3 minute read 26 Apr 2021
young-professionals-in-office-wearing-covid-19-masks

Why the UK economy looks well placed for a post-pandemic recovery

Authors
Hywel Ball

EY UK Chair and UK&I Managing Partner, Ernst & Young LLP

UK Chair and UK&I Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

Howard Archer

Former Chief Economic Advisor to the EY ITEM Club

A leading voice of the UK and global economy.

3 minute read 26 Apr 2021
Related topics Growth COVID-19 Brexit Workforce

The EY ITEM Club has significantly upgraded the UK’s economic growth prospects for 2021, after resilient Q1 performance.

In brief
  • EY ITEM Club now expects 6.8% GDP growth in 2021, revised up from the 5.0% growth predicted in January.
  • UK economy seen returning to its Q4 2019 level in Q2 2022, three months earlier than previously forecast.
  • Solid recovery is expected to develop from Q2 as restrictions are progressively eased and COVID-19 vaccines roll-out continues.

For the first time in what seems like forever, we can look back to 2020 and feel better. A year ago, we were in the dark about the future direction of the economy: forecasts were being downgraded on a daily basis; our understanding of coronavirus was nascent; and lockdown stretched ahead of us.

Fast forward and the vaccination programme continues at pace, lockdown restrictions are easing and the economy has proven to be more resilient than we ever expected. Add in the additional support announced in the Budget, and the outlook is much better than we could ever have imagined 12 months ago.

Improved growth prospects for 2021 and beyond

Without in any way wishing to play down the awful impact of the pandemic on individuals and society overall, the EY ITEM Club Spring Forecast 2021 strongly suggests that at the level of the overall economy, we will emerge with much less damage than we feared. EY ITEM Club expects the UK economy to grow by 6.8% in 2020, a significant upgrade from its forecast of 5% expansion in its January forecast. Expected first quarter performance of a 1% fall in output rather than the 3% to 4% previously anticipated illustrates just how innovative and flexible UK businesses and consumers have been in adjusting to restrictions on activity.

Economic growth in 2021

6.8%

EY ITEM Club expects the UK economy to grow by 6.8% in 2021, significantly upgraded from the 5% predicted in January.

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.
Dr. Howard Archer
Former Chief Economic Advisor to the EY ITEM Club

It does appear that the UK economy will be less ‘scarred’ than some of the more pessimistic scenarios outlined. Most obviously, in the labour market. EY ITEM Club expects unemployment to peak at 5.8% in 2021, much better than the 8 to 9% estimates that formed the consensus 12 months ago. This is hugely important, as it suggests we will not have lost skills and capability in significant numbers and should have more scope to bounce back quickly. 

A fall in business investment was a significant factor in the economic shock in 2020. With the Chancellor announcing enhanced capital allowances alongside increased public investment, EY ITEM Club expects 10% growth in fixed investment in both 2020 and 2021. Alongside the innovative solutions we have seen in health, logistics, pharma and technology, there is the potential for a strong corporate recovery. Reflecting these positive developments, EY ITEM Club now expects the UK economy to return to its pre-2020 levels in the second quarter of 2022, six months earlier than previously forecast.

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.
Hywel Ball
EY UK Chair and UK&I Managing Partner, Ernst & Young LLP

Time to plan for post-pandemic recovery and longer term

We are not out of the woods, but with EY ITEM Club forecasting further growth of 5% in UK GDP 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. Once the return to more normal operations is achieved in the coming months, it will be important to take the time to understand how the new landscape is settling to shape longer-term strategies.

A staged approach makes sense as risks remain, both related to the pandemic through future outbreaks, and in areas that have been of concern for some time, including the impact of Brexit and increased geopolitical tensions. Although EY ITEM Club believes the recovery can be accommodated without any inflationary spike, there is more discussion of the risk of rising prices than for some time, and it would be wise to keep a close eye on input prices.

As we have noted before, we will remain in a policy-driven economy for some time with ‘levelling up’, the move to net zero and the drive to build Global Britain as the priorities. Understanding how these initiatives might impact the economy and what the opportunities arising could be, will remain important for the foreseeable future.

Summary

The economic growth prospects for the UK in 2021 have been significantly upgraded in EY ITEM Club’s Spring Forecast. It now expects the UK economy to grow by 6.8% in 2021, up from the 5.0% growth predicted in January. 

This improved near-term outlook means the UK economy is expected to regain its pre-COVID-19 peak in Q2 of 2022

About this article

Authors
Hywel Ball

EY UK Chair and UK&I Managing Partner, Ernst & Young LLP

UK Chair and UK&I Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

Howard Archer

Former Chief Economic Advisor to the EY ITEM Club

A leading voice of the UK and global economy.

Related topics Growth COVID-19 Brexit Workforce