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UK to avoid double-dip recession amid ‘brighter’ outlook, says think tank

The EY Item Club predicts the economy will now bounce back next year thanks to the vaccine rollout and Brexit deal.

Britain looks on course to narrowly avoid its first double-dip recession since the 1970s and recover sooner than first feared, according to an economic think tank.

The EY Item Club said it believes the economy flatlined in the final quarter of 2020 rather than contracted thanks to a resilient performance during the November lockdown.

While the latest, tougher lockdown is set to see output fall sharply in the first quarter of 2021, the Item Club said that the absence of a contraction at the end of last year will see the UK avoid a much-feared double-dip recession.

A recession is defined by two quarters in a row of falling gross domestic product (GDP) – a measure of the size of the economy.

Despite a contraction of between 3% and 4% due in the first three months of 2021, the Item Club believes the prospects for recovery are “looking brighter” thanks to the vaccine rollout.

It will also mark a far less severe hit than in the first lockdown when second quarter GDP plunged by a eye-watering 18.8%.

Howard Archer, chief economic adviser to the EY Item Club, said: “The UK economy has demonstrated remarkable resilience in recent months and the impact of recent lockdowns has been nowhere near what we saw in April.

“Over the course of 2020, the economy has become quicker to adapt to new Covid-19 restrictions and while new restrictions may still cause disruption, lessons learned from previous lockdowns are rapidly put into place.”

He added: “The combination of vaccines, a UK-EU trade deal and previous lockdown experience means there’s much less uncertainty out there.

“Excluding the first quarter, the UK is looking at two years of strong growth.”

In its winter forecast, the group predicted that after a record 10.1% plunge in 2020, the economy will grow by 5% in 2021, 6.5% in 2022, 2% in 2023 and 1.8% in 2024.

This would mean the economy recovers to pre-crisis levels in the third quarter of 2022, having earlier warned that it could take until 2024.

The unemployment rate will also soar to 7%, though this is again lower than the 7.7% it first feared and will help lower the risks of long-term scarring.

The forecast comes ahead of the Bank of England’s latest decision on interest rates and its updated set of forecasts for the economy next week.

There has been much speculation over whether the Bank will take interest rates negative for the first time in history.

The Item Club believes it is more likely that rates will remain at 0.1% for “some time to come” but does not rule out below zero rates.

The outlook for Britain’s public finances look less rosy, with official figures last week revealing that the Government have borrowed £270.8 billion since the beginning of the financial year in April as it supported the economy.

Ahead of the Budget on March 3, EY’s chair Hywel Ball called on the Chancellor to set out a “clear plan for an orderly reduction of public support for the economy at the same time as articulating a future vision”.