Budget 2021: Fiscal watchdog ramps up forecast for UK economic growth to 6.5 per cent

The government’s fiscal watchdog has ramped up its forecast for the UK economy and expects it to recover to pre-pandemic levels by the end of the year.

Chancellor Rishi Sunak told the House of Commons today, as he delivered his third budget, that the Office for Budget Responsibility (OBR) expects the British economy to expand 6.5 per cent this year.

The OBR previously thought the economy would grow four per cent this year, leaving the economy smaller than it was before the onset of the Covid-19 crisis.

Next year, the UK economy will grow six per cent, down sharply from 7.3 per cent.

The level of lasting damage the economy will undergo from the pandemic has also been revised down from three per cent to two per cent, indicating the government will have better than expected tax receipts over the next five years.

The watchdog also forecasts CPI inflation will average four per cent next year, double the Bank of England’s target. It previously said inflation would only be 1.8 per cent in 2022, while inflation will average 2.3 per cent this year.

The Bank of England’s chief economist Huw Pill thinks it would top five per cent by the end of the year.

Sunak said he has “written to the Governor of the Bank of England today to reaffirm their remit to achieve low and stable inflation. And people should be reassured: they have a strong track record in doing so.”

The elevated inflation clip has been triggered by global supply chains buckling under the weight of a resurgence in global demand as economies suddenly emerge from Covid-19 restrictions.

“Global demand for energy has surged… …at a time when supplies have already been disrupted, putting strain on prices,” the Chancellor said.

The OBR estimates unemployment will peak at 5.2 per cent, down from its last forecast of 5.9 per cent in 2022.

More to follow.