UK set for a strong recovery from pandemic

The UK is predicted to bounce back strongly from the pandemic, with GDP growth of 8.2 per cent this year, according to an employers’ organisation.

Despite the delay on the lifting of all lockdown restrictions for another month, the UK economy is still set for a breakthrough year, according to the latest Confederation of British Industry (CBI) Economic Forecast.

The easing of many Covid-19 restrictions in line with the UK Government roadmap, rapid roll-out of vaccines and the unleashing of pent-up demand means that the UK economy is poised for considerable economic growth over the summer.

But this won’t be felt as strongly by those sectors still working under restrictions. More broadly, stagnant productivity and business investment remain a drag on the longer-term sustainability of economic growth.

UK GDP is set to bounce back to its pre-Covid level towards the end of 2021, a year earlier than the previous CBI forecast (in December 2020) expected.

The CBI is forecasting GDP growth of 8.2 per cent this year, and 6.1 per cent in 2022 (revised up from six per cent and 5.2 per cent in our previous forecast), following a historically large (-9.9 per cent) fall in output over 2020.

Household spending is the linchpin of this recovery, driving just over a quarter of GDP growth in 2021, and 70 per cent 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.

The CBI now also expects a much lower peak in the unemployment rate (5.5 per cent in Q3) than in December (7.3 per cent in Q2 2021). This is in part due to the extension of the Job Retention Scheme into the autumn, the resilience of the labour market so far, and expectations of a much stronger economic recovery.

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 five per cent 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 CBI has identified six ways to transform the economy after the pandemic, to realise a decade of better economic and social progress.

Some of the recommendations include:

  • Deliver record levels of investment for innovation, setting out the spending profile on R&D to reach £22bn by 2024/25 in this year’s Spending Review.
  • Reform VAT rules for company cars and public charging to accelerate take-up of zero emission vehicles.
  • Replacing the Apprenticeship Levy with a ‘Learning for Life’ guarantee, which would unlock trapped levy money for employers to spend more on training.
  • Create globally leading clusters in our regions and nations – commission the CBI to develop coalitions that can scale up economic clusters around the country, and write the playbook for how to build distinctive regional and national comparative advantage.

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