A new report from the Bank of England has forecast a rapid recovery for the British economy as vaccines are rolled out.
According to the quarterly monetary policy report, GDP is expected to shrink by around 4% in the current first quarter, holding back Britain’s immediate recovery from the the pandemic as a result of latest lockdown measures but it suggests a sunnier outlook for much of the rest of the year.
The Bank of England says the drag on growth for 2021 as a whole will be just 5%, compared to a previously-predicted 7.25%.
“GDP is projected to recover rapidly towards pre-COVID levels over 2021, as the vaccination programme is assumed to lead to an easing of COVID-related restrictions and people’s health concerns,” the report suggests.
For 2022, the Bank predicts growth of 7.25%, up from a previously forecast 6.25%.
The Bank also noted that the recovery in spending could be stronger if consumers who have built up savings during lockdowns splash out more than current projections – which suggest they will only burn through 5% of them.
Data suggests that between March and November last year, households stashed away over £125bn more than they usually would, and will have accumulated even more since then.
“The current environment is clearly highly unusual historically, and there are reasons to think that households may choose to spend more of their recently accumulated savings,” the Bank said.
Looking back at last year, officials now think the collapse in the economy was not quite as bad as it had thought – calculating that it contracted by a still-hefty 10%, rather than 11%.
They also think the UK has avoided a so-called “double dip” recession.
The report came as the Bank left interest rates on hold at a record low 0.1%.
It also left unchanged its £895bn programme of asset purchases known as quantitative easing.
Bank of England governor Andrew Bailey said: “COVID vaccination programmes have begun in a number of countries, including the UK, which has improved the economic outlook.
“Nevertheless, recent activity has been affected by an increase in COVID cases, including from newly identified strains of the virus, and the associated reimposition of restrictions.”
The report suggests that GDP grew a little in the final quarter of last year, allaying fears that November’s lockdown would see it shrinking over the course of the October-December period.
That was attributed to businesses being better prepared for the restrictions than they had been earlier in the year.
During the current quarter, early indications gathered from card spending and travelled spending suggest that the economy will shrink, leaving it about 12% smaller than where it was at the start of 2020.
Yet the economic impact of the current lockdown, while worse than that caused by the lighter restrictions in November, is not anticipated to be as bad as that caused by the first one last spring.
If as expected it is just a single quarter of contraction, then it will not be another recession – defined as two quarters in a row of GDP shrinking.