The economy will grow faster than initially expected this year and policymakers should make it clear that they are ready to curb rising inflation, a leading think tank has said.
In its latest forecasts, the National Institute of Economic and Social Research said that the economy would expand by 6.8 per cent this year, up 1.1 percentage points from its May report, even though the spread of the Delta variant of coronavirus has created new uncertainty.
However, the institute noted that “the recovery is not yet broad-based, being principally driven by the reopening of a few sectors”.
The institute expects unemployment to peak at 5.4 per cent, just shy of the bank’s 5.5 per cent forecast. It said the end of the job retention scheme would lead to 150,000 job losses but that most of the two million people still on furlough would be able to find work when the scheme ends because they are disproportionately employed in sectors struggling with staff shortages.
It said the economy would only recover to its pre-pandemic size by the first quarter of next year, which is later than forecast by the Bank of England. The US and China have already recovered their pandemic losses.
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The think tank uses the same forecasting model as the Treasury and the International Monetary Fund and its predictions are ranked by The Times in the top third for accuracy.
It said that prices would rise faster than the 3 per cent forecast by the Bank. Inflation has been rising rapidly as developed countries unlock their economies. Central banks believe that much of the increase will be short-lived but markets suggest that policymakers will have to act to curb rising prices.
The institute said inflation would peak at 3.9 per cent in the first quarter of 2022 and that the Bank would be forced to tighten policy in the final quarter of the year, which is in line with market expectations. It called on the Bank of England to clearly and carefully communicate how it plans to take its foot off the stimulus pedal to avoid a significant tightening in financial conditions that could put the recovery from the pandemic at risk.
