UK set for an uneven economic recovery, despite record GDP growth

The British Chambers of Commerce (BCC) has today (Thursday) released its latest economic forecast which predicts UK GDP growth for 2021 of 6.8%, which if realised would be the strongest outturn since official records began in 1949.

If covid restrictions continue to be released, UK GDP growth will be strongest over Q2 2021 and Q3 2021. The UK economy is then expected to return to its pre-pandemic level in Q1 2022 with growth of 5.1% projected for next year.

The BCC forecast assumes that the UK government’s roadmap out of lockdown restrictions proceeds as currently planned. Another scenario would lead to revisions in the next forecast.

Consumer spending is expected to be the main driver of this year’s economic rebound. The release of pent-up demand if restrictions ease as currently planned and the rapid vaccine rollout is forecast to drive the strongest growth in spending since 1988, as consumers spend some of their ‘unanticipated’ savings accumulated during lockdowns.

Business investment is forecast to rebound strongly in 2021 and 2022, driven by the anticipated boost from the reopening of the economy and the introduction of the super-deduction incentive. However, business investment is projected to slow sharply in 2023 as the super-deduction incentive ends and corporation tax increases.

Despite the immediate boost to UK GDP, our latest outlook projects an uneven recovery. Output from catering and hospitality, some of the sectors hardest hit by the pandemic, are forecast to only return to pre-pandemic levels in Q2 2023. In contrast, manufacturing output is projected to return to its pre-pandemic level in the third quarter of this year.

UK unemployment is projected to remain at a much lower level than in recent recessions. UK’s unemployment rate is expected to peak at 6.0% and youth unemployment at 15.6% in Q4 2021, after the furlough scheme expires.

Youth unemployment is expected to lag the wider recovery with the UK’s youth unemployment rate projected to average 10.1 percentage points higher than the overall unemployment rate across the forecast period, a quarter (25%) higher than the pre-covid average (7.6 percentage points).

Trade is projected to make a negative contribution over the forecast period. This largely reflects an anticipated decline in exports to the EU with post-Brexit disruption and the weak near-term outlook for the euro area expected to weigh on EU demand for UK goods and services.

Commenting on the forecast, Suren Thiru, head of economics at the British Chambers of Commerce, said:  “Our latest forecast points to a historically robust short-term outlook for the UK economy.

“The UK economy is in a temporary sweet spot with the boost from the release of pent-up demand, if restrictions ease as planned, and ongoing government support expected to drive a substantial summer revival in economic activity, underpinned by the rapid vaccine rollout.

“Beyond the strong short-term outlook, notable economic scarring from the pandemic is projected to weigh on economic activity once government support winds down and drive an uneven recovery across different sectors and groups of people.

“The UK economy is expected to be increasingly unbalanced through the forecast period with a growing dependence on consumer expenditure to drive growth, while net trade is projected to be a drag on the economy. Such economic imbalances leave the UK more exposed to future economic shocks.

“The risks to the outlook are on the downside. A more significant surge in inflation would weigh on a consumer led revival by eroding their spending power. The squeeze on activity and the damage to confidence from a marked delay to the full lifting of restrictions or further restrictions to combat covid variants would materially slow the recovery.”

Responding to the forecast, Hannah Essex, co-executive director the British Chambers of Commerce, added:  “The UK economy, and the business communities that drive it, are showing their propensity to bounce back from a crisis. Historic levels of growth for this year are predicted, a testament to the flexibility and innovation shown by businesses and the resilience of consumers.

“However, we must not believe that this represents job done. These predictions rely upon the government hitting its target date for the full re-opening of the economy. If there are bumps in the road, the government must be prepared to extend existing support until all sectors are able to fully trade again.

“Beyond the immediate optimism, further action will be needed if we are to see a recovery which truly sustains itself and seizes the opportunity to rebuild and renew our economy.

“Young people now entering the workforce and those who lost jobs during the pandemic are at particular risk of longer-term unemployment. As the economy emerges from the pandemic, we need to create a dynamic and flexible skills system that meets the needs of local employers and supports individuals looking to return to the jobs market.

“The government cannot afford to ignore the economic impact of decreased exports to Europe. The UK and the EU must now get back around the table and continue talks so they can build upon the arrangements set out in the TCA to deliver long-term improvements to the flow of trade between them.”

Key points in the forecast:

• UK GDP growth forecast for 2021 is 6.8%, 5.1% in 2022 and 2.1% in 2023.
• Following the Q1 2021 contraction of 1.5%, quarter-on-quarter GDP growth forecast is 4.1% in Q2, 3.5% in Q3 and 1.1% growth in Q4
• Despite a Q1 contraction of 3.9%, household consumption forecast is for growth of 5.5% in 2021, strongest since 1988. Growth of 7.8% forecast for 2022 and 2.9% in 2023
• Business investment for 2021 is 4.1% and 6.8% in 2022, before slowing to 1.2% in 2023
• BCC expects export growth of 0.7% in 2021, 4.2% in 2022 and 1.5% in 2023, compared to import growth of 5.1%, 8.3% and 2.9%
• Exports to the EU is forecast to contract by 12.0% for 2021 by 1.4% in 2022 and by 2.5% in 2023
• BCC expects UK unemployment rate of 5.5%, 5.2% and 4.8%, compared to youth unemployment rate of 15.6%, 15.4% and 15.0%
• CPI inflation is expected to rise in the near-term peaking at 2.6% in Q3 2021, which would be the highest rate since August 2018. With current price pressures largely transitory, inflation is expected to drop back to the Bank of England’s 2% target in Q2 2022
• UK official interest rates are expected to start rising in Q2 2023 to 0.25%
• In terms of sectors:
  • Growth in services output is forecast at 6.3% in 2021, 5.2% in 2022 and 2.0% in 2023
  • Growth in manufacturing output is forecast at 8.5% in 2021, 4.5% in 2022 and 2.0% in 2023