The UK’s economic growth prospects for 2021 have been significantly upgraded in the EY ITEM Club’s Spring Forecast, published today. The EY ITEM Club now expects the economy to grow 6.8% this year rather than the 5.0% growth expected in January.
The improved near-term outlook means the UK economy is expected to regain its pre-COVID-19 peak in the second quarter of 2022 – a further improvement from January’s forecast of the third quarter of 2022, and the 2023 and 2024 dates predicted previously.
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. The substantial near-term fiscal support for the economy announced in the Chancellor’s Budget, the roadmap towards economic reopening, and the continued rapid roll-out of COVID-19 vaccines have also helped to improve growth prospects.
The EY ITEM Club now believes that GDP contracted by just over 1% quarter-on-quarter in the first quarter of 2021, rather than the 3-4% contraction expected in January’s Winter Forecast. Looking ahead, growth in the region of 4-5% quarter-on-quarter is expected in 2021’s second quarter, with the economy helped by the continuation of the reopening roadmap and supportive fiscal and monetary policy.
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.”
A faster recovery in 2021 is pulling predicted growth forward, and while the EY ITEM Club now expects growth of 5.0% in 2022 (down from 6.5% in January), the economy is predicted to return to pre-pandemic levels in Q2 2022, faster than previously expected. The forecast also expects growth of 2.1% in 2023 (up from 2.0%) and 1.7% in 2024 (down from 1.8%).
Suzanne Robinson, Office Managing Partner for EY in Yorkshire, said: “Of course we welcome the movement of jobs from Whitehall and the South, such as the Bank of England and the Department for Transport North hubs both being based in Leeds, However, if our economy here in the North is to continue to grow, we also need to create the conditions to hot house more innovative companies. It’s a virtuous circle - as more of these fast growth businesses come to the fore, they give confidence not only in our ability to recover but to build back bolder.
“We have the platforms - leading education, science, R&D opportunities and thriving digital and media hubs, which will be further bolstered by Channel 4’s Leeds HQ and the news that hundreds more BBC jobs will be relocating North. We already understand the importance of connecting our villages, towns & cities through better transport networks, exploiting technology to drive new channels for business and investing in the skills, health & wellness of our communities.
“However, to be yet more productive we need to look to opportunities presented by gigabit connectivity, energy transition and sustainability.”
Labour market helped by furlough scheme, with forecast peak unemployment rate revised down to 5.8%
In further positive news, the EY ITEM Club’s Spring Forecast also predicts a lower peak in the unemployment rate than initially expected. Unemployment is now forecast to reach 5.8% in the fourth quarter of 2021 – down from the 7.0% peak predicted in January – and is expected to be as low as 4.5% by the end of 2022. The EY ITEM Club says that the furlough scheme has supported UK employment throughout the pandemic and has been a key part of the economy’s resilience.
Suzanne Robinson 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.”
Business investment expected to gain momentum in 2021 and see further growth in 2022
Following a contraction of 10.2% in 2020, the EY ITEM Club expects business investment to gain momentum over the course of 2021, rising 7.1% as companies grow more confident in the recovery. Business investment growth of 10.5% is then expected in 2022 as confidence benefits from a more settled business environment.
The EY ITEM Club’s forecast notes that, while businesses will benefit from Budget measures designed to incentivise investment – including the 130% ‘super deduction’ relief on plant and machinery expenditure – these measures are primarily expected to bring investment forward to 2021 and 2022 rather than increase it substantially overall.
Suzanne Robinson said: “With two years of decent growth forecast and measures announced in the Chancellor’s Budget to support capital investment, businesses can start to plan ahead with more confidence and invest in the future. Disruption and uncertainty have contributed to relatively weak levels of UK business investment in recent years, so there is some catching up to do too. Many companies may now need to think about replacing or upgrading plans and processes which have become outdated while business priorities and attention have been elsewhere.”
Net trade expected to be negative in 2021
The EY ITEM Club forecasts net trade to be significantly negative in 2021 with exports – up 4.9% – expected to be outgrown by imports – up 7.6%. Both imports and exports are expected to have declined in the first quarter of 2021, largely because of the new trading relationship between the UK and EU coming into effect at the start of the year. This first quarter contraction will hold back overall trade growth for the rest of the year. Net trade is expected to be remain negative in 2022 as exports rise 8.0% and imports expand 11.3%.
Strong consumer spending growth expected to continue into next year
The EY ITEM Club forecast says that, overall, consumers look well-placed to play a key role in the recovery given the recent high savings ratios and lower-than-expected levels of unemployment. The household savings ratio reached 16.3% in 2020, up from 6.8% in 2019.
After a contraction of 10.9% in 2020, consumer spending is expected to expand 4.4% in 2021 before growing 5.7% in 2022 as consumers benefit from falling unemployment and increased earnings growth. Consumer spending is then expected to grow 2.2% in 2023 and 1.9% in 2024.
Inflation is expected to be higher overall in 2022 – averaging 2.2% – but households are still expected to see growth of 3.5% in real household disposable income. While higher, the EY ITEM Club does not forecast inflation to be a significant issue as there will still be excess capacity in the economy and labour markets.
Howard Archer added: “While it must be said that not every household has been able to save more over the last year, there is likely to be significant pent-up demand released as the economy re-opens. Indeed, we’ve already seen some evidence of this. Overall, consumers will play a significant role in the economy’s recovery.”