A leading UK economic forecasting group has significantly upgraded the UK’s economic growth prospects for 2021, after resilient Q1 performance.
EY ITEM Club (the ITEM stands for independent treasury economic model), now expects 6.8 per cent GDP growth in 2021, revised up from the five per cent growth predicted in January, with the UK economy returning to pre-pandemic levels in the second quarter of next year, three months earlier than previously forecast.
Solid recovery is expected to develop from the second quarter of this year as restrictions are progressively eased and the Covid-19 vaccine roll out continues.
The EY ITEM Club’s forecast says: “Without in any way wishing to play down the awful impact of the pandemic on individuals and society overall, the EY ITEM Club Spring Forecast 2021 strongly suggests that at the level of the overall economy, we will emerge with much less damage than we feared. EY ITEM Club expects the UK economy to grow by 6.8 per cent in 2020, a significant upgrade from its forecast of five per cent expansion in its January forecast. Expected first quarter performance of a one per cent fall in output rather than the three per cent or four per cent previously anticipated illustrates just how innovative and flexible UK businesses and consumers have been in adjusting to restrictions on activity.”
It does appear that the UK economy will be less scarred than some of the more pessimistic scenarios outlined. Most obviously, in the labour market. EY ITEM Club expects unemployment to peak at 5.8 per cent in 2021, much better than the eight to nine per cent estimates that formed the consensus 12 months ago. This is hugely important, as it suggests we will not have lost skills and capability in significant numbers and should have more scope to bounce back quickly.
But the forecast warns that we are not out of the woods yet, but with EY ITEM Club forecasting further growth of five per cent in UK GDP in 2022, businesses can start to plan for the possibility of two years of strong economic performance, with a very favourable tax regime to support capital investment. Once the return to more normal operations is achieved in the coming months, it will be important to take the time to understand how the new landscape is settling to shape longer-term strategies.