UK growth prospects significantly brighter in 2021, as EY ITEM Club, the UK economic forecasting group, publishes upgraded economic forecast
- Resilient UK economic performance means the 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 vaccine rollout continues
The economic growth prospects for the UK in 2021 have been significantly upgraded in the EY ITEM Club’s Spring Forecast 2021, with the UK economy expected 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.
The upgraded forecast strongly suggests that at the level of the overall economy, the UK will emerge with much less damage than originally feared. 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.
Andrew Dann (shown in main image), EY’s Channels Islands Managing Partner, explained to Channel Eye: “The UK economy has proven to be more resilient than seemed possible at the outset of the pandemic. 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 twelve months have helped minimise the economic impact.
“This latest forecast suggests that the UK economy will emerge from the pandemic with much less long-term ‘scarring’ than was originally envisaged and looks set for a strong recovery over the rest of the year and beyond.
While the outlook for the Jersey economy is not quite as certain, with recent reports concluding the economy is likely to suffer more long-term ‘scarring’ and a more gradual recovery predicted over the next five years, the newly strengthened prospects in the UK is positive news for both Guernsey and Jersey and will give hope of a stronger recovery across the Channel Islands.
“Both Islands have proven to be resilient in the face of the challenges and uncertainties and our financial strength will continue to put us in a strong position to deal with any further disruptions.”
With a faster recovery in 2021 pulling growth forward, the EY ITEM Club now expects growth of 5.0% in 2022 (down from 6.5% in January), 2.1% in 2023 (up from 2.0%) and 1.7% in 2024 (down from 1.8%).
Business investment expected to gain momentum in 2021 can see further growth in 2022
Following a contraction of 10.2% in 2020, the EY ITEM Club expects business investment to gain momentum over the course of 2021, rising 7.1% as companies grow more confident in the recovery. Business investment growth of 10.5% is then expected in 2022 as confidence benefits from a more settled business environment.
The EY ITEM Club’s forecast notes that, while businesses will benefit from Budget measures designed to incentivise investment – including the 130% ‘super deduction’ relief on plant and machinery expenditure – these measures are primarily expected to bring investment forward to 2021 and 2022 rather than increase it substantially overall.
Andrew concluded: “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. Disruption and uncertainty have contributed to relatively weak levels of UK business investment in recent years, so there is some catching up to do too. Many companies may now need to think about replacing or upgrading plans and processes which have become outdated while business priorities and attention have been elsewhere.
“Crucially, rising business investment and improved productivity will also help the UK and the Channel Islands economies remain competitive internationally.”