CBI predicts UK’s economic recovery will accelerate into autumn

Britain’s economic recovery will accelerate into the autumn despite the threat from staff shortages and higher inflation, according to a forecast by the business lobby group, the CBI.

The economy will expand by 8.2% this year and by 6.1% next year as the successful vaccination programme allows lockdown easing to continue next month, driving a surge in consumer spending and business activity in the second half of 2021, the CBI said.

The rate of growth will outpace all the UK’s major competitors, taking the economy back to pre-pandemic levels of activity by the end of the year, it added, though the bounce-back will follow one of the steepest contractions of any nation during the first months of the pandemic.

A large number of vacancies and some shortages of raw materials and components, especially of computer chips, were likely to persist for several months, hitting some industries, but would probably prove temporary, the CBI said.

Last month the Bank of England raised its estimate for growth in the UK’s national income, or GDP, from 5% to 7.25% in 2022 – the fastest pace since the second world war.

Spring economic boom signals UK Covid recovery is still on track Read more

Next week, the central bank’s policymakers meet to set the level of interest rates, and while they will not be revising their quarterly forecasts, they could signal that the strength of the rebound from last year is proving stronger than previously estimated.

In April, GDP growth accelerated to 2.3% from March, marking the fastest month-on-month increase since July last year.

City economists have spent recent weeks revising their forecasts, with some pushing their estimates for this year towards 8%, citing strong falls in unemployment and a tumble in the number of workers on furlough.

The proportion of UK workers who are reported to be on furlough has fallen from about 20% in late January 2021 to 7% in late May 2021, the Office for National Statistics said this week. Roughly 2 million workers are now on furlough, the lowest number since the scheme began.

However, business investment was likely to grow at a slower pace than consumer spending, falling 5% short of its pre-pandemic peak.

Former central bank governor Mervyn King has argued that a surge in spending could trigger runaway inflation, forcing the Bank of England to raise interest rates sharply.

Wages growth is now running at 3%. Should the inflation rate rise above 3%, it would mean UK workers suffering a fall in living standards and could reverse the current rise in spending.

CBI director-general Tony Danker said there were ‘really positive signs about the economic recovery ahead’. Photograph: Jonathan Brady/PA

The CBI’s director-general, Tony Danker, said: “There are really positive signs about the economic recovery ahead this year and next. The data clearly indicates that there is pent-up demand and ambition across many sectors.

However, the CBI’s lead economist, Alpesh Paleja, warned “this won’t feel like a recovery to some”, with the aviation and events industries, which have yet to fully restart, taking much longer to recoup their losses.

“Other long-term challenges are also emerging: recruitment difficulties are adding to global supply bottlenecks, which are in turn stoking pricing pressures,” said Paleja. “While these should subside as activity around the world normalises, it’s one to keep an eye on.”

Paleja said it was possible that a combination of rising consumer spending and shortages of some goods could push inflation higher later in the year, but he expected any spike to be temporary before falling back to 2% next year.

Treasury minister Jesse Norman said there was “the potential for inflation to be a serious risk” as the economy recovered from the coronavirus crisis.

He told BBC Radio 4’s Today programme: “I would hesitate to disagree with [Lord King], who is a great expert in these areas, but it is also true that it is very difficult to make a judgment based on the extraordinary circumstances we have at the moment.

“As an economy rebounds, and in particular in the face of social distancing and other restrictions, it may be that different markets and different companies find different price points, so it’s not impossible you could get a temporary inflation pressure.

“I think there’s the potential for inflation to be a serious risk – and the reason why we’ve conducted the kinds of economic policies over 20 years in this country with the independent Bank of England is precisely in order that we can monitor and manage inflation risks.”