UK economy to rebound faster than expected, report says

by | Apr 26, 2021

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The UK economy will grow more than expected in 2021 and will regain its pre-crisis peak earlier than predicted, according to one of the country’s most prominent forecasters.
The EY Item Club expects output to increase 6.8% this year rather than the 5% it forecast in January after the economy showed resilience in the past two quarters. As a result, GDP will return to its pre-pandemic high-point in the second quarter of 2022 and not the third, Item said.

The economy shrank by just 1% in the first quarter of 2021 instead of the expected 3-4% and will expand by 4-5% in the current quarter, Item said. Prospects have also been boosted by further support in the February budget, the government’s reopening plan and the NHS’s successful vaccination programme, the research group added.

Item said its forecasts indicated the economy would suffer less permanent damage such as long-term unemployment and the failure of otherwise solid businesses. The forecaster cut its estimate for peak unemployment to 5.8% from 7% forecast in January.

Surveys on Friday showed services and manufacturing activity accelerating as the economy began to reopen from lockdown and with vaccines increasing confidence in the recovery. Consumer sentiment jumped in the first quarter, paving the way for a sharp rebound in spending, a Deloitte report showed on Monday.

Howard Archer, Item’s chief economic adviser, said: “The UK economy has proven to be more resilient than seemed possible at the outset of the pandemic. Businesses and consumers have been innovative and flexible in adjusting to Covid-19 restrictions and, while restrictions have caused disruption, lessons learned over the last 12 months have helped minimise the economic impact.

“Our latest forecast suggests that the UK economy will emerge from the pandemic with much less long-term ‘scarring’ than was originally envisaged and looks set for a strong recovery over the rest of the year and beyond.”

After plunging by almost 11% in 2020 consumer spending is expected to rise by 4.4% in 2021 and 5.7 in 2022 as unemployment falls and real earnings rise, Item said. Archer said inflation was a risk to watch out for as the economy springs back to life but that the Bank of England was unlikely to increase interest rates until late 2022 at the earliest.

Archer said: “While not every household has been able to save more over the last year, there is likely to be significant pent-up demand released as the economy reopens. Overall, consumers will play a significant role in the economy’s recovery.”

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