The UK economy is growing the fastest in 80 years and could be back to pre-pandemic size by the end of this year, according to a leading economic forecaster.
Spurred on by the introduction of vaccines and a recovery in consumer spending, the EY Item Club now expected GDP growth of 7.6% – the fastest annual national income growth since 1941. The UK economy contracted 9.8% in 2020, the worst performance in the G7.
The optimism comes despite the chaos caused by widespread staff shortages as workers en masse self-isolate after being pinged by NHS tests and traces. The “pingdemik” affects the operation of shops, restaurants, factories, and even railroad companies, as bosses struggle to find staff for the shifts.
Although lockdowns have shown the economy to be increasingly resilient, the EY Item Club report included a health warning that “the future pattern of the pandemic and any renewed pandemic-related restrictions will have a significant impact on whether the forecast is met.”
The UK economy is more dependent on consumer spending on services such as recreation and leisure, which has meant the lockdowns have had a greater economic impact than other countries, said Martin Beck, senior economic advisor for the EY Item Club. Reopening these “personal parts of the economy means the UK should recover faster,” he said.
In the spring, the group of economists, which is the only non-governmental forecasting organization to use the Ministry of Finance’s economic modeling, expected growth of 6.8%. This is the second time this year that it has raised its forecast and put the economy on track to peak pre-pandemic by the end of 2021. That milestone would now be reached about six months earlier than when the figures were last published in April, with the UK’s successful vaccine program being a key factor.
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However, recent business surveys have been less encouraging, leading to fears that the recovery may stall. The IHS Markit and Cips surveys showed the slowest growth since March, attributed to widespread staff shortages, rising Covid cases and thousands of workers isolating themselves due to pingdemia. It also showed a new sense of caution among the public, triggered by the rapidly increasing infection rates.
The EY Item Club report warned that rising inflation and unemployment could hurt growth. The group predicts that consumer price inflation could reach 3.5% by the end of 2021 before falling again in 2022, and that unemployment could rise in the second half of the year and peak at 5.1% before rising again in 2022 4.6% could decline.
“While consumers have amassed their greatest savings since World War II, the big question is whether they will actually spend those funds when restrictions on activity are lifted,” Beck said. “The assumption is that they will, but this is not guaranteed. The picture for consumers is not entirely positive: savings are concentrated in higher-income households, while higher unemployment and inflation will weigh on real income growth. “