The UK economy is predicted to grow strongly over the next few months and return to its pre-pandemic peak by the end of the year, according to a new report.
Thanks to the success of the vaccine rollout and the relaxation of Covid-19 restrictions, the EY ITEM Club now expects GDP to grow by 7.6% in 2021 – the fastest growth since 1941 – followed by 6.5% growth in 2022.
Now that people are returning to working, shopping and socialising, consumer spending is anticipated to rebound strongly. And if households spend some of the £200bn of excess savings built up since early 2020 it would make that rebound even stronger, the EY ITEM Club said.
Support from macroeconomic policy will also underpin a strong expansion this year and next, according to the report. Fiscal policy remains in loosening mode, while the Chancellor may be able to rein back planned future tax rises and spending cuts if the economy recovers more strongly than the Office for Budget Responsibility (OBR) expects. Meanwhile, the Bank of England is predicted to keep the official interest rate at its current record low of 0.1% until late 2022.
Rising inflation and unemployment could affect growth, however.
Consumer price inflation is anticipated to reach a peak of 3.5% in the fourth quarter of 2021, while unemployment is seen rising in the second half of the year, peaking at 5.1% before falling back to 4.6% in 2022.