Investment incentives needed to fast-forward Covid economic recovery

Renewed household and government spending will drive the UK’s economic recovery in 2021 – but a more cautious revival in business investment means it will be the end of 2022 before GDP returns to pre-pandemic levels.

According to the CBI’s latest economic forecast, the huge fall in GDP triggered by Covid-19 restrictions in March and April – and a smaller dip over the winter following November’s second lockdown – means that an economic recovery still has some way to go.

However, steady growth in household incomes and spending will be a catalyst for revival from mid-2021 onwards, as the prevalence of the Covid-19 fades, a pandemic-related spike in unemployment eases and earnings recover.

The CBI is forecasting 6% growth in GDP over 2021, and 5.2% in 2022.

A significant increase in government spending will also play a key role, following announcements since the summer around more spending on tackling the virus.  As a result, government consumption rises by 12.7% in 2021.

Business investment will be slower to return, however. A significant downturn (-17.5%) in 2020 will be followed by a further small reduction in 2021 (-0.6%), before growing by 9.3% in 2022 – a timely return, as government spending will fall again in 2022.

Tony Danker, CBI Director-General, said:

“Covid-19 has left deep scars on the economy, but this forecast does offer grounds for optimism. The road to recovery will be long, but the trajectory is positive, and we must do all we can to hasten the journey.

“We simply must find new ways to get businesses investing at the start of 2021 if we are to fast-forward the recovery.

“We’ve had great news on vaccines this week, but if we are to be masters of our own destiny then we must act decisively to rebuild a better economy.

“British business is like a coiled spring ready to release ambition and investment. They just need a chance.”

Key forecast data

GDP

• Despite the summer economic rebound, GDP was still 8% below its pre-Covid peak in September. A second lockdown over November means that we expect a 1.7% fall in GDP over Q4, rounding off a historic decline of 11.1% for 2020 as a whole – the worst year for the UK economy since 1709.
• Losses will be fully regained through steady growth until the end of 2022 – 6% in 2021, and 5.2% in 2022.

Jobs and household spending

• Consumer spending has been at the epicentre of the crisis, and is set to drop by 14.7% in 2020, with leisure activity strongly curtailed and many workers reining in spending due to uncertain employment prospects and hits to incomes.
• The Job Retention Scheme has insulated the labour market against bigger job losses, but unemployment will peak at 7.3% in Q2 2021. By the end of 2022, it will have receded to 4.9% – still short of the pre-pandemic level of 4%.
• With health outcomes improving from mid-2021, and real incomes recovering, household spending will pick up, rising by 3.3% in 2021 and 8% in 2022.

Long-term outlook

• While projections show business investment recovering, it will do so at a relatively slower pace, falling in 2021 (-0.6%) before picking up in 2022 (growing by 9.3%). This is due in part to the sheer scale of decline seen this year, but also indicates ongoing hesitancy around investing in longer-term projects.
• This will have a knock-on effect on productivity. Already weak before the pandemic after more than a decade of near-stagnation, productivity levels face a sluggish recovery throughout the forecast period.

While the immediate priorities for recovery remain controlling coronavirus and securing a Brexit deal, stimulating business investment can also help hasten the revival and build a sustainable foundation for longer-term growth.

The CBI suggests this can be achieved in a number of ways, including:

• Business Rates reform. Modernising an archaic system, including reducing and fixing UBR and delaying revaluations to free up billions of pounds for potential investment.
• Productivity Vouchers. Incentivising business innovation and investment by subsidising technology adoption
• Government should publish the energy White Paper before Christmas to provide detail and clarity in areas of long-term energy infrastructure and net zero to unlock private sector participation.

Alpesh Paleja, CBI Lead Economist, said:

“Overcoming Covid would lay a rock upon which business confidence can be renewed. But there is more we can do in the meantime.

“If we are to accelerate the UK’s economic rebound, we must find the missing pieces which complete the recovery picture. This means taking positive steps to foster a more dynamic business environment which rewards entrepreneurship, innovation and investment.

“That can start with a Productivity Vouchers scheme – a time-limited proposal that could help SMEs access new technologies at a discount rate to improve performance.

“Meanwhile, finally reforming our analogue-age Business Rates system is a must – a system that sinks investment intentions, energy efficiency plans and worsens regional inequalities in its current form in England.

“Businesses have endured a torrid year. But the right action now from the Government can bring forward the timescale for recovery and enable UK companies to look to the future with renewed optimism.”