Although many of us have been hiding from the weather for much of this unusually cold and rainy month, the economic picture is looking much sunnier. Growth figures suggest that the economy may recover from the Covid-19 pandemic sooner than expected, and optimism is increasing as businesses begin to reopen.

While there are likely to be lingering effects of the recession – and not everyone is going to be able to return to the way things were before – there seems to be a lot to be positive about.

This Insight looks at recently published data, and discusses what this might mean for the economy in the months ahead.

GDP growth forecasts indicate a speedy recovery

As Covid-19 restrictions are relaxed and the economy opens up, there’s likely to be growth. This might happen sooner and more strongly than previously expected. Recent estimates show that the economy shrank by 1.5% in January-March 2021. In normal times this would be a worrying decrease, but given lockdown restrictions were in force for most of this time, it’s actually much better than forecasters had previously thought (and there was growth in both February and March).

Chart showing independent GDP growth forecasts tracked by HM Treasury. All show the economy returning to growth in Q2 of 2021 and very strong growth in 2021 and 2022. They also show the OBR’s forecasts from March as being lower than most independent forecasts, and much lower than actual GDP growth in Q1 of 2021.
Sources: HM Treasury, Forecasts for the UK economy: April 2021 and May 2021. Forecasts for Q1 to Q2 are from the April edition and forecasts from Q2 to Q3 are from the May edition – Q2 figures were revised for some forecasters between these editions.

As the charts above show, the Office for Budget Responsibility (OBR) produced forecasts alongside the March 2021 Budget which now look overly pessimistic. All forecasters expect growth in 2021 and 2022 to be far higher than in a normal year as the economy recovers.

In its Monetary Policy Report for May 2021, the Bank of England said that it now expects GDP to “recover strongly to pre‑Covid levels” over the rest of 2021. This also means that the Government is likely to have to borrow less money than expected. Borrowing in April was about £7 billion lower than forecast, and analysis by the Financial Times suggests that public borrowing in 2020/21 could be as low as £150 billion, much lower than the OBR’s March estimate of £233.9 billion.

Activity and optimism are up across much of the economy

This recovery is starting to appear in some data already – retail sales, for example, were 9.2% higher in April than in March, as non-essential retail reopened. The effect is even clearer in some of the more forward-looking data sources, such as the business confidence measures published by both the Confederation of British Industry (CBI) and IHS Markit.

: Charts showing that the CBI’s Industrial Trends Survey and IHS Markit’s PMI measures both fell during the Covid-19 pandemic, but have since rebounded strongly, and are now higher than they were pre-pandemic.
Sources: CBI, IHS Markit

Far more manufacturers in the CBI’s Industrial Trends survey thought that output would rise over the next three months than thought it would fall, when asked in both April and May this year. The figure in April (net +36%) was higher than at any point since 1988. Similarly, Markit’s Purchasing Managers’ Index (PMI) figures for both the services and manufacturing sectors were at their highest level in many years, indicating strong optimism among businesses.

As activity picks up and demand increases, inflation may also begin to rise. CPI inflation more than doubled in April to 1.5%, driven largely by household services such as gas and electricity as well as clothing sales and transport; these rises are expected to continue in the short term.

But it’s not back to normal, as some things have changed long term

Despite the optimism, there is evidence that some of the pandemic’s effects will be longer-lasting. While the most recent labour market statistics from the Office for National Statistics (ONS) show the employment rate has risen and unemployment has started to fall, this is not the case across the board. Youth employment has continued to fall, suggesting that more people aged 16 to 24 are staying in education rather than entering the workforce (and those in education are now less likely to also have a job). There may also be higher unemployment levels still to come, with many people still furloughed (over 4 million as of March 2021). The Coronavirus Job Retention Scheme is set to continue until the end of September, but it’s unlikely that all of these jobs will be saved in the long term.

While overall pay levels have continued to rise, the ONS says this is partly due to changes in the labour market, as people in higher-paid jobs have been more likely to keep them.  The increase is therefore partly driven by the lower-paid losing their jobs.

Another significant change that has taken place during the pandemic is the end of the Brexit transition period. It’s too early to tell exactly what effects this is likely to have, but some unusual patterns have emerged. In particular, imports of goods from non-EU countries were higher than from EU countries in the first quarter of 2021, for the first time since records began in 1997. The ONS says that it will continue to assess whether this “reflects short-term trade disruption or longer-term supply chain adjustments”.

Further reading

Economic Indicators, House of Commons Library.

The UK economy: A dashboard, House of Commons Library.

About the author: Philip Brien is a researcher specialising in public spending at the House of Commons Library.

Image: Coronavirus (COVID-19) Sheffield by Tim Dennell, under CC BY-NC 2.0

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