COVID-19: Weekly Economy Summary – 13 May

The Economy Summary is part of our Weekly COVID-19 Bulletin, sent every Thursday. You can sign up to receive your copy here.

GDP 

UK gross domestic product (GDP) is estimated to have grown by 2.1% in March 2021, the fastest monthly growth since August 2020, as schools in some parts of the UK reopened throughout the month. March’s GDP is 5.9% below the levels seen in February 2020, and 1.1% below the initial recovery peak in October 2020. Latest estimates also show only small revisions to GDP in January (now negative 2.5%, from negative 2.2%) and February (now growth of 0.7%, from 0.4%). 

Economic outlook 

NIESR central forecast for UK economic growth in 2021 has been revised up to 5.7%, compared to 3.4% in February, with 4.5% growth forecast for 2022. The significant upward revision reflects a better-than-expected first quarter – a greater resilience to further lockdowns – and the large rise in Covid-related public spending in the 2021-22 fiscal year announced in the March Budget.   

The poor Covid-19 performance has greater permanent cost for the UK compared with other major economies. The size of the economic contraction means that the level of GDP is nearly 4% lower in 2025 than NIESR had forecast it to be before the Covid-19 pandemic, equivalent to around £1,350 per person per year (2018 prices) falling further behind the US and Germany as a result. 

Thanks to the extension of furlough and other support measures to the autumn, NIESR now forecast unemployment to peak at 6.5% in the final quarter of this year (compared to 7.5% in February). This central forecast is compatible with an assumption that around 450,000 of those remaining on furlough in September will not be taken back after the scheme ends. 

Income growth and a degree of forced savings under lockdown provide a strong basis for a consumption growth forecast of 5.9% in 2021. NIESR forecast household saving then to fall to a level higher than that seen before the pandemic but close to historical averages: a faster or further fall constitutes the principal upside risk to our consumption and GDP forecasts in 2021. 

NIESR’s central forecast is for CPI inflation to rise over the coming months, reaching 1.8% in the final quarter of 2021 before falling to 1.5% at the end of 2022 and settling just below its 2% target between 2023 and 2025. Bank Rate is not forecast to rise until 2023 but there is considerable uncertainty regarding both the direction and instruments of monetary policy.   

Double jobs and mental health crisis facing young people risks outlasting the pandemic 

Young people have experienced the largest employment hit and sharpest increase in mental health conditions of any age group during Covid-19 in a ‘double crisis’ that risks outlasting the pandemic, according to a report by the Resolution Foundation. The report, Double Trouble, examines the worrying trends in young people’s mental health in the run-up to and during the crisis, their links to changes in the labour market, and the risks posed to young people’s post-pandemic living standards. The think tank recommends that the government intensifies efforts to keep young people in work by expanding and extending the Kickstart Scheme, and ensures that access to mental health support is strengthened in the period after pandemic.  

Business confidence 

The success of the UK’s vaccine rollout has also influenced an increase in service sector confidence, which has risen to its highest level in over a year. BDO’s latest services optimism index shows that confidence among businesses in the service sector hit a fourteen-month high in April. Businesses in other sectors also recorded improved optimism, while BDO’s output index showed a month-on-month increase in debit and credit card spending in line with the reopening of non-essential retail last month.