The UK economy could return to pre-pandemic levels by early next year as the vaccine rollout leads to an easing of restrictions and people become less fearful of coronavirus, the Bank of England has forecast. The Bank estimates that the economy shrunk 10 per cent last year, a stronger performance than it had predicted in November. However, the country is in for tough weeks ahead with lockdown measures expected to cause output to plunge again before mass vaccination allows for an economic rebound as life returns closer to normal. The Bank thinks that will encourage shoppers to spend more, helping the economy to return to pre-Covid levels by the end of this year or early next year – slightly earlier than it forecast three months ago when England was put into a second national lockdown. “Covid continues to hit spending, incomes and jobs in the UK,” the Bank said in its latest inflation report. “It has put a big strain on UK businesses’ cash flow, and is threatening the livelihoods of many people.” The central bank slashed its growth forecast for this year from 7.25 per cent to 5 per cent for this year but said growth would be stronger next year than previously thought. “GDP is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns,” the Bank said. One in five adults have so far received at least one dose of vaccine, including over half of the most vulnerable elderly groups. Policymakers predict that retired people who have been inoculated will be the first to start spending. The strength of economic recovery will depend partly on what households do with around £125bn in additional savings put away last year, a figure that’s expected to rise further over the next few months. Seven in 10 people surveyed by the Bank said they intended to keep the cash in savings. The Bank said there was evidence from businesses that positive vaccine news had already helped UK holiday bookings jump for later in 2021. While the Bank suggested the vaccine rollout gave reason for optimism, it warned that unemployment is expected to increase as government financial support is withdrawn. Prices are also expected to rise sharply as a VAT cut comes to an end and rising energy costs filter through the economy. That gives Rishi Sunak a difficult balancing act to perform in his upcoming Budget. The chancellor has hinted that he is seeking ways to increase taxes and rein in public spending which has soared to cover the costs of the pandemic. But a chorus of voices from across the political spectrum has urged Mr Sunak not to remove support too early, arguing that it could choke off any recovery and put hundreds of thousands of people out of work.