Economists are raising their forecasts for the UK economic growth this year thanks to the fast vaccines rollout, the extension of government support and the resilience shown by businesses during the latest lockdown.
Leading economists now expect the economy to grow 5.4 per cent this year, much stronger than the 4.2 per cent expected in February, according to Consensus Economics — a company that averages forecasts.
But many are predicting even faster growth. Andrew Goodwin, chief UK economist at Oxford Economics, said: “Most forecasters are too pessimistic about the outlook and the strength of the recent data suggests our forecast that GDP will grow by 7.2 per cent in 2021 is well on track.”
The consultancy EY Item Club updated its growth forecast on Monday to 6.8 per cent in 2021, up from 5 per cent predicted in January. It sees the UK economy returning to its Q4 2019 level in Q2 2022, three months earlier than previously predicted.
The consensus rate of output growth would be the fastest pace since 1989 as the economy rebounds from the largest fall in output in more than 300 years in 2020. Any expansion above 6.5 per cent would be the strongest since the second world war.
A “considerable upgrade” is also expected in the Bank of England GDP growth projections when it publishes its monetary policy report next week, according to Elizabeth Martins, senior economist at HSBC.
Economists have become more optimistic about UK growth prospects because of the substantial government support announced in the chancellor’s March Budget and the reopening of the economy that has been possible with a low number of infections and the rapid rollout of Covid-19 vaccines.
The extension of the government’s job retention scheme until the autumn also prompted a more optimistic consensus unemployment outlook, now forecast at 5.9 per cent in 2021, down from the 7.4 per cent expected in September.
Early data from the easing of the lockdown have been promising, with the latest business surveys and measures of consumer mobility pointing to a “barnstorming” start to the second quarter, according to Martins.
Yael Selfin, chief economist at KPMG, said the prospects of UK social distancing restrictions being lifted faster than other European countries this summer “could see a particularly strong Q3 this year, with pent-up demand and summer holiday spending being absorbed almost exclusively by the domestic hospitality sector”.
But the brighter outlook for the UK economy also comes from the resilience of businesses during the latest lockdown, as shown last week by falling unemployment and strong retail sales.
The data reflect that more businesses remained open and suffered a milder hit to their turnover during the latest lockdown than in spring 2020 by adapting to Covid-19 restrictions and finding consumers willing to buy online. “Businesses and consumers have been innovative and flexible in adjusting to Covid-19 restrictions,” said Howard Archer, chief economic adviser to the EY Item Club.
In February, the BoE forecast a 4 per cent GDP contraction in the first quarter, but with better than expected incoming data, Ruth Gregory, senior UK economist at Capital Economics, said the drop in output could be 1.8 per cent “or even smaller”.
However, the costs associated with Brexit could be a drag on the post-Covid recovery, warns Goldman Sachs economist Sven Jari Stehn.
He forecast 7.8 per cent GDP growth this year, but added that custom checks after the UK moved to a new trade deal with the EU on January 1 would continue to create disruption this year.
“Brexit is likely to lower trend growth [in the medium term] by holding down investment and net migration,” he added.
Source: Economy - ft.com
