The economy is growing at its fastest pace in 80 years as consumers embrace the pandemic reopening and loosen their purse strings.
GDP is set to grow by 7.6pc this year, according to forecasts from the EY Item Club, significantly faster than the 6.8pc predicted in the spring. The UK’s rebound from Covid is taking hold even more quickly than previously anticipated, the economists said.
It represents the fastest expansion since 1941, when the war economy ramped up production to battle the Axis power.
This upgrade indicates consumers are defying the latest wave of Covid and the “pingdemic” in a bid to resume pre-Covid life as much as possible.
Martin Beck, senior economic adviser, said the success of the vaccination programme has been crucial.
“Vaccines have played a key role in bringing forward the reopening of the economy and have been a key factor in the upgrades of the forecast throughout this year,” he said, adding that households have an estimated £200bn of extra lockdown savings which can power the recovery further.
He expects unemployment to peak at 5.1pc, falling back in 2022 to 4.6pc, well on its way to getting back below 4pc as it was before the pandemic.
“Thanks to the furlough scheme and the way businesses have adapted, the jobs market is emerging from the pandemic in a remarkably little-damaged state. Unemployment will be higher than it was before Covid-19 arrived, but nowhere near as high as most forecasters were expecting,” said Mr Beck.
“The EY Item Club’s own forecast in summer 2020 was for unemployment to peak at 9pc.”
Britain suffered a bigger hit than most rich economies in part because it relies more heavily on the services sector which was particularly disrupted by social distancing rules. In turn this means the economy should rebound more quickly than many others.
Similarly the UK measures its public sector in a different way to many other countries, which hit growth numbers hard in lockdown but should rebound more quickly now.
Mr Beck expects GDP will get back to pre-Covid levels by the end of this year.
However there are risks to the optimistic picture.
“While consumers have accumulated their largest stockpile of savings since the Second World War, the big question is whether they will actually start to spend these funds once restrictions on activity are lifted. The assumption is that they will, but this is not guaranteed,” said Mr Beck.
“The picture for consumers is not entirely positive: savings are concentrated among higher-income households, while higher unemployment and inflation will weigh on real income growth. Household incomes are expected to rise 1pc in real terms this year, which is well short of forecast GDP growth.”
Rising prices could also bite spending power. The economists expect inflation to peak at 3.5pc later this year, well above the Bank of England’s 2pc target.