"Despite the rhetoric about ‘building back better’ existing inequalities could be exacerbated by the pandemic and an uneven recovery."
The significant upward revision reflects a better-than-expected first quarter, a greater resilience to further lockdowns, and the large rise in Covid-related public spending in the 2021-22 fiscal year announced in the March Budget.
The immediate economic effects of the virus, which have been concentrated in low-waged service sectors, are expected to wane, while remaining negative consequences of Brexit will make themselves felt over the long-run and largely in sectors less affected by Covid-19.
NIESR says the private non-traded services sector, which includes badly affected industries such as hospitality, is likely to see its output increase by 9% this year after its pandemic-induced 14.75% fall last year. However, it expects the sector to shed a further 190,000 jobs after the furlough scheme comes to an end later this year.
Its report also shows that the poor Covid-19 performance has greater permanent cost for the UK compared with other major economies. The size of the economic contraction means that the level of GDP is nearly 4% lower in 2025 than NIESR had forecast it to be before the Covid-19 pandemic, equivalent to around £1,350 per person per year.
Thanks to the extension of furlough and other support measures to the autumn, NIESR now forecasts unemployment to peak at 6.5% in the final quarter of this year, compared to 7.5% in February.
Its central forecast is for CPI inflation to rise over the coming months, reaching 1.8% in the final quarter of 2021 before falling to 1.5% at the end of 2022 and settling just below its 2% target between 2023 and 2025. Bank Rate is not forecast to rise until 2023 but NIESR says there is "considerable uncertainty regarding both the direction and instruments of monetary policy".
NIESR deputy director, Dr Hande Kucuk, said: “Beyond short-term optimism, the outlook for the UK economy is less certain given the economic and social challenges that existed before the pandemic.
"Our analysis at sectoral, regional, and household level shows that despite the rhetoric about ‘building back better’ existing inequalities could be exacerbated by the pandemic and an uneven recovery.
"Now that the worst of the pandemic may be behind us, a new fiscal policy framework is needed to combine clear principles for spending and tax to support the ultimate long run objectives of economic policy – creating the conditions for more robust and inclusive growth.”
