The National Institute of Economic and Social Research has upped its growth forecasts for the UK, the influential think-tank confirmed on Monday.
Niesr believes the UK economy will expand by 5.7% this year, up from its earlier forecast in February of 3.4%. Its prediction of 4.5% GDP growth in 2022 is unchanged.
It said that the immediate economic effects of the virus “are expected to wane”, while the remaining negative consequences of Brexit would make themselves felt in sectors less affected by the pandemic.
In addition, Niesr argued that the third national lockdown, coupled with the successful vaccination rollout, had brought down new Covid-19 cases and deaths “dramatically”.
It continued: “Secondly, the government has announced a large rise in Covid-related spending in the 2021-22 fiscal year. This spending contributes directly to GDP growth, and the early confirmation of continuing support until September – in contract to the last-minute U-turn over the Coronavirus Job Retention Scheme in October – provides clarity and stability to households and businesses, allowing more confidence in forward planning.”
Niesr now expects unemployment to peak at 6.5% in the final quarter of 2021, with the rate for the year likely to be 5.6%. In February, the think-tank had forecast a peak of 7.5% and an overall rate of 6.5%. It attributed the changes in it forecasts to the extension of the furlough scheme and other support measures into the autumn.
CPI inflation is expected to rise to 1.8% in the final quarter before falling to 1.5% by the end of 2022 and settling just below the Bank of England’s 2% target between 2023 and 2025.
Niesr noted: “After a year in which the UK suffered one of the worst Covid-19 death rates in the world, coupled with one of the deepest recessions, there are now grounds for some optimism about recovery in both respects.
“Economic data, official and unofficial, have exceeded many expectations in the first few months of 2021.
“Following the worst economic performance among G7 countries in 2020, optimism about the UK recovery is broad-based and well-founded.”
However, it cautioned: “The principal downside risk remains a resurgence of the Covid-19 virus, through new variants or the failure of vaccines, and the UK will not be physically or economically protected from a failure to control the virus globally.”