Latest quarterly UK Economic Outlook
UK Economic Outlook Spring 2021 - UK GDP growth revised up in 2021 but unemployment will still rise to 6.5%
- Our central forecast for economic growth in 2021 has been revised up to 5.7 per cent from 3.4 per cent in February. The immediate economic effects of the virus, which have been concentrated in the low-waged service sector, are expected to wane, while remaining negative consequences of Brexit will make themselves felt over the long-run and largely in sectors less affected by Covid-19.
- The third national lockdown has seen the adaptation of much of the economy to pandemic conditions, meaning that a smaller fall in first-quarter GDP than previously forecast provides a strong basis for the rest of the year. This is followed by the projected re-opening of the remaining affected sectors, thanks to the successful vaccination programme. The principal downside risk remains a resurgence of the Covid-19 virus, through new variants or the failure of vaccines, and the UK will not be physically or economically protected from a failure to control the virus globally
- Thanks to the extension of furlough and other support measures to the autumn, we now forecast unemployment to peak at 6.5 per cent in the final quarter of this year. Even after allowing for compositional effects wage growth seems robust. As a result, disposable incomes, which fell by 0.6 per cent in 2020 in real terms, are forecast to rise by 3.1 per cent this year and 2.7 per cent in 2022.
- Income growth and a degree of forced savings under lockdown provide a strong basis for forecast consumption growth of 5.9 per cent in 2021. We forecast household saving to fall to a level higher than that seen before the pandemic but close to historical averages: a faster or further fall constitutes the principal upside risk to our consumption and GDP forecasts in 2021.
- We forecast CPI inflation to rise over the coming months, reaching 1.8 per cent in the final quarter of 2021, before falling to 1.5 per cent at the end of 2022 and settling just below its 2 per cent target between 2023 and 2025. Bank Rate is not forecast to rise until 2023.
- Government debt, which rose in response to the pandemic, peaks at 104 per cent of GDP in 2022-23, with interest payments forecast to remain low and decline further as a share of GDP. Given the increased intertwining of monetary and fiscal policy as a result of quantitative easing, greater clarity is urgently needed about the way that tightening will be conducted when required and how HM Treasury will deal with any potential interest rate volatility.
- The general conduct of fiscal policy is long overdue a serious rethink. Prior underinvestment in health and social care capacity had devastating consequences in 2020 and also contributed to the UK’s relative economic underperformance during the pandemic. The long-term challenges of low wage growth, slow productivity and inequalities across regions and between groups of people have not been resolved by Covid-19; indeed, the risk is that they have been exacerbated.
- We forecast growth this year of 9 per cent in the non-traded services sector, which includes badly affected industries such as hospitality, but expect it to shed a further 190,000 jobs after the furlough scheme comes to an end later this year
At a sectoral level, while the first national lockdown hit the whole economy, subsequent lockdowns affected mainly the private nontraded sector, which remains some 20 per cent below its February 2020 level.
As the economy re-opens and consumer confidence returns on the back of the successful vaccination programme, we expect a strong recovery in consumption expenditure starting from the second quarter, with positive spill-overs to industries like manufacturing, private traded services and construction. The tourism and hospitality sectors will likely continue to suffer for as long as international travel remains subdued.
At the regional level, the third lockdown resulted in a fall of economic output as measured by Gross Value Added (GVA) in all parts of the UK. The total drop was 2.4 percent in the first quarter of 2021 compared with the last quarter of 2020, but GVA is still projected to remain 9 percent below the pre-Covid-19 level. The economy is estimated to recover by the second quarter of 2023 with the North, Wales and Northern Ireland still 2 percent below their level in the fourth quarter of 2019.
As the higher and rising participation rate is not matched by job creation and vacancy fillings, the unemployment rate in London is projected to be the highest in the UK and to decrease slowly. Elsewhere, there is a lower rise in unemployment, but the pace of the recovery is almost equally slow. The rise in youth unemployment (18–24-year-olds) is particularly alarming, while the number of unemployed persons in the 25-49 year age groups were relatively moderate but increasing.
The rise in destitution is projected to be particularly acute in Scotland, the North West, Yorkshire and Humberside and the South East. Equally alarming is the projected incidence of food poverty among children.
NIESR Deputy Director, Dr Hande Kucuk, said: “Beyond short-term optimism, the outlook for the UK economy is less certain given the economic and social challenges that existed before the pandemic. Our analysis at sectoral, regional, and household level shows that despite the rhetoric about ‘building back better’ existing inequalities could be exacerbated by the pandemic and an uneven recovery. Now that the worst of the pandemic may be behind us, a new fiscal policy framework is needed to combine clear principles for spending and tax to support the ultimate long run objectives of economic policy – creating the conditions for more robust and inclusive growth.”