UK economy could grow by nearly 7 per cent in 2021

The UK economy could recover earlier than previously thought as accounting firm EY significantly upgrades its economic forecast.

Following initial predictions made in January, the EY ITEM Club now expects UK GDP to grow 6.8 per cent this year, up from 5 per cent in the previous forecast.

This means that UK output could recover to pre-pandemic levels in the second quarter of 2022, a further 3-month improvement on the January forecast.

At the height of the crisis, some forecasters had said this would not happen until 2024.

The upgraded forecast primarily reflects the UK economy’s resilient performance in the lockdown-affected fourth quarter of 2020 and first quarter of 2021, providing a better-than-expected platform for growth through the rest of this year.

Moreover, the substantial near-term fiscal support for the economy provided by the Government, as well as the roadmap to reopening and the continued rapid roll-out of COVID-19 vaccines, have also helped to improve growth prospects.

Looking back on the first quarter of 2021, the EY ITEM Club now believes UK GDP fell by just 1 per cent despite the national lockdown.

Growth in the region of 4 and 5 per cent is now expected in the second quarter, with the economy going from strength to strength amid further reopening.

Howard Archer, chief economic advisor to the EY ITEM Club, 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.

“There will be some issues to look out for though, not least inflationary risks which will grow as the recovery gains pace and monetary policy remains accommodating.

“Interest rates aren’t likely to rise until late 2022 or early 2023 at the earliest.”

The labour market outlook has also improved on the January forecast, with unemployment expected to peak at just 5.8 per cent in the fourth quarter of 2021, down from 7 per cent predicted previously.

The Coronavirus Job Retention Scheme (CJRS) has played a leading role in keeping this figure down and has supported economic activity more generally.

Mike Scoular, EY senior partner for the North East, said: “Lower peak unemployment is good news for both society and the UK’s longer-term economic prospects.

“It means the economy is less likely to lose significant skills and capacity and should have more scope to bounce back quickly.

“That said, the experience in the employment market has not been uniform and younger workers have been among those most affected by job losses or reduced employment opportunities.

“As the economy recovers, it’s vital that businesses step up by providing opportunities to support younger workers back into employment and invest in the skills and training that many have missed out on over the last year.”

Lastly, business investment is expected to gain momentum in the year ahead, rising 7.1 per cent as companies grow more confident in the recovery.

In 2022, business investment is expected to be even higher at 10.5 per cent.

The EY ITEM Club’s forecast notes that, while businesses will benefit from the 130 per cent ‘super deduction’ relief on plant and machinery expenditure this measure is primarily expected to bring investment forward to 2021 and 2022 rather than increase it substantially overall.

Business investment fell by 10.2 per cent in 2020.