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Better-than-expected UK growth at the start of this year means we now see a more front-loaded recovery. That’s why we’ve revised our GDP forecast for 2021 up by one percentage point to 6.8 per cent – but revised our 2022 forecast down by a point to 5.1 per cent. This is largely a change to the projected timing of the recovery, not the extent.

Official growth figures for the final quarter of 2020 were revised up and the contraction in the January-March quarter was less than expected. That alone warrants a large part of our upgrade for the year, with the remainder reflecting stronger momentum going into the second-quarter than we had previously assumed.

This strong momentum is evident in numerous indicators, including business and consumer confidence surveys. Finance directors’ investment intentions are at their highest since before the 2016 Brexit referendum; Britain’s housing market is barnstorming, and March’s retail sales were already above pre-pandemic levels – despite non-essential shops remaining closed. And although trade flows remain well below pre-2020 levels, they have returned to what might be called a ‘pandemic normal’.

In 2020, the initial rebound after re-opening petered out quickly despite few COVID-19 cases during the summer and government schemes to support the hospitality sector. This year’s recovery started from a higher base, but more importantly, the vaccine rollout makes the re-opening look much more sustainable.

Even so, the fastest growth, will again come from the low-hanging fruit – re-opening businesses that were closed. The recovery could soften once these easier gains have been made. And recruitment difficulties, particularly in hospitality, and continued social distancing could limit to the recovery.

We had previously expected the year’s strongest growth to come in July-September, but with momentum peaking earlier, we now see April-June GDP being 4.6 per cent above the previous quarter with July-September revised down from 4.9 per cent to 2.6 per cent.

The lion’s share of the second-quarter pick-up should come from household spending. While many people have lost their jobs or run down savings during the pandemic, households in aggregate have saved a lot more than they usually would and, with restrictions lifted, are now able to spend it. We expect consumption in the fourth-quarter to be back roughly where it was at the end of 2019, and rise 2.3 per cent in 2022.

Much hinges on the outlook for the labour market. As furlough support tapers we expect unemployment to rise, peaking at 6 per cent in the second half of 2021, which could hit real income growth and consumer confidence.

With consumption set to outstrip income growth, the savings ratio could fall to around 4 per cent by the end of 2022 – below the 2019 average of 6.5 per cent but only a modest unwinding of the extra GBP140 billion of savings built up during 2020 compared with 2019.

So while our growth revisions look big, they are more a question of timing. We still see GDP ending 2022 exactly where we previously did – 1.6 per cent higher than its pre-pandemic peak. We expect a normalisation, not a boom, with higher unemployment, inflation and Brexit all keeping headwinds in play, despite the current post-lockdown euphoria. Against this backdrop, we see no change in monetary policy this year or next.

First published 18 May 2021.

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