The rapid rollout of Covid vaccines and a surge in consumer spending has prompted forecasters to improve their outlook for the UK economy.
Forecasts published by EY Item Club predict that the UK economy will grow 7.6 per cent this year, the fastest pace of expansion since 1941.
The recent burst in consumer spending triggered by the lifting of restrictions to curb the spread of the virus has prompted forecasters to up their expectations for output growth.
Read more: Retail sales soar above pre-Covid levels
In April, EY Item Club said it expected the economy to grow 6.8 per cent in 2021. Latest official figures show the UK economy grew at a slower pace in May, up 0.8 per cent compared to the previous month.
The reopening of high streets, leisure and hospitality businesses has prompted consumers to release a flood of pent-up demand as they rushed to purchase goods and services unavailable amid Covid lockdowns.
Spending has been boosted by households deploying the estimated £200bn in savings accumulated during the pandemic, EY Item Club said.
The firm also predicted that the UK economy is likely to recovery faster than other economies due to spending rising rapidly in the services industry, which the economy heavily relies on.
Martin Beck, senior economic advisor to the EY Item Club, said: “Vaccines have played a key role in bringing forward the reopening of the economy and have been a key factor in the upgrades of the forecast throughout this year.”
“Compared to other economies, the UK is much more dependent on consumer spending on services, such as recreation and leisure activities, which meant that lockdowns had a greater economic impact here than elsewhere. Reopening these face-to-face parts of the economy means the UK should have a correspondingly faster recovery.”
The firm expects the economy to grow 6.5 per cent in 2022, an improvement from the 5 per cent growth forecast in April.
Inflation presents strong headwind for the economy
Rising inflation and potentially suppressed demand as a result of households retaining pandemic savings present downside risks to the economy, said EY Item Club.
It forecast that inflation will hit 3.5 per cent by the end of 2021, 1.5 percentage points above the Bank of England’s target.
Beck added: “While consumers have accumulated their largest stockpile of savings since the Second World War, the big question is whether they will actually start to spend these funds once restrictions on activity are lifted. The assumption is that they will, but this is not guaranteed.”
Beck suggested that higher inflation could trigger the Bank to tighten monetary policy, which may hit economic growth.
Read more: UK economy grows 0.8 per cent in May
Latest figures from the Office for National Statistics shows inflation is already running higher than the Bank’s target, up 2.5 per cent annually in June.
Lower than expected rise in unemployment
The EY Item Club expects unemployment to jump in the second half of the year, peaking at 5.1 per cent before falling back to 4.6 per cent in 2022.
The furlough scheme and businesses’ successfully navigating Covid restrictions has left the UK labour relatively insulated from the worst effects of the pandemic.
“The end of furlough and other business support schemes could put some upwards pressure on unemployment later on in the year. But, overall, a relatively limited rise in unemployment will mean a limited long-term impact from the pandemic on the economy’s capacity to produce goods and services” Beck said.