UK economy to enjoy summer high but question marks remain medium-term

• Overall GDP growth of 4.6% is forecast for 2021 with the economy returning to pre-Covid levels by the last quarter of 2022
• Extension of the Government’s Job Retention Scheme and other programmes to provide additional support as the economy opens up
• Rising taxes and lack of concrete economic plans put prospects for the medium-term in question

Following the Budget, UK GDP growth of 4.6% (up from 4.2% forecast in Jan) is now expected in 2021 and the economy will return to pre-Covid levels by the last quarter of 2022, according to the latest UK analysis in KPMG’s Global Economic Outlook.

Government intervention, and in particular the extension to the Job Retention Scheme, should help to keep unemployment relatively low considering the scale of the negative shock to the economy. As a result, unemployment is expected to be 5.6% in 2021, down from the 6% forecast in January.

 Yael Selfin, Chief Economist at KPMG UK, commented on the report: “A sugar rush of extra spending announced during the Budget will bring the economy to a high this summer, as people are eager to go out and spend again while staycations boom as most international travel is likely to be still on hold.

 “By extending the furlough scheme, the Chancellor has potentially protected half a million jobs that would have been lost over the summer. In addition, the prolonged VAT cuts will help to temper the anticipated rise in inflation, putting less pressure on interest rates.”

Table 1. KPMG’s March forecasts for the UK economy (main scenario) 

a	2020	2021	2022
GDP	-9.9	4.6	5.6
Consumer spending	-10.7	7.6	8.2
Investment	-8.7	5.6	8.0
Unemployment rate	4.5	5.6	5.8
Inflation	0.9	1.6	1.9
Base interest rate	0.1	0.1	0.1

 

_{Source: ONS, KPMG forecasts. Average % change on previous calendar year except for unemployment rate, which is average annual rate. Investment represents Gross Fixed Capital Formation, inflation measure used is the CPI and unemployment measure is LFS. Interest rate represents level at the end of calendar year.}

 

Build back better

 

While the UK economy is expected to bounce back strongly in the short term, KPMG’s latest  forecasts expect growth of only 5.6% in 2022 as there are still many question marks as to how far the Super Deduction will bring business investment forwards and whether the rise in corporation tax will hurt investment in the medium term.

The Budget provided an opportunity for the Chancellor to set solid foundations to unlock a future of faster growth through greater productivity by investing in skills and technology, including bringing forward investment in high speed broadband and supporting high growth emerging industries.

Yael Selfin, Chief Economist at KPMG UK, concludes: “The Budget focused primarily on extending support to protect the economy from the current crisis. But as we are nearing the end of the pandemic, the big miss was a full plan to build back better an economy that has been turned upside down by Covid and Brexit.

“Post-Covid we are likely to see major changes in the way people and businesses operate. More help is needed to prepare for those changes now so that the economy can gather full momentum once restrictions are lifted, so that fewer businesses are lost as they no longer have a viable market to operate in.”  

 

-ENDS-

 

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About the research

The forecasts were produced by the KPMG macroeconomics team using a suite of external and in-house models capturing the main inter-relationships in the UK economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly.

 

About KPMG

KPMG LLP, a UK limited liability partnership, operates from 21 offices across the UK with approximately 16,000 partners and staff.  The UK firm recorded a revenue of £2.3 billion in the year ended 30 September 2020. KPMG is a global organisation of independent professional services firms providing Audit, Legal, Tax and Advisory services. It operates in 147 countries and territories and has more than 219,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.