UK output to hit pre-pandemic level a year earlier than forecast


UK business has become increasingly bullish about the economic recovery, with the CBI predicting that output will regain its pre-pandemic level by the end of 2021, a full year earlier than it had previously expected.

In its latest forecasts, published on Friday, the business lobby group said gross domestic product would bounce back by 8.2 per cent this year and grow a further 6.1 per cent in 2022, after plunging by 9.9 per cent last year.

If that proves right, the recovery this year will be twice as fast as that expected in March by the Office for Budget Responsibility, the independent fiscal watchdog, and significantly stronger over the two-year period than the Bank of England forecast in its May monetary policy report.

The newfound confidence reflects the strength of the rebound already seen since retail and hospitality businesses began reopening in April.

Alpesh Paleja, economist at the CBI, said that while the four-week delay in removing remaining Covid-19 restrictions could feel like a “hammer blow” to the sectors affected, it would make little difference to the overall economic outlook, with most businesses now open in some form.

The government should consider targeted support for sectors still unable to open fully, in the guise of business rates relief or help channelled through local authorities, Paleja added. But with many businesses now reporting difficulties hiring, the CBI did not believe an extension of the furlough scheme beyond September was needed to match the delay in reopening.

The CBI said government spending on tackling the virus would account for half of this year’s rise in GDP, but consumer spending would be “the linchpin of the recovery”, driving 70 per cent of growth in 2022 as households ran down some of the savings they had built up over the past year.

Household incomes should rise in real terms, the CBI said, predicting that unemployment would peak at 5.5 per cent in the third quarter of 2021 — higher than its current level of 4.7 per cent, but an earlier and smaller peak than previously feared.

The CBI is also relatively sanguine about the risks of inflation accelerating, despite this week’s data showing it had risen above the BoE’s 2 per cent target much sooner than expected.

The group forecast that consumer price inflation would rise well above target in the fourth quarter of 2021 but fall steadily from then and average 2 per cent over the course of 2022.

Paleja said while many CBI members were flagging up inflationary pressures, many supply constraints should prove temporary — although any sign of more sustained pressures would “set alarm bells ringing” among monetary policymakers.

However, the CBI was less upbeat about the longer-term outlook for the UK economy — with business investment set to remain 5 per cent below its pre-Covid level even at the end of 2022 and productivity improving over the next year, but only to its already weak pre-Covid path.

“There are really positive signs about the economic recovery ahead this year and next,” said Tony Danker, CBI director-general. “The imperative now must be to seize the moment to channel this investment into the big drivers of long-term UK prosperity.”


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