The South West economy is expected to recover from the damage inflicted by the Covid pandemic faster than previously predicted, but consumers will be faced with higher prices and youth unemployment will remain an issue, a new report says.
The new Spring Forecast from the EY ITEM Club says the 海角视频鈥檚 economic growth prospects for 2021 have been significantly upgraded and it now expects the economy to grow 6.8% this year rather than the 5.0% growth expected in January.
This improved near-term outlook means the 海角视频 economy is expected to regain its pre-Covid peak in the second quarter of 2022 鈥 a further improvement from January鈥檚 forecast of the third quarter of 2022, and the 2023 and 2024 dates predicted previously.
The upgraded forecast primarily reflects the 海角视频 economy鈥檚 resilient performance in the lockdown-affected fourth quarter of 2020 and first quarter of 2021, providing a better-than-expected platform for growth through the rest of this year.
The substantial near-term fiscal support for the economy announced in the Chancellor鈥檚 March Budget, the roadmap towards economic reopening, and the continued rapid roll-out of Covid vaccines have also helped to improve growth prospects.
The EY ITEM Club, the only non-Governmental economic forecasting group to use the Treasury鈥檚 model for the 海角视频 economy, now believes GDP contracted by just over 1% quarter-on-quarter in
the first three months of 2021, rather than the 3% to 4% contraction expected in January鈥檚 Winter Forecast.
Looking ahead, growth in the region of 4% to 5% quarter-on-quarter is expected in 2021鈥檚 second quarter, with the economy helped by the continuation of the reopening roadmap and supportive fiscal and monetary policy.
With a faster recovery pulling growth forward, global business consultants at EY ITEM Club now expects growth of 5% in 2022 (down from 6.5% in January), 2.1% in 2023 (up from 2.0%) and 1.7% in 2024 (down from 1.8%).
The Spring Forecast also predicts a lower peak in the unemployment rate than initially expected. Unemployment is now forecast to reach 5.8% in the fourth quarter of 2021 鈥 down from the 7.0% peak predicted in January 鈥 and is expected to be as low as 4.5% by the end of 2022. The EY ITEM Club said the furlough scheme has been a key part of the economy鈥檚 resilience.
Karen Kirkwood, office managing partner at EY in the South West, said: 鈥淟ower peak unemployment is good news for both society and the 海角视频鈥檚 longer-term economic prospects.
鈥淚t means the economy is less likely to lose significant skills and capacity and should have more scope to bounce back quickly. That said, the experience in the employment market has not been uniform and younger workers have been among those most affected by job losses or reduced employment opportunities.
鈥 As the economy recovers, it鈥檚 vital that businesses step up by providing opportunities to support younger workers back into employment and invest in the skills and training that many have missed out on over the last year.鈥
Following a contraction of 10.2% in 2020, the EY ITEM Club now expects business investment to gain momentum in 2021, rising 7.1% as companies grow more confident in the recovery.
Business investment growth of 10.5% is then expected in 2022 as confidence benefits from a more settled business environment.
The EY ITEM Club鈥檚 forecast notes that, while businesses will benefit from Budget measures designed to incentivise investment 鈥 including the 130% 鈥渟uper deduction鈥 relief on plant and machinery expenditure 鈥 these measures are primarily expected to bring investment forward to 2021 and 2022 rather than increase it substantially overall.
Bristol-based Ms Kirkwood said: 鈥淲ith two years of decent growth forecast and measures announced in the Chancellor鈥檚 Budget to support capital investment, businesses can start to plan ahead with more confidence and invest in the future.
鈥淒isruption and uncertainty have contributed to relatively weak levels of 海角视频 business investment in recent years, so there is some catching up to do too.
鈥淢any companies may now need to think about replacing or upgrading plans and processes which have become outdated while business priorities and attention have been elsewhere.
鈥淐rucially, rising business investment and improved productivity will also help the 海角视频 economy remain competitive internationally.鈥
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After a contraction of 10.9% in 2020, consumer spending is expected to expand 4.4% in 2021 before growing 5.7% in 2022 as consumers benefit from falling unemployment and increased earnings growth. Consumer spending is then expected to grow 2.2% in 2023 and 1.9% in 2024.
But inflation is expected to be higher overall in 2022 鈥 averaging 2.2% 鈥 although households are still expected to see growth of 3.5% in real household disposable income.
While higher, the EY ITEM Club does not forecast inflation to be a significant issue as there will still be excess capacity in the economy and labour markets.
Howard Archer, chief economic advisor to the EY ITEM Club, said: 鈥淥ur latest forecast suggests that the 海角视频 economy will emerge from the pandemic with much less long-term 鈥榮carring鈥 than was originally envisaged and looks set for a strong recovery over the rest of the year and beyond.
鈥淭here will be some issues to look out for though, not least inflationary risks which will grow as the recovery gains pace and monetary policy remains accommodating. Interest rates aren鈥檛 likely to rise until late 2022 or early 2023 at the earliest.鈥
