more lives than almost anything apart from clean water. They have been shown to

pay for themselves and much more.

The easiest way to imagine the impact of an approved vaccine in economic terms is to imagine the board meetings happening in companies up and down the country right now.

Weary executives, finance directors in particular, will be signing off on investment plans for the fiscal year starting in April 2021.

The very basis of those calculations will now alter, with the reasonable chance that most of that year could resemble a situation more normal than abnormal, thanks to at least one approved vaccine.

It is the shot in the arm required for medium-term confidence, and could prevent a self-fulfilling spiral of negativity, closure and joblessness.

Nothing is certain, but those planning on the basis of some sort of normal, will feel confidence to take risks, that keep more people employed, and the economy growing. Clearly an approved, rolled out, effective and well-used vaccine will eventually reduce the need for lockdowns and severe social restrictions.

In a March study from the Resolution Foundation, which accurately predicted the double digit hit to the economy and the public finances from the pandemic, Covid-19 was best thought of as following the economic path of the Ebola epidemic in West Africa or Spanish flu in 1918-19, with multiple peaks and troughs.

We have never had a vaccine arrive in the middle of a pandemic before, so the benefits could be extremely large. It could be the equivalent of the East Asian countries’ which, through effective public health measures (rather than a vaccine), dodged the long-term fiscal and economic impact of SARS in 2003, and Covid-19 over the past year.

In other words it could, in economic terms, make up for the relatively sluggish response at the beginning of the pandemic.

The author of that paper, Richard Hughes, is now the chief executive of the Office for Budget Responsibility.

This approval pushes the fate of the economy a little closer to the “upside scenario” set out in the OBR’s forecasts for the UK economy last week. This assumers there would be “widespread” vaccine availability by Spring, bringing back a more normal economy at the time the furlough scheme is due to end, and therefore causing only a small increase in unemployment.

Two notes of caution. The very short-term impact might work both ways. The restrictions could stay in place, and perhaps be stricter than they otherwise would have been.

Also the key voluntary social distancing – where the public simply decides not to go to restaurants, pubs and shops – may be maintained at a higher level through to the spring.

Why? Because, as the government itself is advising, with the scientific cavalry on the way, and light at the end of the tunnel, why take risks right now? Also the early direct beneficiaries of vaccination will be concentrated among the most elderly and at risk, as well as health workers. It will not be the public at large.

Three months of patience might weigh on the social side of the economy at the same time as fundamental changes to trade affect the manufacturing and service sectors.

And then there is the fact that the success of the scheme is now baked in to asset prices. Any plausible deviation or setback, either to rollout or in the science, risks precipitating a quick downside for stock markets and house prices.

Risks aside, the development, approval and acquisition of an effective vaccine stands to offer an incalculable boost to people’s lives, but livelihoods too, over the next year.

This is the first approved vaccine for human use for any coronavirus ever. It’s also the first ever vaccine to be available in the middle of a pandemic. And that could offer an economic stimulus far greater than anything the Bank of England and HM Treasury could provide.