NationalInstituteUKEconomicOutlook

Recovery:stallingnotsoaring

Autumn2021

SeriesA.No.4

NationalInstituteUKEconomicOutlook–Autumn2021

ISSN2753-9350

?NationalInstituteofEconomicandSocialResearch,2021

NationalInstituteofEconomicandSocialResearch

2DeanTrenchSt

LondonSW1P3HE

+44(0)2072227665

enquiries@niesr.ac.uk

niesr.ac.uk

Registeredcharityno.306083

NATIONALINSTITUTEOFECONOMICANDSOCIALRESEARCH

OFFICERSOFTHEINSTITUTE

PRESIDENT

SIRPAULTUCKER

COUNCILOFMANAGEMENT

PROFESSORNICHOLASCRAFTSCBE(CHAIR)

TeraAllasCBE

AlexBaker

JennyBates

ProfessorPhillipBrown

NeilGaskell

ProfessorSirDavidGreenaway

StephenKing

KeithMackrell

NevilleManuel

ProfessorJillRubery

RomeshVaitilingamMBE

DIRECTOR

PROFESSORJAGJITS.CHADHAOBE

2DeanTrenchStreet,SmithSquare

London,SW1P3HE

TheNationalInstituteofEconomicandSocialResearchisanindependentresearchinstitute,foundedin1938.Thevisionofourfounderswastocarryoutresearchtoimproveunderstandingoftheeconomicandsocialforcesthataffectpeople’slives,andthewaysinwhichpolicycanbringaboutchange.AndthisremainscentraltoNIESR’sethos.Wecontinuetoapplyourexpertiseinbothquantitativeandqualitativemethodsandourunderstandingofeconomicandsocialissuestocurrentdebatesandtoinfluencepolicy.TheInstituteisindependentofallpartypoliticalinterests.

Contents

Foreword

3

NationalInstituteUKEconomicOutlook–Autumn2021

4

1UKEconomicOutlook:ShortagesandfiscaltighteningthreateneconomicrecoveryfromCovid-19

6

Economicbackgroundandoverviewoftheforecast

6

Economicactivity

8

BoxA:TheEuropeanUnion’sCarbonBorderAdjustmentMechanism:levellingtheEUcarbonplayingfield

11

Households

13

BoxB:FurloughandhouseholdfinancialdistressduringtheCovid-19pandemic–insightsforfuturelockdowns

14

BoxC:Wagepressures:aperspectivefromonlinejobadvertisements

17

Firms

20

Trade

22

Fiscalpolicy

23

Inflationandmonetarypolicy

25

BoxD:Thenewemploymenttax

29

2UKRegionalOutlook:Autumn2021

33

RegionalOutlook

34

GVA,(un)employmentandlabourproductivity

35

Skillsandlabour-marketinterventions

35

Reducingregionaldisparities

38

HouseholdincomesacrosstheUK’sdevolvednationsandEngland’sregions

39

BoxE:DistributionalimpactsofCovid-19andpotentialforpolicyintervention

41

Appendix

45

NationalInstituteUKEconomicOutlook–Autumn2021

Foreword:Ripitupandstartagain

TheBritisheconomy’srelativedeclinehasbeenhighlightedbyasequenceofeventsthatwillbeseenashistoricallyimportant.ThefinancialcrisislaidtorestournotionthatitwassufficienttobuildanationalplanonaburgeoningCityofLondon.ThereferendumonBrexittoldusthatopennesstoEuropeantradeandmigrationalonedidnotallowoureconomicstructurestodeliversustainedincreasesinprosperityacrossthecountry.Lifeunderthepandemichasfurtherexposedtheneedtoredevelopourpublicprovisionofhealth,socialcareandtransportinfrastructure,aswellasareconsiderationoftherevenuestofinancethat.Whileitisnotthedutyofthestatetoreplaceprivatesectoractivityandimpingeonitsplansundulywithtaxes,thestate(localandnational)doeshavetheobligationtosupportandenabletheprivatesectortogeneratejobsandprosperityacrossthenation,aswellasprovidepublicgoods.Inthoseobligationsithasrepeatedlyfailed.

Aswereachtheendof2021,weareemergingfromtheCovid-19cloud,albeitgingerly.However,itisbynomeanscertainthatwewillavoidreturningtosomerestrictionsonourmobility;certainly,thethreatthatwemightdosowillcontinuetoaffecthouseholdandbusinessconfidence.Economicactivityisfacingapersistentnegativesupplyshock,whichmeansthatwecannotproduceallthegoodsandserviceswewouldwantatprevailingprices.Alongsidethat,thereismuchpent-updemandassignalledbythestockofhouseholdsavings.Twofundamentaljudgementsintheshortrunarehowquicklythesedisruptionstodomesticandglobalsupplysortthemselvesoutandhowquicklyhouseholdsreturntotheirmorenormalpropensitiestosave.IfwethinkthedisruptionswillironoutbyChristmasandconsumerswillquicklyrundowntheirsavings,wemightwellthinkthatourproblemsarebehindus.However,ifwethinkthatdisruptionswillpersistandfirmsandhouseholdswillcontinuetoactwithcaution,wemaybefacedwitheconomicstagnation.

AsthisOutlookmakesclear,webelievethatshortrunsupplyproblemsfacedbytheUKwillpersistandarelikelytobeexacerbatedbyBrexit.ThisisbecauseourexitfromtheEuropeanUnionhasactedtoreducethepooloflabour,contributedtolowerlevelsoffirminvestmentthanmightotherwisehavebeenthecase,andledtosomecontractioninthesizeofourtradedsector.Ofcoursethesqueezeonlesswell-offhouseholdsisnowwelloveradecadeoldlong,predatingBrexit,andhasprimarilyresultedfromaninabilitytoaddressourproductivityshortfall,whichisourlongtermsupplyconstraint.Inthissensedemandandsupplyaremeeteachotheratthesamepointwherelowskillsandlowwagesareassociatedwithlowlevelsofdemandandconstrainedsupply.Ourproblemsarenotinsurmountablebutpromptandconsistentinterventionsbythestatetosupporttraining,labourmobility,housebuildingmayacttoalleviatesomeofthecostsofadjustmenttothathighwage-highskilleconomyforwhichweyearn.

Structurally,wethinktherearelargeshortfallsinthecapitalstock–human,physicalandotherwise–inmanypartsofBritain.Thegovernmentneedstoaddressthesewithaprolongedperiodofregionalregenerationthataskshardquestionsofourlocalgovernmentsystemanddomesticfinance.TheNationalInfrastructureBankshouldhelpestablishaddresstheseshortfallsandfillthegapleftbytheEuropeanInvestmentBank.However,itisearlydays,andthescaleofitsambitionmaynotmatchthatofthetaskinhand.Thesupplyshortfallscanonlybeoffsetbyyearsofinvestmentinpublicserviceswithasustainedfiscalintervention.However,whenplacedalongsidenegativerealinterestrates,thereisatthesametimenowaseriousinflationriskthatrequirestightermonetarypolicy.Inflationnearing5percentwillsurelyriskofescalatinginflationandwageexpectations,particularlyasfirmsseektomark-upaftertheCovid-19crisis.FailuretoactsoonmayleadmarketparticipantstoconcludethattheBankofEngland’spreferencesforoutputgrowthhavetrumpedthoseforpricestability,whichisitsprimarygoal.Alternatively,toconcludethattheAssetPurchaseFacility’sbalancesheetmaynotbeabletobearconsiderablyhigherpolicyrates.Wehaveproposedawayofunwindingquantitativeeasingwithoutexposingthefacilitytolargelossesandpotentiallydislocatinggiltmarketswithlargescaleandlumpyredemptions.WehopethattheMonetaryPolicyCommitteewilltakenote.

Itisbecomingclearthatoverthepasttenyears,weadoptedthewrongmixofmonetaryandfiscalpolicies.Thelatterbeingtootightandtheformertooloose.Itistimetoripupoursheetmusic.Fiscalpolicyshouldpromotepublicinvestmentandthebuild-upofnationalassets;monetarypolicyshouldconcentrateonrestoringinterestratesthatwillprovidemoreincentivesforfirmsandbankstodeploytheircapitalproductivity.Startagain.

JagjitS.Chadha,Director,NIESR

November2021

NationalInstituteofEconomicandSocialResearch 3

NationalInstituteUKEconomicOutlook–Autumn2021

NationalInstituteUKEconomicOutlook–

Autumn2021

Thenextfewmonthsarelikelytobringstutteringgrowth,risinginflationandwideningincomeinequalitiestotheUKeconomy.Householdincomeswillbepainfullysqueezedbyacombinationofearningsgrowthlagginginflation,risinginterestratesandtighterfiscalpolicy.Theeffectswillbefeltunevenly,withUniversalCreditrecipientsthehardesthitandthoseinreceiptofsignificantnon-labourincome-notsubjecttotheHealthandSocialCareLevy-relativelyunaffected.

ThesqueezeonhouseholdincomesfromrisingpricesandwithdrawaloftheUniversalCreditupliftwillleadtoadoublingofdestitution:despitethereducedtaperrate,neithertherecoverynortheincreaseintheminimumwagewillbeenoughtomakeupforthissqueeze.AffectedhouseholdsareconcentratedincertainregionsandlocalitiesoftheUK,especiallyintheNorthofEngland(notablytheNorthWest)andinNorthernIreland.

WithCOP26underwayitremainstobeseenwhetherpoliticalauthoritieswillagreethecoordinatedpoliticalandfiscalactionrequiredtotackleclimatechange.WhiletheadditionalgreeninvestmentannouncedintheBudgetiswelcome,itdoesnotyetgofarenough.Ourresearchshowsthatcentralbankscanplaytheirpartinmitigatingextremeweatherevents,buttheonusisonHMTreasuryandotherfinanceministriestousethefiscalspacetheyhavetoinvestinthegreenmeasuresnecessary.

InourAutumnforecastfortheUKeconomy,GDPgrowsby6.9percentin2021followedby4.7percentin2022,withsupplyconstraintsassumedtocontinueuntilthemiddleof2022andrisingpricesweighingonconsumerconfidence.SupplydisruptionshavedriventheautumnslowdownbutconsumerconfidenceisalsocontingentoncontrollingthefurtherspreadofCovid-19.

WedonotexpectunemploymenttorisenoticeablyfollowingtheendoftheCoronavirusJobRetentionScheme,withthoseremainingonfurloughlargelyreturningtojobsorfindingjobsthankstothecurrentrecordlevelsofadvertisedvacancies.Wagegrowthisbeingflatteredatpresentbybaseeffectsbutanunusualdegreeofpaydriftsuggeststhatstartingsalariesareoutpacingsettlements,whilehoursarealsoincreasing.

Weforecastthatconsumerpriceindexinflationwillpeakataround5percentinthesecondquarterof2022,fallingthereafterbutremainingabovetargetuntil2024.Above-targetinflationisbeingdrivenbysupplyshortages,baseeffectsandaglobalriseinenergyprices.TheBankofEnglandmustensurethatinflationexpectationsdonotbecomede-anchoredbutwedonotforeseeawage-pricespiraltakinghold.

J

J

Aftera15basispointriseinthefinalquarterof2021weexpecttheMonetaryPolicyCommitteetoraiseinterestratesto0.5percentinthesecondquarterof2022,thereaftertighteningpolicythroughtherun-offofmaturingQEholdings,withfurtherraterisesin2023.

Weexpectthefiscaldeficittoreturntocloseto4percentofGDPnextfiscalyearandpublicsectornetdebttofallbelow90percentofGDPbytheendoftheforecastperiod–around10percentagepointshigherthanitwasbeforethepandemic.Thisconstitutesanunwelcometighteningoffiscalpolicy,whichwillnotbesignificantlyoffsetbytheslightlooseningannouncedatOctober’sBudget.

BrexithascausedtheUKtoorientateitsgoodsimportsawayfromtheEuropeanUnion,withalargersharenowimportedfromtheRestoftheWorld.Thecurrentaccountdeficitisforecasttosettleataround3percentofGDP,partlydrivenbylowercapitalinflowsfromtheEU.

4 NationalInstituteofEconomicandSocialResearch

NationalInstituteUKEconomicOutlook–Autumn2021

Table1.1 Summaryoftheforecast(percentagechangeunlessotherwisestated)

2018

2019

2020

2021

2022

2023

2024

2025

2026

GDP

1.7

1.7

-9.7

6.9

4.7

1.7

1.3

1.4

1.3

PercapitaGDP

1.1

1.1

-10.1

6.2

4.1

1.2

0.9

0.9

0.9

CPIInflation

2.4

1.8

0.8

2.4

4.4

3.4

1.9

1.8

2.0

RPIXInflation

3.3

2.5

1.7

3.7

5.2

4.1

2.5

2.5

2.7

RPDI

2.8

1.3

-1.2

1.2

2.3

2.8

1.7

1.7

1.4

Unemployment,%

4.1

3.8

4.6

4.7

4.4

4.5

4.3

4.2

4.2

BankRate,%

0.6

0.8

0.2

0.1

0.4

0.7

1.4

1.7

1.7

LongRates,%

1.4

0.9

0.3

0.8

1.3

1.6

1.8

1.9

2.0

Effectiveexchangerate

1.9

-0.3

0.5

4.8

0.6

-0.1

-0.3

-0.6

-0.6

Currentaccountas%ofGDP

-3.9

-2.7

-2.6

-1.7

-2.5

-2.6

-3.2

-3.2

-2.9

Netborrowingas%ofGDP

1.7

2.4

14.8

6.7

3.7

3.3

3.1

3.0

2.7

Netdebtas%ofGDP

79.3

83.6

94.6

94.2

93.6

94.0

90.4

90.0

89.3

Note:Numbersreportedareyearlyaveragesexceptfornetborrowing,whichisreportedforthefullfiscalyear,andnetdebt,whichisreportedfortheendofthefiscalyear.

OurcentralforecastisforGDPgrowthof6.9percentin2021and4.7percentin2022,withrisksbalancedevenlyoneitherside.SeeEconomicActivity,page8.

AnnualGDPgrowth

earlier

25

Forecast

20

ayear

15

10

on

5

increase

-5

Percentage

0

-10

-15

-20

-25

2018

2020

2022

2024

2026

Annualinflationisforecasttoriseto5percentinthesecondquarterof2022andremainabovethe2percenttargetuntil2024.SeeInflationandmonetarypolicy,page25.

CPIinflation

a

7

Forecast

on

6

prices

5

increasein

yearearlier

4

3

2

Percentage

1

-1

0

-2

2018

2020

2022

2024

2026

Source:NiGEMdatabase,NIGEMforecast,NIGEMstochasticsimulation.

Notes:Thefanchartisintendedtorepresenttheuncertaintyaroundthemain-caseforecastscenarioshownbytheblackline.Thereisa10percentchancethatGDPgrowthinanyparticularyearwillliewithinanygivenshadedareainthechart.Thereisa20percentchancethatGDPgrowthwilllieoutsidetheshadedareaofthefanchart.

Source:NiGEMdatabase,NIGEMforecast,NIGEMstochasticsimulationandjudgement.

Note:Thefanchartisintendedtorepresenttheuncertaintyaroundthemain-caseforecastscenarioshownbytheblackline.Thereisa10percentchancethatCPIinflationinanyparticularyearwillliewithinanygivenshadedareainthechart.Thereisa20percentchancethatCPIinflationwilllieoutsidetheshadedareaofthefan.TheBankofEngland’sCPIinflationtargetis2percentperannum.

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NationalInstituteUKEconomicOutlook–Autumn2021

UKEconomicOutlook:ShortagesandfiscaltighteningthreateneconomicrecoveryfromCovid-19

byCyrilleLeno?l,RoryMacqueenandPaulMortimer-Lee1

Economicbackground

andoverviewoftheforecast

Supplyconstraintsreplacedeficientdemandasprimesourceofeconomicconcern

InourSummerEconomicOutlook,theoptimismofSpring’s‘unlockingrecovery’wasgivingwaytoconcernsabouttheDeltavariantandalossofconsumptionmomentum.ThecontextforourAutumnEconomicOutlookisafurtherslowingofgrowth,nowresultingfromaconfluenceofsupplyfactors.

Covid-19caseshaveremainedatanelevatedlevelsincetheirriseinthesummer,withoutsofarthreateningtobreakthroughpastpeaks,nodoubtasaresultofthehighdegreeofantibodiesamongUKadults.Socialconsumptiondrovewhatgrowththerewasinthesummer.

AshortageofHGVdrivershasarippleeffectwellbeyondthetransportsector

The‘pingdemic’hasgivenwaytomorewidespreadreportsoflabourshortages,particularlyinroadtransport,whichinturnhasledtoshortagesofconsumptionandinvestmentgoods.Theriseinglobalgaspriceshasfedthroughtobusinesscostsandintoconsumerprices,damagingrealincomes,confidenceandeconomicoptimism.GDPfellslightlyinJulybeforereturningtogrowthinAugust,boostedbyUKresidentsholidayingdomestically.

Yieldsriseinanticipationofhighershort-termrates

Bondyields,whichsurgedinanticipationofrapidgrowthearlierintheyearbeforeeasing,haveresumedupwardmomentum,motivatedmorenowbyinflationconcerns.10-yeargiltsreachedatwo-yearpeakyieldof1.2percenton21October.Wedecomposethe10-yearyieldintoanexpectationoffutureshort-terminterestratesandatermpremiumandestimatethattheinterestratecomponentincreasedfrom0.3-0.4percentinAugustandSeptemberto0.9percentinthesecondhalfofOctoberinanticipationofhighershort-terminterestrates(seeFigure1.1).

ThetermpremiumhasbeencontractingsinceMayandreachedanine-monthlowof14basispointson29October:thismaybeexplainedbyreducedconfidenceinfuturegrowthprospects;termpremiausuallydeclineaspolicyratesrise.AsdiscussedintheNationalInstituteSeptemberTermPremiumTracker,thetermpremiumalsodeclinedintheUnitedStatesoverthisperiod.

Figure1.1Interestratecomponentofthe10-yeargiltyield1.0

0.9

0.8

0.7

0.6

cent 0.5

Per 0.4

0.3

0.2

0.1

0.0

02Aug 19Aug 05Sep 22Sep 09Oct 26Oct

Source:NIESRTermPremiumTracker

Highfrequencydatagiveamixedpicture

IndicatorsfromtheOfficeforNationalStatistics(ONS)andotherscontinuetoindicateastronglabourmarket,withrecordlevelsofjobvacancies(see‘Households’).Spendingoncreditanddebitcardshasbeenlargelyflatsincethestartofthesummerbut,whilework-relatedspendinghascontinuedtogrow(withpetrolbuyingcontributingtoaspikeinlateSeptember),expenditureondelayablesandstapleshasbeenflatorfallenslightly.Someoftheslowingingrowthrepresentstheinevitableaftermathofanunsustainablerisewhenrestrictionswerelifted,butthereturnofabove-targetinflationtogetherwithfallingeconomicconfidencewillnowbejoinedbytighterfiscalpolicy.

TheauthorsaregratefultoJanineBoshoff,JagjitChadha,HuwDixon,BarryNaisbittandManuelTongKoecklinforhelpfulcommentsandtoPatriciaSanchezJuaninoforpreparingthechartsandthedatabaseunderlyingtheforecast.Theforecastwascompletedon25October

2021;morerecentdataareincorporatedinthetext.Unlessotherwisespecified,thesourceofalldatareportedintablesandfiguresistheNiGEMdatabaseandNIESRforecastbaseline.AllquestionsandcommentsrelatedtotheforecastanditsunderlyingassumptionsshouldbeaddressedtoCyrilleLeno?l(enquiries@niesr.ac.uk).

6 NationalInstituteofEconomicandSocialResearch

NationalInstituteUKEconomicOutlook–Autumn2021

Figure1.2 OfficeforNationalStatistics(ONS)spendingandhiringindicators

160

140

120

100

80

60

40

20

0

Feb20

Apr20

Jun20

Aug20

Oct20

Dec20

Feb21

Apr21

Jun21

Aug21

Oct21

Debitandcreditcards

Onlinejobadverts

EPCcertificatesfornewdwellings(a)

(a)EnglandandWales.

Debitandcreditcards(CHAPS-based):100=February2020,percentagechangeonabackwardlookingseven-dayrollingaverage,non-

seasonallyadjusted,nominalprices.Jobadverts:100=sameweekin2019.EPCcertificates:100=sameweekin2019/2020,four-weekrollingaverage,adjustedfortimingofholidays.

Source:ONS,BoE,Adzuna,MHCLG,NIESR

Wehavealsoseenaslowdowninmobilitywhichmay–dependingonprogressintacklingthevirus–betemporary.Springboardfoundthatfootfallinhighstreetsfellby3.6percentacrosstheUKintheweekbeginning17October(thelastbeforehalfterm)andFigure1.3suggestsaslightdrop-offinretailandrecreationactivityoverrecentweeks.

Twooutofthreeindicatorsarepositivesofar

InJunethisyearNIESR’sDirectornoted2threeareastowatchinthesecondhalfoftheyeartomonitortherecovery’sprogress.Firstly:thelabourmarketdoesnotshowsignsofstrugglingtoaccommodatethoseexitingfurloughattheendofSeptember,thoughitistooearlytocelebrateandtheOfficeforBudgetResponsibility(OBR)stillforecastunemploymenttopeakatover5percent.Secondly,weareyettoseeanydeclineinbusinessincorporationsorriseindissolutionapplications,whichmaysupportfutureemploymentandpotentiallyproductivityprospects.Butthirdly,giventhat“thiswon’tendforanyoneuntilitendsforeveryone”,thelackofprogressonvaccinewaiversattheWorldTradeOrganisationremainsamajorconcernforthefutureoftheUKeconomy.

Figure1.3

GoogleMobility

baseline

10

0

-10

from

-20

-30

change

-50

Percentage

-40

-60

-70

-80

-90

Feb20

Jun20Oct20

Feb21Jun21

Oct21

Retailandrecreation

Workplaces

Transport

Source:GoogleCovid-19CommunityMobilityReports,NIESRcalculations.Note:BaselineismedianvalueforthedayoftheweekJan3-Feb62020.Seven-dayrollingaverage.

Chadha,J.,‘HowwilltheUKeconomyemergefromtheshadowofCovid-19?’,TheGuardian/business/2021/jun/30/how-will-the-uk-economy-emerge-from-the-shadow-of-covid-19

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NationalInstituteUKEconomicOutlook–Autumn2021

Overviewoftheforecast

Thelonger-termcontextisoneofcontinuingstagnationandinequality…

WearehopefullyemergingfromthecloudofCovid-19andarefacingapersistentsupplyshockalongsidepotentiallysignificantpent-updemand.Itisalsoclearthattherearelargeshortagesofcapital–human,physicalandotherwise–inmanypartsofBritainthatneedtobeaddressedthroughregionalregeneration.

Thereisstillroomfor‘catch-up’growthinsomesectors,whencomparedwiththeirpre-Covidlevels,butwearealsolikelytolivewithadegreeofCovid-19infectionsforsometimeandtherewillundoubtedlybepeoplewhocannotorchoosenottoreturntoalltheirpreviouseconomichabits.

…butwiththeadditionofarisktoincomesfromhigherinflation

Thepersistenceandsizeofthesupplyshockwhichisreverberatingthroughglobalsupplychainsmeansthatthereisaninflationrisk,whichwillneedtobeaddressedwithtightermonetarypolicy,alongsideaneedtooffsetyearsofunder-investmentinpublicserviceswithasustainedfiscalintervention.Wedonotthinkthereisanemergingdislocationinthelabourmarketbutdoexpectlesswell-offhouseholdstofacethecontinuationofanincomessqueezethatisnowoveradecadelong.

Whilethesavingsrateisforecasttoreturntonormallevelsrelativelyquickly,thebalanceofhouseholdsavingshasbeenboosted.Thisoverhangofsavingsanddisruptiontosupplyresembletheeconomicaftermathofmajoreventssuchaswars.InthewakeofthevirusandBrexit,confidenceanduncertaintymeansthatinvestmentislikelytocontinuetodrag,andconsumersmaycontinuetobecautious,retaininghigherlevelsofaccumulatedsavings,ifnotsavingahighershareofincome.

TheUK’slowlevelsofunemploymentarelikelytocontinue…

Ouroutlookforemploymentisnonethelessoptimistic:wedonotseeasustainedjoblessrisetothelevelofevenayearago.UndoubtedlytheCoronavirusJobRetentionScheme(CJRS)hasbeenmoreeffectiveinprotectingjobsthanmanyfearedandwedonotexpectanincreaseinjoblessnesstohavefolloweditswithdrawalattheendofSeptember.Butdespiteapproachingfullemployment,realwageswillcontinuetostagnateunlessproductivityimproves:somethingwhichwilldependontrade,foreigninvestmentandthedevelopmentofhighvaluefirms.

…butthisislikelytocontinuetocoincidewithasqueezeonrealincomesforthoseinwork

Realannualhouseholdincomegrowthof2.3percentin2022isflatteredbytheendoftheCJRS:formany,especiallythoseinworkandreliantonUniversalCredit,thereturnofabove-targetinflationcouldnotbemoreunwelcome.PeoplewhoreceiveincomewhichisnotsubjecttoNationalInsurancecontributionsareamong

thosewhowillbeleastaffectedbythesqueezeonrealincomesincomingmonths.

Slowergrowth,higherinflation…

Asaresultofthepersistentsupplyshock,therisksarethatgrowthwillbetoolowandinflationtoohigh.OurforecastforGDPgrowthin2021islittlechangedat6.9percent,butwehavereviseddowntheoutlookfor2022to4.7percent.Inflationisnowexpectedtoreach5percentinthesecondquarterofnextyearbeforefallingbackaslargebaseeffectsdropoutandtheBankofEnglandraisesinterestratesto0.5percentbythemiddleof2022.Between2020and2025cumulativegrowthinourmaincaseforecastscenarioof17percentundershootsthatoftheOfficeforBudgetResponsibility(19percent)whileourforecastforinflation(15percent)overshootstheirs(14percent).

…andfiscalpolicyprovidinglittlesupport

Inourmaincasescenariofiscalpolicyinjectslittleadditionaldemandintotheeconomyacrosstheforecastperiod,withthedeficitfallingtobelow3percentofGDP,thecurrentbudgetapproachingbalanceandpublicinvestmentconsistentlyslightlybelow3percent–lessthanoptimalatatimewhenevenwithalowergrowthpaththereisfiscalspace.Monetarypolicyisinapositionwheresomestimuluscanberemovedandpolicystillremainbroadlysupportive.IftheMonetaryPolicyCommitteewerenowtobegintheprocessofnotreinvestingmaturingQEdebtwithoutactivelysellingany,the￡740billionofcurrent(facevalue)holdingswouldfallto￡490billionbytheendoftheforecastperiodinfiveyears’time(seeFigure1.26onpage28).

Economicactivity

Growthrevisedupinthefirsthalfof2021

SincethereleaseofourSummerUKEconomicOutlook,growthinthesecondquarteroftheyearwasrevisedupwardsto5.5percent–somethingnotreflectedintheOfficeforBudgetResponsibility’sforecastspublishedalongsidelastmonth’sBudget(see‘Fiscalpolicy’,page23).Thoughgrowthhascontinuedwellaboveaverageratessincethen,itslowednotablyinthethirdquarter,astheendofthe‘unlockingmini-boom’coincidedwiththeriseoftheDeltavariantandthenwasfollowedbyincreasingsupplychainconstraints.

ButactivityhasweakenedinthesecondhalfoftheyearWithwinterapproaching,theprincipalmacroeconomicthreatsappeartobepersistentsupplychaindisruptionsandariseinenergyprices,bothofwhichareglobalinorigin.Addedtothismaybeadditionalsupplyconstraintsarisingfromlabourmarketdisruption(see‘Households’,page13).Thecompositepurchasingmanagers’indexdeclinedfromMayuntilAugust(seeFigure1.4)whiletheGfKconsumerconfidenceindicatorfellinAugust,Septembera