Britain is on track for the strongest growth since the second world war this year as it stages a faster-than-expected recovery from the Covid-19 pandemic, according to the Bank of England.
The Bank raised its estimate for UK GDP growth to 7.25% in 2021, up from a previous forecast in February for growth of 5% this year, as rapid progress with the Covid-19 vaccine and easing of restrictions paves the way for a boom in pent-up demand.
The growth rate would be the fastest since an 8.7% expansion in 1941, when production was being pushed to the limit during the second world war. However, it follows a collapse of almost 10% in 2020, the worst decline for more than three centuries.
Setting out upbeat forecasts for growth and jobs as the economy reopens, the central bank’s rate-setting monetary policy committee (MPC) voted unanimously to keep interest rates on hold at record-low level of 0.1%.
Andrew Bailey, the Bank’s governor, said there was “very strong, good news” from the economy as lockdown measures are relaxed. However, he warned two years of GDP growth had been lost to the global health emergency, and said there were still risks on the horizon – including high rates of coronavirus in India and some other countries.
“Let’s not get carried away. It takes us back by the end of this year to the level of output we had essentially at the end of 2019 pre-Covid. So that is good news in the context of where we’ve been, but it still means that two years of output growth have been lost to date,” he said.
“So I would give this a balanced message: there is good news, clearly very good news given what we’ve been through. But let’s put it into perspective.”
Reflecting the pace of the recovery, the Bank said it expected the UK economy to recover to its pre-pandemic level by late 2021 and that unemployment would hit a much lower peak than previously forecast.
Supported by the extension of furlough until the end of September, Threadneedle Street said it estimated the jobless rate would peak at just under 5.5% in the autumn.
Unemployment was 4% before the pandemic struck, representing about 1.3 million people. During the first wave last year, the Treasury’s independent forecaster, the Office for Budget Responsibility, had forecast a peak jobless rate of 12%, the highest level since the 1980s.
The Bank said rising consumer spending would help fuel the economic rebound, driven by more than £200bn in additional savings built up mainly by wealthier households during lockdown, as well as a rise in confidence thanks to the Covid vaccine.
Some economists are concerned stronger growth will lead to a jump in inflation, which could force the central bank to raise interest rates. Threadneedle Street said it anticipated inflation would rise above its 2% target, which is set by the government, but added this would probably only be temporary.
Labelling the rise in inflation as “transitory,” Bailey said inflation was on track to fall back below its target rate by 2023, while growth would also fade as a result of the government scaling back Covid support measures.
The upgrade to forecasts comes after a more-resilient-than-expected economic performance during the third national lockdown at the start of this year, as businesses adapted to life under restrictions.
The MPC said the economy probably shrank by as little as 1.5% in the first three months of 2021 during the toughest restrictions since the first wave of the pandemic, significantly better than its previous forecast for a 4% plunge.
“You look at the impact of the first lockdown and look at the impact of the third lockdown, and they’re very different. It has attenuated a lot,” Bailey said. GDP fell by more than 20% in the first half of 2020 when Covid-19 spread to the UK.
“We’ve all found ways to do things and to spend money in ways that we needed to find a bit of time to exercise our imagination because we weren’t doing it this time last year.”
Setting out its quarterly economic update, the MPC also voted to maintain the level of its £895bn quantitative easing programme, a policy designed to keep borrowing costs low across the economy.
However, the central bank’s chief economist, Andy Haldane, who has warned of a possible “inflation tiger” being unleashed as Covid restrictions are relaxed, cast a lone vote to cut the overall size of bond-buying scheme by £50bn.
In a move interpreted by investors as a first step towards scaling back emergency financial support, the Bank also said it would ease the pace of its asset purchases to £3.4bn a week between May and August, down from a rate of £4.4bn.