EY has significantly upgraded the UK’s economic growth prospects for 2021 with the expectations of a solid recovery from Q2
As Covid-19 restrictions are eased and the vaccine rollout continues, the EY ITEM Club's spring forecast has upgraded the UK economy’s prospects projecting 6.8% growth this year, compared to the initial 5% growth predicted in January.
As a result of the ‘resilient Q1 performance’ the improved near-term outlook means the UK economy is expected to regain its pre-Covid-19 peak, returning to its Q4 2019 level in Q2 of 2022, six months earlier than previously forecast.
The EY says that the UK economy will be less ‘scarred’ than some of the more pessimistic scenarios outlined, expecting unemployment to peak at 5.8% in 2021 instead of the 8-9% estimates that formed the consensus 12 months ago, meaning the economy will bounce back quicker.
Dr Howard Archer, chief economic advisor to EY ITEM Club said: ‘Businesses and consumers have been innovative and flexible in adjusting to Covid-19 restrictions and, while restrictions have caused disruption, lessons learned over the last 12 months have helped minimise the economic impact.’
EY said that the fall in business investment was a significant factor in the economic shock of 2020 but with Chancellor, Rishi Sunak, announcing enhanced capital allowances with the super deduction tax relief measure announced in Budget 2021 alongside increased public investment, EY expects a 10% growth in fixed investment in 2021.
Even the services sector which was severely affected in Q4 2020 by restrictions still achieved an output growth of 1.0%, and with consumer spending forecast to rise by 4.4% in 2021 and 5.7% in 2022 many sectors will feel the effect.
Even with the positive news EY said that we ‘are not out of the woods yet’ but with further growth of 5% in UK GDP forecast in 2022, businesses can start to plan for the possibility of two years of strong economic performance, with a very favourable tax regime to support capital investment.
The report also states that once a return to more normal operations is achieved in the coming months, it is important for businesses to take the time to understand how the new landscape is settling to shape longer-term strategies.
Hywel Ball, UK chair and UK&I regional managing partner, EY, said: ‘With two years of decent growth forecast and measures announced in the Chancellor’s Budget to support capital investment, businesses can start to plan ahead with more confidence and invest in the future.’