What a difference a year makes

It’s safe to glance backwards …

For the first time in what seems like forever, we can look back to 2020 and feel better. A year ago, we were in the dark about the future direction of the economy: forecasts were being downgraded on a daily basis; our understanding of coronavirus was nascent; and lockdown stretched ahead of us.

Fast forward and the vaccination programme continues at pace, lockdown restrictions are easing, and the economy has proven to be more resilient than we ever expected. Add in the additional support announced in the Budget, and the outlook is much better than we could ever have imagined 12 months ago.

… but even better to look ahead …

Without in any way wishing to play down the awful impact of the pandemic on individuals and society overall, the EY ITEM Club Spring Forecast 2021 strongly suggests that at the level of the overall economy, we will emerge with much less damage than we expected. EY ITEM Club expects the UK economy to grow by 6.8% in 2020, a significant upgrade from its forecast of 5% expansion in its January forecast. 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.

It does appear that our economy will be less ‘scarred’ than some of the more pessimistic scenarios outlined. Most obviously, in the labour market. EY ITEM Club expects unemployment to peak at 5.8% in 2021 much better than the 8 to 9% estimates that formed the consensus 12 months ago. This is hugely important, as it suggests we will not have lost skills and capability in significant numbers and should have more scope to bounce back quickly.

A fall in business investment was a significant factor in the economic shock in 2020. With the Chancellor announcing enhanced capital allowances alongside increased public investment, EY ITEM Club expects 10% growth in fixed investment in both 2020 and 2021. Alongside the innovative solutions we have seen in health, logistics, pharma and technology, there is the potential for a strong corporate recovery. Reflecting these positive developments, EY ITEM Club now expects the UK economy to return to its pre-2020 levels in the second quarter of 2022, six months earlier than previously forecast.

… and plan for recovery and beyond

We are not out of the woods, but with EY ITEM Club forecasting further growth of 5% in UK GDP in 2022, businesses can start to plan for the possibility of two years of strong economic performance, with a very favourable tax regime to support capital investment. Once the return to more normal operations is achieved in the coming months, it will be important to take the time to understand how the new landscape is settling to shape longer-term strategies.

A staged approach makes sense as risks remain, both related to the pandemic through future outbreaks, and in areas that have been of concern for some time, including the impact of Brexit and increased geopolitical tensions. Although EY ITEM Club believes the recovery can be accommodated without any inflationary spike, there is more discussion of the risk of rising prices than for some time, and it would be wise to keep a close eye on input prices.

As we have noted before, we will remain in a policy-driven economy for some time with ‘levelling up’, the move to net zero and the drive to build Global Britain as the priorities. Understanding how these initiatives might impact the economy and what the opportunities arising could be will remain important for the foreseeable future.

PS And it’s goodbye from him. A message from Mark

Finally, I am hanging up my pen or whatever economists do, so this is the last EY ITEM Club forecast I will oversee. From the Global Financial Crisis, through the Eurozone Crisis, Brexit and finally the COVID-19 pandemic, it has been a fascinating if bumpy journey. Thanks for all your interest and support. I hope we have been of some use in shining a light on what, at times, was a very foggy world.

I look forward to watching how things evolve from the sidelines.