"By 2025, the level of GDP is forecast to be around 6% lower compared with pre-Covid-19 expectations"
The resurgence of Covid-19 has led to a downward revision in forecasts of UK economic growth in 2021 made by NIESR, from 5.9% to 3.4%, following a contraction of 9.9% in 2020.
NIESR says that early indications are that the lockdown in the first quarter is having a larger impact on activity than in November, but a smaller impact than the Spring 2020 lockdown.
The Coronavirus Job Retention Scheme (CJRS) and the Self-employed Income Support Scheme (SEISS) have protected millions of jobs, costing the government an estimated £100 billion or 4.8% of GDP, for the 20-21 fiscal year. In NIESR’s main forecast scenario, unemployment is expected to rise significantly following the end of these schemes in April, reaching 7.5% or 2.5 million people by the end of the year.
To prevent a rise in unemployment of the magnitude of the forecast, and to limit the economic and social ‘scarring’ from the public health crisis, NIESR says the Chancellor should soon announce policies to support the labour market beyond April.
Public sector net debt, which increased to 99.4% of GDP as of December 2020, is projected to peak at 111% in 2023. NIESR warns that if Covid-19 support is withdrawn prematurely, or if consolidation is prematurely applied in response to the increase in public debt, "the economic recovery will be delayed and the long-term economic impact of the pandemic exacerbated".
The Instute added that there are "major risks to the downside" associated with the roll-out and effectiveness of vaccines, the emergence of new Covid-19 strains and their effect on the path of the virus, which might imply the continuation of lockdown measures for a longer period, suppressing domestic demand.
A slower than expected global recovery due to Covid-19 is also a major downside risk for the UK economy through lower trade.
Dr Hande Kucuk, deputy director at NIESR, said: “Despite the roll-out of vaccines, Covid-19 will have long-lasting economic effects. By 2025, the level of GDP is forecast to be around 6% lower compared with pre-Covid-19 expectations, reflecting lower consumption caused by higher unemployment, weaker business investment due to stressed balance sheets and uncertainty during the pandemic, and the adoption of a Trade and Cooperation Agreement with the EU which imposes more barriers to trade than before.”
