Monthly economic brief: May 2021

GDP growth outlook

Optimism for the economic outlook has improved in recent months reflecting stronger than expected activity at the start of 2021 and progress towards easing lockdown restrictions.

• At a global level, world GDP is estimated to have fallen around 3.5% in 2020 and on aggregate has returned to pre-pandemic activity levels with the OECD forecasting growth of 5.8% in 2021 and 4.4% in 2022.^[22] However the OECD set out that the global economy will remain below pre-pandemic expectations at the end of 2022, and alongside the latest IMF forecasts, highlight that the strength and pace of recovery is expected to vary significantly across countries. ^[23]
• At a UK level, the Bank of England^[24] forecast UK GDP to grow 7.25% in 2021, returning to pre-pandemic levels in Q4 2021, while unemployment is expected to peak at 5.5% and inflation to rise temporarily above its 2% target.
• The Bank’s outlook for growth was revised up from its previous forecast reflecting that the fall in output in Q1 2021 during lockdown was not as steep as previously anticipated while expectations for a robust pickup in demand strengthened, supported by the progress of the vaccination programme and easing of restrictions. This contributed to a downward revision to the projection for unemployment, which is now expected to peak at 5.5% in 2021, further supported by the extension of the Job Retention Scheme to September 2021.
• The latest average of new independent UK forecasts^[25] published by HM Treasury in May reports that UK GDP is expected to grow 6.5% in 2021. Reflecting the general improvement in optimism for the outlook, the average new forecast for 2021 has risen each month since February and is up 0.8 percentage points from the average new forecast in April.

  

• In January, the Scottish Fiscal Commission^[26] forecast Scotland’s GDP to fall 5% over the first quarter of 2021 during lockdown and to grow 1.8% over 2021 before returning to pre-pandemic levels at the start of 2024. As in the UK as a whole, the latest outturn data for Q1 2021 show that economic output fell by less than many independent and official forecasts had expected in the first quarter, with Scotland’s GDP falling by 2.1%. The Commission will publish their next set of forecasts on 26^th August.
• In their latest growth scenario analysis published in March, the Fraser of Allander Institute’s central scenario projected Scotland’s GDP to grow 3.6% in 2021 and 5.6% in 2022, with GDP returning to pre-crisis levels in October 2022.^[27] However, the level of ongoing uncertainty is reflected in their more pessimistic scenario of 2.4% growth in 2021 (GDP recovers to pre-crisis levels later in July 2023) and their more optimistic scenario of 4.2% growth in 2021 (GDP recovers to pre-crisis levels earlier in June 2022).