UK's economy is forecast to be back to normal by the end of 2021
The Bank of England has declared that the UK economy will grow by the largest amount since World War Two this year, but only because of how unexpectedly quickly we’ve recovered from the major dip in 2020 caused by Coronavirus.
The Bank has slowed down the speed at which it is buying trillion-dollar bonds, but it has stressed that it is still committed to its stimulus measures to maintain the economic growth.
The forecast by the Bank of England in February was for 2021 to see the economy grow by 5%. That’s now been updated to 7.25% as the vaccination programme continues at pace and unemployment figures are lower than had been anticipated.
However the economy dropped by 9.8% in 2020, so this is still just a recovery swing rather than a state of growth compared to prior years. The 7.25% growth is still the largest since 1941 when Britain was rearming for the second half of the war.
It’s now expected that the UK economy will return to the pre-pandemic levels in the final quarter of 2021, which is around three months earlier than had been previously forecast. As a result, though, the Bank of England has also downgraded its predictions for 2022. Whereas previously it expected growth to be at 7.25% in that year, it is now expected to be at 5.75%.
Let’s not get carried away…It takes us back by the end of this year to the level of output that we had essentially at the end of 2019 pre-COVID.
Andrew Bailey, Governor, Bank of England
The Bank has confirmed that it will be reducing the amount of bonds it is buying every week to £3.3 billion, a cut of 25% from the current £4.4million. The bank is adamant that this is not a change in policy, with most central banks at pains to stress they are not ending their economic support.
Smaller Than Expected Unemployment Rise
A major factor in the recovery is the small uplift in unemployment which is now expected to peak at 5.4% in the third quarter of 2021 when the job protection programme announced by Rishi Sunak expires, much lower than had been anticipated.
With a combination of a fast rollout of vaccinations keeping the country on track to open up businesses sooner, the short-term boost to investment thanks to government tax incentives and the protection of jobs as park of Sunak’s measures in the latest lockdown, the long-term economic scarring is now forecast to be 1.25%, down from 1.75%.
Inflation is likely to increase beyond the 2% target set by the Bank of England, mainly thanks to some temporary boosts from markets such as energy pricing. However, the potential bottlenecks in supply caused by both COVID-19 and Brexit could have a harmful impact further down the line.
Following the announcements from the Bank of England, Sterling remained almost unchanged against the dollar and the euro.