The UK economy will return to its pre-pandemic level by the end of 2022, according to a new analysis by the National Institute of Economic and Social Research (NIESR).
In its spring 2021 economic outlook, the think tank said it expected the economy to grow by 5.7% this year – an upgrade from its previous estimate for growth of 3.4% – and recover to its pre-pandemic peak in the last quarter of 2022.
The revised forecast comes after a smaller than expected fall in first-quarter GDP and the projected re-opening of the remaining affected sectors, thanks to the successful vaccination programme. The main downside risk remains a resurgence of the Covid-19 virus, due to the rise of 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, the authors noted.
NIESR now anticipates that unemployment will peak at 6.5% in the final quarter of this year, based on an assumption that around 450,000 of those remaining on furlough in September will not be taken back after the scheme ends.
CPI inflation is forecast to rise over the coming months, reaching 1.8% in the fourth quarter of 2021, before falling to 1.5% at the end of 2022 and settling just below the 2% target between 2023 and 2025.
NIESR also took the opportunity to call for a “serious rethink” of fiscal policy.
“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 report argued.
“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.”