UK economic outlook: all systems go

After a torrid year, it finally looks like there is light at the end of the tunnel for the UK economy. Successful rollout of COVID-19 vaccines, and the subsequent improvement in health outcomes, means that the outlook for growth has improved considerably. A range of data point to a surge in activity over the summer, as restrictions are gradually lifted (notwithstanding the latest delay to the government’s roadmap for re-opening), and confidence returns.

As such, the CBI has upgraded its predictions for economic growth. In our latest forecast, we now expect GDP to rise by just over 8% this year, and 6% in 2022 (up from 6% and 5.2% previously). This means that the economy recovers all its COVID-related losses by the end of 2021 – a year earlier than we had previously expected.

Broad-based growth

Household spending is at the centre of this recovery, driving just over a quarter of GDP growth this year, and 70% of growth in 2022. Consumers are buoyed by an improvement in real incomes, and a recovery in the labour market. While the end of the Job Retention Scheme (JRS) in the autumn means that unemployment will pick up, we expect a much smaller rise in the unemployment rate (to 5.5%), than in our last forecast (7.3%). This reflects a combination of stronger economic growth, the further extension of the JRS earlier this year, and the sheer resilience of the labour market so far. In the context of a very big hit to GDP, the relatively small rise in unemployment is very encouraging.

But there are also signs of growth becoming much more broad-based, beyond household spending. At home, government spending drives half of economic growth this year, partly reflecting all the resource put behind the vaccine rollout and Test & Trace. Further afield, a revival in world goods trade drives growth in UK exports. Taken together, this is very much looking like a multi-pronged recovery.

Potential growth needs a boost

However, there are some missing pieces in the UK’s recovery. This is most apparent in business investment, which fell sharply during the height of the COVID crisis (declining by almost a quarter in the first half of 2020). While we expect a substantial turnaround ahead – corroborated by our business surveys, which show that investment plans have swung upwards – capital spending remains 5% below its pre-COVID level at the end of 2022. This partly reflects the sheer scale of the decline so far (and hence more ground to make up), but also lingering uncertainty among businesses around the longer-lasting effects from the pandemic, and what these will mean for their business models.

Furthermore, while it is encouraging that GDP regains its pre-crisis peak sooner than we previously expected, it’s worth noting that the UK’s underlying growth trajectory wasn’t much to write home about. Over a decade of stagnant productivity and weak investment means that potential growth had taken a big hit, which is concerning for living standards and competitiveness over the longer-term. As we emerge from the pandemic on a relatively strong footing, it’s vital that policymakers turn their attention to structurally boosting the UK’s underlying growth trajectory.

Recovery will be felt by some more than others

There are near-term challenges too. The upturn in demand is causing some frictions for businesses, in the form of growing recruitment difficulties and pipeline cost pressures. The latter is exacerbated further by ongoing disruption to global supply chains, as COVID continues to hit shipping activity – further stoking shortages of raw materials and components. While we expect pricing pressures to be largely temporary, there’s no doubt that higher costs will be taking the edge off of bottom lines for some companies.

Furthermore, the strong economic recovery that we’re predicting won’t be felt equally by everyone. Sectors like aviation and events, which continue to content with restrictions across the world, will take longer to come back fully. And while completely justified from a health perspective, the latest delay to the government’s roadmap for reopening the economy is a further blow to sectors like hospitality and entertainment. Government should now think about extending some of the more targeted support measures that have helped these businesses so far – such as business rates relief, and getting grant money currently sitting with local authorities out of the door speedily.

All in all, it looks like the economy is coming out of the other side of this pandemic, and we’re in for a strong recovery further ahead. This is a perfect platform for addressing both the near and longer-term challenges facing the economy, ultimately ensuring that this is a recovery that works for all.