KPMG - Expected strong recovery marred by medium-term risks ahead


- Robust recovery in the short-term to see UK economy return to pre-Covid level by Q1 2022, with GDP growth of 6.6% forecast for 2021 and 5.4% for 2022.

- Despite interest rates remaining low in the short term, the withdrawal of government support schemes could coincide with a significant uptick in the number of company insolvencies.

- Recovery is unlikely to be even across the UK with strongest growth expected in the West Midlands, London, and the East of England.

A combination of restrictions lifting, pent-up consumer demand, accumulated excess savings and a range of government incentives are expected to spark a strong lift-off for the UK economy this summer. This will see GDP grow by 6.6% (up from 4.6% forecast in March) in 2021 and 5.4% in 2022*, allowing the economy to reach its pre-Covid level by the first quarter of next year, according to the latest analysis in KPMG’s UK Economic Outlook.

Meanwhile, rising cost pressures and the reversal of temporary tax cuts will add to inflation this year, but the analysis shows it should moderate towards the second half of next year, and average 1.7% in 2021 and 2.1% in 2022. With spare capacity still in place, KPMG expect the Bank of England to keep interest rates on hold in the short-term in order to allow the economy to fully recover and mitigate the downside risks to the outlook.

From the onset of the pandemic, businesses have been partially shielded from insolvency both by the direct financial support on offer as well as by temporary measures suspending and relaxing insolvency procedures. So, once the temporary regime is over and businesses are forced to confront a new normal, there could be a significant uptick in the number of company insolvencies, despite interest rates remaining low in the short term. This could mean a peak of about 8,000 insolvencies around the turn of the year before numbers fall back again to around 4,000 per quarter.

The outlook beyond the short-term paints a less strong picture, with the end of the super deduction allowance and the rise in corporate tax causing a sharp fall in business investment from 2023, while consumers readjust their spending patterns.

Yael Selfin, Chief Economist at KPMG UK, commented on the report: “As restrictions are lifted and consumers flock back, we expect a robust recovery ahead. Some sectors, such as manufacturing and construction, have already recovered most of the ground lost last year, while for others such as hospitality, the big times are now.

“But the possible emergence of new variants of the virus that are less responsive to the current vaccines is still a downside risk, albeit less severe than previously, as the economy has adapted to operating under social distancing restrictions. An expected rise in the level of insolvencies, as government support programmes are withdrawn, could also impact recovery.”

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