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 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% this year, and 6.1% in 2022 (revised up from 6.0% and 5.2% in CBI’s previous forecast), following a historically large (-9.9%) 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% 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% in Q3) than in December (7.3% 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 5% 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 imperative now must be to seize the moment to channel this investment into the big drivers of long-term UK prosperity. That’s why it’s the right time for Government to come forward with far more detailed plans on everything from decarbonisation, to innovation to levelling up.
“Clearly this does not apply to the hardest hit sectors from the pandemic who even now face continued delays and genuine challenges to stay viable. Extending the commercial rent moratorium will help keep some firms’ heads above water, but the Government must also do the same on business rates relief.
“It would be devastating for hospitality, events or aviation businesses to fail on what we hope is the last leg of restrictions.”
Key forecast data
Jobs and household spending
- Household spending is set to increase by 6% in 2021 and 7% 2022 as real incomes recover, and unemployment falls back from its peak in Q3 2021
- Employment is set to recover from the second half of the year onwards, leading to a lower and later peak in unemployment than we had previously expected. By the end of 2022, the level of employment will be slightly above its pre-Covid level (by 1.3%).
- The unemployment rate is expected to peak at 5.5% in Q3 2021. The unemployment rate will fall back thereafter, ending 2022 at 4.2% – historically low, but still a little above its pre-Covid level (of just under 4%)
- Real household incomes rebound in 2022 particularly (rising by 3.1%), as the economic and labour market recovery gain a firmer footing.
- Whilst business investment will recover, it nevertheless remains 5% below its pre-Covid level at the end of 2022
- Weak productivity also continues to mark the recovery. While output per worker recovers its losses over the forecast, it only returns to its (already weak) post-2010 trend over the next year.
- A recovery in global trade drives UK exports growth in our forecast, which grow by 2.1% in 2021 and 10% in 2022. The recovery is particularly pronounced in global goods trade, likely reflecting strong growth in large economies such as China and the US. However, global services trade is likely to lag behind by comparison – reflecting a more sluggish recovery in areas such as tourism and aviation.
- We expect stronger global GDP growth (6.3% in 2021, 4.9% in 2022 in purchasing power parity terms) than in our last forecast (5.6% and 4.3%), thanks partly to better health outcomes and fiscal stimulus in the US, which fuel consumer spending and business investment
- However, there is some divergence in the global recovery: we expect a weaker near-term outlook in the Eurozone, and many emerging markets are also likely to lag behind, due to variable progress in tackling the pandemic so far.
Alpesh Paleja, CBI Lead Economist, said: “Successful rollout of COVID vaccines and an improvement in health outcomes means we are set for a bounce in growth over the summer. However, this won’t feel like a recovery to some, the aviation and events industries in particular will take much longer to recoup their losses.
“Other long-term challenges are also emerging: recruitment difficulties are adding to global supply bottlenecks, which are in turn stoking pricing pressures. While these should subside as activity around the world normalises, it’s one to keep an eye on.
“As we move from crisis to recovery, it’s important to present a vision for what a post-COVID economy should look like. Maintaining the strength in innovation and tech adoption during the pandemic, and facilitating the adjustment of firms to new ways of working, are only the first steps in tackling the UK’s burdensome legacy of weak productivity.”
The recovery from the pandemic provides the ideal springboard to tackle the structural issues weighing on the economy prior to the COVID-19 pandemic. To achieve this, 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 CBI 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 a new Strategic Dialogue on Funding our Future, co-chaired by HM Treasury, the Bank of England and the CBI, to bring together the whole value chain – from hungry investees to private investors. This will add the customer viewpoint to the Bank’s productive finance workstream and shape proposals to unlock more pension funds, patient capital and private sector finance, fostering a cultural change to power growth.
- 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.