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United Kingdom
The economy is recovering and expected to reach pre-crisis levels at the beginning of 2022. Output is
projected to rise by 6.9% in 2021, with growth moderating to 4.7% in 2022 and 2.1% in 2023. Consumption
is the main driver of growth during the projection period. Business investment will improve but continues to
be held back by uncertainty. Increased border costs following the exit from the EU Single Market are
weighing on imports and exports. Unemployment will continue to decline. Inflation will keep increasing due
to higher energy and commodity prices and continuing supply shortages. It is expected to peak at 4.9% in
the first half of 2022 and then fall back towards the 2% target by the end of 2023.
Monetary policy should tighten gradually to bring inflation back to target over the medium term, as price
pressures show signs of becoming persistent. Fiscal policy should continue to support the economy and
become more targeted to aid economic restructuring. Boosting training and career counselling programmes
can facilitate economic reallocation and ease job transitions. Government programmes should focus on
providing certainty on long-term issues such as the transition to net zero in order to support investment. The
effects from phasing out fiscal support measures on businesses and households should be closely
monitored, in the context of planned tax increases, to avoid derailing the recovery.

Vaccination progress is supporting the recovery

A fast initial roll-out of COVID-19 vaccines has weakened the link between new COVID-19 cases,
hospitalisations and deaths, allowing a broad reopening of the economy. In England, practically all
COVID-19-related restrictions were lifted on 19 July, allowing nightclubs to reopen and easing restrictions
on large events and performances. Hygiene and distancing advice remains in place. Devolved
administrations in Scotland and Wales progressively lifted COVID-19-related restrictions over the summer,
whereas some restrictions on group sizes remain in Northern Ireland. To prepare for a potential third wave
over the winter and on the back of a sharp increase of confirmed cases in October, booster jabs are being
offered to eligible people and vaccination offers are expanded to include healthy 12-15 year olds.

United Kingdom
Consumption will drive the recovery The labour market is tightening
Index 2019Q4 = 100, s.a. Thousands Thousands
110 1400 2800
Real GDP
Real private consumption ← All vacancies
105 1200 2400
Number of unemployed people →

100 1000 2000

95 800 1600

90 600 1200

85 400 800

80 200 400

75 0 0 0
2020 2021 2022 2023 2019 2020 2021

Source: OECD Economic Outlook 110 database; and ONS labour market statistics.
StatLink 2 https://stat.link/2j3scy

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United Kingdom: Demand, output and prices

2018 2019 2020 2021 2022 2023

Current prices Percentage changes, volume

GBP billion (2019 prices)
United Kingdom

GDP at market prices 2 174.4 1.7 -9.7 6.9 4.7 2.1

Private consumption 1 412.3 1.3 -10.9 3.7 6.6 2.8
Government consumption 399.0 4.2 -6.3 15.8 3.9 1.1
Gross fixed capital formation 386.5 0.5 -9.1 4.6 4.2 2.9
Final domestic demand 2 197.8 1.7 -9.7 6.5 5.6 2.5
Stockbuilding¹ 4.9 -0.1 -0.5 1.5 0.1 0.0
Total domestic demand 2 202.7 1.6 -10.4 7.8 5.6 2.4
Exports of goods and services 663.3 3.4 -14.7 -2.5 5.1 3.7
Imports of goods and services 691.6 2.9 -16.8 1.6 8.0 4.5
Net exports¹ - 28.3 0.1 0.8 -1.1 -0.8 -0.3
Memorandum items
GDP deflator _ 2.0 5.9 0.8 2.3 2.2
Harmonised index of consumer prices _ 1.8 0.9 2.4 4.4 2.4
Harmonised index of core inflation² _ 1.7 1.4 2.3 3.3 2.3
Unemployment rate (% of labour force) _ 3.8 4.5 4.5 4.3 4.2
Household saving ratio, gross (% of disposable income) _ 4.6 13.4 12.2 6.5 5.3
General government financial balance (% of GDP) _ -2.3 -12.9 -9.1 -5.4 -4.0
General government gross debt (% of GDP) _ 118.5 154.4 155.6 153.6 153.1
Current account balance (% of GDP) _ -2.7 -2.6 -2.8 -3.5 -3.5
1. Contributions to changes in real GDP, actual amount in the first column.
2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook 110 database.
StatLink 2 https://stat.link/dqn3vg

United Kingdom 2
The surge in inflation is projected to moderate The fiscal balance is set to improve gradually
Y-o-y % changes % of GDP % of GDP
5 0 125
Headline inflation (CPIH)
Core inflation¹
4 -3 100

3 -6 75

2 -9 50

Net government debt² →

1 -12 25
← Fiscal balance

0 0 -15 0
2019 2020 2021 2022 2023 2006 2008 2010 2012 2014 2016 2018 2020 2022

1. Harmonised Consumer Price Index excluding food, energy, alcohol and tobacco.
2. General government net financial liabilities.
Source: OECD Economic Outlook 110 database.

StatLink 2 https://stat.link/p7uavi

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Output rose strongly in the first half of 2021 as the economy gradually reopened, but high frequency data
indicate a slowing of the economy due to supply and labour shortages. GDP growth slowed to 1.3% in the
third quarter of 2021. Hospitality services and events benefited particularly from the lifting of COVID-19
restrictions in England. Production output contributed positively to growth in the third quarter, whereas the
construction sector contracted. The labour market has rebounded strongly, with vacancies reaching a
record high level of almost 1.2 million in September. Employment is on the rise, while unemployment has
been decreasing since January. Labour shortages are emerging in sectors particularly affected by the
pandemic and in which EU-born migrants were also over-represented, such as accommodation and food
services, wholesale and retail trade and transport and logistics. Average regular pay excluding bonuses
increased by 6% between June and August 2021, but according to the Bank of England underlying wage
growth is estimated to be more modest. A surge in energy prices, in combination with supply and labour
shortages that are exacerbated by increased trade and immigration restrictions following the exit from the
EU Single Market, have pushed inflation well above the 2% target, to 4.2% in October. Inflation
expectations in October for the year ahead also edged up reaching to 4.4%.

Support measures have ended following the lifting of containment restrictions

The main fiscal support measures have been phased out and spending on support measures will largely
disappear in 2022. The Coronavirus Job Retention Scheme (CJRS), the Self Employment Income Support
Scheme (SEISS) and the GBP 20 a week increase to the Universal Credit ended in September, along with
a number of other crisis supports. Other measures, such as reduced VAT rates on hospitality and
recreational services, are being tapered away. Some degree of fiscal tightening is expected as the
government plans tax increases in 2022, when income tax brackets will be frozen and national insurance
contributions increased, and in 2023, when an increase in corporate income tax is planned. Spending will
be focused on infrastructure improvements and projects supporting the transition to a carbon net
zero economy.
Monetary policy remains supportive. The Bank of England has maintained its Bank Rate at 0.1% and
increased its bond purchasing programme over the course of the crisis to reach a total of GBP 895 billion
(about 44% of GDP in 2020). As inflationary pressures are mounting on the back of supply and labour
shortages, and rising fuel and energy prices, the Bank is projected to tighten policy over the near term,
gradually increasing the policy rate from 0.1% to 0.5% to maintain the inflation target over the medium
term. When the policy rate reaches 0.5%, the Bank of England intends to stop reinvesting the proceeds of
maturing assets, if appropriate given the economic circumstances, and it will only consider selling assets
once the policy rate rises to at least 1%.

The recovery is set to continue

Output is projected to grow by 6.9% in 2021 before growth slows to 4.7% in 2022 and 2.1% in 2023.
Consumption will continue to support growth but is expected to slow as government support is wound down
and households feel the income effects of rising prices. Households in lower income brackets, who saved
less during the crisis, are set to be particularly affected by the winding-down of COVID-19 support. In
contrast, wealthier households will normalise their savings, which increased sharply in 2020. Business
investment in 2022 will be supported by an increased deduction for some types of investments available
until April 2023. Unemployment will gradually decline to 4.2% in 2023 as the labour market continues to
tighten. Labour shortages add to wage pressures, but are not expected to persistently push up inflation.
Annual CPI is set to peak at 4.9% in the second quarter of 2022 on the back of rising energy prices as well
as upward pressures from trade disruptions and imported inflation. Public investment will rise over the
course of 2022 and 2023 reflecting planned spending increases on infrastructure and climate. The general
government deficit is projected to decline gradually to 5.4% of GDP in 2022 and 4% of GDP in 2023.

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The projection is surrounded by risks. Lingering public health concerns and higher-than-expected goods
and energy prices could weigh on consumption. A prolonged period of acute supply and labour shortages
could slow down the recovery by forcing firms into a more permanent reduction in their operating capacity.
Higher inflation expectations could lead to an earlier-than-expected increase of the policy rate. A worsening
trade relationship with the European Union could also weigh on the economic outlook in the medium term.
Upside risks include a faster-than-expected relocation of workers from the ended furlough scheme into
available job vacancies.

Addressing long-term challenges to sustain the recovery

Monetary policy should tighten amidst clear signs of persistent price pressures. Fiscal policy should remain
supportive. Boosting investment in skills, retraining and career counselling programmes is a welcome step
as it can support the restructuring of the economy. Reducing out-of-pocket costs of childcare further would
help parents, notably mothers, to increase hours in paid employment and training. The government can
also stimulate the recovery by being clear about its approach to the transition to a net zero economy, and
policy decisions can provide the needed certainty for businesses to increase investment. In addition, public
investment should focus on improving residential heating and on necessary infrastructure to reach the
UK’s ambitious carbon emission objectives, such as infrastructure to electrify new economic sectors and
to make the electricity system more suitable for much higher volumes and variability of renewable energy.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 2: PRELIMINARY VERSION © OECD 2021