The British economy is growing at its fastest pace in 80 years and could recover its pre-pandemic size by the end of this year, according to a leading economic forecaster.
Buoyed by the vaccine rollout and a bounce back in consumer spending, the EY Item Club said it now expected GDP to grow by 7.6% – which would be the fastest annual growth in national income since 1941. The UK economy shrank by 9.8% in 2020, the worst performance in the G7.
The optimism comes despite the chaos caused by widespread staff shortages as workers self-isolate en masse after being pinged by NHS test and trace. The “pingdemic” is affecting the running of shops, restaurants, factories and even railway services as bosses struggle to find staff to cover shifts.
Although the economy has proved increasingly resilient through lockdowns, the EY Item Club report came with the health warning that the “future pattern of the pandemic and any renewed pandemic-related restrictions will have a significant bearing on whether the forecast is achieved”.
The UK economy is more dependent on consumer spending on services, such as recreation and leisure activities, which meant that the lockdowns had a greater economic impact than in other countries, said Martin Beck, the EY Item Club’s senior economic adviser. The reopening of these “face-to-face parts of the economy means the UK should have a correspondingly faster recovery”, he said.
In the spring, the group of economists, which is the only non-government forecasting organisation to use the Treasury’s modelling of the economy, pencilled in growth of 6.8%. This is the second time this year it has upgraded its forecast, putting the economy on track to attain its pre-pandemic peak by the end of 2021. That milestone would now be reached some six months sooner than when it last crunched the numbers in April, with the UK’s successful vaccine programme a key factor.
Recent surveys of economic activity have, however, been less encouraging, leading to concerns that the recovery is stalling. The IHS Markit and the Cips survey showed growth at its slowest since March, which was attributed to wide-ranging staff shortages, rising Covid cases and thousands of workers having to isolate owing to the pingdemic. It also highlighted a new mood of caution among the public triggered by the rapidly rising infection rates.
The EY Item Club report warned that rising inflation and unemployment could affect growth. The group thinks consumer price inflation could hit 3.5% by the end of 2021, before falling again in 2022, and that unemployment could rise in the second half of the year, peaking at 5.1% before falling back to 4.6% in 2022.
“While consumers have accumulated their largest stockpile of savings since the second world war, the big question is whether they will actually start to spend these funds once restrictions on activity are lifted,” said Beck. “The assumption is that they will, but this is not guaranteed. The picture for consumers is not entirely positive: savings are concentrated among higher-income households, while higher unemployment and inflation will weigh on real income growth.”
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