Despite the delay on the lifting of all lockdown restrictions for another month, the UK economy is still set for a breakthrough year, according to the latest CBI economic forecast.
The easing of many Covid-19 restrictions in line with the UK Government roadmap, rapid roll-out of vaccines and the unleashing of pent-up demand means that the UK economy is poised for considerable economic growth over the summer.
But this won’t be felt as strongly by those sectors still working under restrictions. More broadly, stagnant productivity and business investment remain a drag on the longer-term sustainability of economic growth.
UK GDP is set to bounce back to its pre-Covid level towards the end of 2021, a year earlier than the previous CBI forecast (in December 2020) expected. The CBI is forecasting GDP growth of 8.2% this year, and 6.1% in 2022 (revised up from 6.0% and 5.2% in its previous forecast), following a historically large (9.9%) fall in output over 2020.
Household spending is underpinning this recovery, driving just over a quarter of GDP growth in 2021, and 70% of growth in 2022. Consumer spending is bolstered by an improvement in real incomes, and households running down some of the excess savings built up over the last year.
The CBI now also expects a much lower peak in the unemployment rate (5.5% in the third quarter) than in December (7.3% in Q2 2021). This is in part due to the extension of the Job Retention Scheme into the autumn, the resilience of the labour market so far, and expectations of a much stronger economic recovery.
A temporary boost to Government spending on tackling the virus is another significant contributor to growth this year, driving around half of the rise in GDP over 2021. Business investment is also set to claw back some of its losses, spurred on by strong economic growth and rising confidence, reinforced by the Super Deduction Tax Break announced in March’s Budget.
Business investment nonetheless remains 5% below its pre-Covid level at the end of 2022, reflecting both the scale of the decline seen during the crisis, and lingering uncertainty over the longer-term impact of Covid-19 on business models.
Tony Danker, CBI Director-General, said: “There are really positive signs about the economic recovery ahead this year and next. The data clearly indicates that there is pent up demand and ambition across many sectors.
“The imperative now must be to seize the moment to channel this investment into the big drivers of long-term UK prosperity. That is why it is the right time for Government to come forward with far more detailed plans on everything from decarbonisation, to innovation to levelling up.
“Clearly this does not apply to the hardest hit sectors from the pandemic which even now face continued delays and genuine challenges to stay viable. Extending the commercial rent moratorium will help keep some firms’ heads above water, but the Government must also do the same on business rates relief.
“It would be devastating for hospitality, events or aviation businesses to fail on what we hope is the last leg of restrictions.”