The UK’s spending watchdog expects the economy will return to its pre-Covid level at the turn of the year, Chancellor Rishi Sunak has said.
The Office for Budget Responsibility (OBR) has lifted its prediction for economic growth in 2021 to 6.5%, up from its previous forecast of 4%.
It has also reduced its estimate of the long-term “scarring” effect of Covid-19 on the economy from 3% to 2%.
But the chancellor acknowledged that the cost of living is rising.
He described the economic picture as “strong” in the short term, with the OBR now expecting the economy to return to pre-pandemic levels six months earlier than it had forecast previously.
But the OBR forecast that economic growth would be lower next year than it previously thought, partly down to a better performance in 2021.
In 2022, gross domestic product (GDP), which measures all the activity of companies, governments and people in an economy, will increase by 6%, the OBR said, rather than the 7.3% it predicted in March.
Growth is forecast to be 2.1% in 2023, 1.3% in 2024 and 1.6% in 2025.
Mr Sunak said that the pick-up in inflation, which measures how quickly the cost of living increases over time, was due to increased demand for energy and supply chain issues as economies and factories reopened following coronavirus lockdowns.
The inflation rate was 3.1% in September “and is likely to rise further”, the chancellor said. The OBR expects the CPI measure of inflation to average 4% over the next year.
“The pressures caused by supply chains and energy prices will take months to ease,” Mr Sunak said.
“It would be irresponsible for anyone to pretend that we can solve this overnight.”