One of the the UK’s leading thinktanks has slashed its forecasts for growth this year after the delay to recovery caused by the second wave of the Covid-19 pandemic.
In its quarterly update, the National Institute of Economic and Social Research said it now expected the economy to grow by 3.4% in 2021 compared with the 5.9% it had been expecting in November.
NIESR said it expected unemployment to rise sharply after the government’s furlough scheme ended in April and would reach 2.5 million – or 7.5% of the workforce – 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, the chancellor should soon announce policies to support the labour market beyond April,” it said.
The thinktank was less optimistic than the Bank of England about the time it will take for the economy to recover fully from the pandemic, predicting that it will take until late 2023 before output is back to the level reached in the fourth quarter of 2019.
Last week, Threadneedle Street said it envisaged a return to pre-Covid 19 levels by the start of 2022, but NIESR said uncertainty about future variants of the coronavirus, continued social distancing, more trade barriers as a result of Brexit and the weakness of productivity in the years before the pandemic would mean only a gradual recovery.
Hande Kucuk, a NIESR deputy director, said it would take time to make up the lost ground, just as it had after the global financial crisis of 2008-09 when it took five years to return to the pre-recession peak.
She said: “Despite the rollout of vaccines, Covid-19 will have long-lasting economic effects. By 2025, the level of GDP is forecast to be about 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.”