UK economy to return to pre-COVID levels a year earlier than forecast

Businesses confidence has returned to the UK, with the economy set for a breakthrough year - despite this week’s delay on the lifting of the last lockdown restrictions. The easing of most pandemic-related restrictions in line with the government’s roadmap, rapid vaccines roll-outs and the unleashing of pent-up consumer demand are behind the numbers, according to the CBI.

The business group 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 an historically large (-9.9%) fall in output over 2020.

The business group warned that this boost won’t be felt as strongly by those sectors still working under restrictions, however, and, more broadly cautioned that stagnant productivity and business investment remain a drag on the longer-term sustainability of economic growth.

Household spending is the linchpin of 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.

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 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 over the crisis, and lingering uncertainty over the longer-term impact of COVID-19 on business models.

CBI director-general, Tony Danker, 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’s why it’s 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 who 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.”

Alpesh Paleja, CBI lead economist, added: “Successful rollout of COVID vaccines and an improvement in health outcomes means we are set for a bounce in growth over the summer. However, this won’t feel like a recovery to some, the aviation and events industries in particular will take much longer to recoup their losses.

“Other long-term challenges are also emerging: recruitment difficulties are adding to global supply bottlenecks, which are in turn stoking pricing pressures. While these should subside as activity around the world normalises, it’s one to keep an eye on.

“As we move from crisis to recovery, it’s important to present a vision for what a post-COVID economy should look like. Maintaining the strength in innovation and tech adoption during the pandemic, and facilitating the adjustment of firms to new ways of working, are only the first steps in tackling the UK’s burdensome legacy of weak productivity.”

The global outlook (Source: CBI)

• A recovery in global trade drives UK exports growth in the CBI’s forecast, which grow by 2.1% in 2021 and 10% in 2022. The recovery is particularly pronounced in global goods trade, likely reflecting strong growth in large economies including China and the US. However, global services trade is likely to lag behind by comparison – reflecting a more sluggish recovery in areas such as tourism and aviation.

• The business group expects stronger global GDP growth (6.3% in 2021, 4.9% in 2022 in purchasing power parity terms) than in its last forecast (5.6% and 4.3%), thanks partly to better health outcomes and fiscal stimulus in the US, which fuel consumer spending and business investment.

• There is some divergence in the global recovery. The group expects a weaker near-term outlook in the Eurozone, and many emerging markets are also likely to lag behind, due to variable progress in tackling the pandemic so far.

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