Region expected to reach pre-Covid levels of output this year

A combination of restrictions lifting, pent-up consumer demand, accumulated excess savings and a range of Government incentives are expected to spark a strong lift-off for the West Midlands economy this summer.

This will see the region’s GDP grow by 9.5% in 2021 (up from 8.9% forecast in September 2020) and 6.4% in 2022, allowing the economy to reach its pre-Covid level by the end of the year, according to the latest analysis in KPMG’s UK Economic Outlook.

The sharp contraction the West Midlands suffered last year was mainly caused by falls in wholesale and retail trade, however given manufacturing operations were not restricted after the first lockdown, recovery was able to begin.

Though the longer-term outlook for the manufacturing sector remains uncertain, largely due to the ongoing impact of Brexit on automotive manufacturing, the West Midlands’ post-pandemic economy is expected to be more reliant on the region’s growing IT and financial services sectors.

The outlook for all regions and nations of the UK is one of a recovery in both 2021 and 2022, although at varying speed, with strongest growth expected in the West Midlands, London and the East of England.

This reflects the uneven impact of the pandemic across sectors and regions, with a relatively quick bounce-back in manufacturing leading much of the early gains in output. However, as the economy re-opens and restrictions lift, the shift towards a services-based economy will resume across most of the UK.

Karl Edge, Birmingham office senior partner and Midlands regional chair, said: “Our forecast shows that the pace of economic recovery for the West Midlands has picked up speed, with the region leading the way with the highest projected growth of any UK region for 2021. Whilst the focus for the last year has largely been on resilience and recovery, businesses have also sought growth where possible, and locally we’ve seen a notable uptick in performance within the manufacturing industry. Our local IT and financial services sectors are also gaining traction and we expect to see further growth supported by these sectors going forwards.

“As restrictions continue to ease, I believe that the Midlands has a bright outlook ahead as an attractive place to live, study, work and visit, being wholly supported by a range of quality businesses, educational institutions, vibrant communities and milestone events like the Commonwealth Games 2022 and Coventry as the UK’s City of Culture 2021.”

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A combination of restrictions lifting, pent-up consumer demand, accumulated excess savings and a range of government incentives are expected to spark a strong lift-off for the UK economy this summer. This will see GDP grow by 6.6% (up from 4.6% forecast in March) in 2021 and 5.4% in 2022*, allowing the economy to reach its pre-Covid level by the first quarter of next year.

Meanwhile, rising cost pressures and the reversal of temporary tax cuts will add to inflation this year, but the analysis shows it should moderate towards the second half of next year, and average 1.7% in 2021 and 2.1% in 2022. With spare capacity still in place, KPMG expect the Bank of England to keep interest rates on hold in the short-term in order to allow the economy to fully recover and mitigate the downside risks to the outlook.

From the onset of the pandemic, businesses have been partially shielded from insolvency both by the direct financial support on offer as well as by temporary measures suspending and relaxing insolvency procedures. So, once the temporary regime is over and businesses are forced to confront a new normal, there could be a significant uptick in the number of company insolvencies, despite interest rates remaining low in the short term. This could mean a peak of about 8,000 insolvencies around the turn of the year before numbers fall back again to around 4,000 per quarter.

The outlook beyond the short-term paints a less strong picture, with the end of the super deduction allowance and the rise in corporate tax causing a sharp fall in business investment from 2023, while consumers readjust their spending patterns.