8 minute read 12 Oct 2020
couple-sat-under-an-umbrella-by-the-coast

Challenges still face UK economy despite strong Q3 2020 bounce back

Authors

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

Howard Archer

Chief Economic Advisor

Chief Economic Advisor to EY ITEM Club. A leading voice of the UK and global economy.

Hywel Ball

UK Chair and UK&I Regional Managing Partner, Ernst & Young LLP

UK Chair and UK&I Regional Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

8 minute read 12 Oct 2020

EY ITEM Club now expects the economy to contract 10.1% in 2020, an improvement from the 11.5% contraction forecast in the summer.

The UK economy’s initial recovery from the deep but brief recession has been much faster than expected, according to the EY ITEM Club’s Autumn Forecast, but future growth prospects have been downgraded. In its latest forecast, the EY ITEM Club says GDP likely grew around 17% q/q in Q3 – much faster than the 12% growth predicted in July’s Summer Forecast – but growth of 1% or less is expected in Q4, while the growth forecast for 2021 has been lowered from 6.5% to 6.0%. 

Download the report for the full EY ITEM Club Autumn Forecast – October 2020

Government intervention continues to provide much-needed support but, even with this boost, many of the factors that supported the pick-up in growth in Q3 are now beginning to fade, notably the release of pent up demand and relaxation of lockdown restrictions.
Dr. Howard Archer
Chief Economic Advisor to the EY ITEM Club
WEBCAST:

Mark Gregory, UK Chief Economist, and Howard Archer, Chief Economic Advisor to the EY ITEM Club provide an overview of the autumn forecast
PODCAST:

Mark Gregory shares his thoughts on the forecast, the  policy response and how businesses can look beyond the current uncertainty facing the UK economy

The end of the summer

All aboard the rollercoaster …

More than half a year since coronavirus (COVID-19) hit the UK, the levels of volatility and uncertainty in the economy are still very high. Whenever it seems that a trend is becoming established, something happens to change the outlook once again. Unsurprisingly, long-term forecasting is almost impossible, but even day-to-day predictions are far from reliable — businesses are being tested like never before.

The EY ITEM Club Autumn Forecast 2020 illustrates the problem perfectly. The economy performed better than the 12% expected in the July forecast, growing at 17% over the three summer months. The further easing of lockdown restrictions and the boost to the housing market from the stamp duty holiday played their part, and the Eat Out to Help Out Scheme drove a significant amount of incremental spending.

However, just as the green shoots of higher confidence among businesses and consumers started to appear, a surge in new cases of coronavirus plunged many parts of the country back into lockdown. It does appear that encouraging people to go back to work and to dine out has contributed to an upturn in the number of confirmed cases.

… so hold on tight …

The return of restrictions at a local level adds to the challenges facing the economy in the final quarter of 2020 as the Coronavirus Job Retention Scheme (CJRS) is wound down, and doubts over the likelihood of a UK–EU free trade agreement (FTA) cast a shadow over business investment. As a result, the EY ITEM Club expects the economy to slow significantly during the autumn, with growth of only 1% over the final quarter of 2020.

The 2020 year-end forecast of a 10% fall in GDP appears better on the surface than the 11.5% fall forecast by EY ITEM Club in the summer, but the improvement derives from the faster growth in the second quarter. Although the Chancellor’s Winter Statement provided around £5b of additional support for the economy, all the signs are that the next one or two quarters will be very challenging unless there is a significant medical breakthrough — EY ITEM Club are assuming a vaccine will not be widely available in the first half of 2021.

EY ITEM Club assume a gradual return to growth in 2021 with GDP increasing by 6%. Growth is then forecast to slow to 2.9% in 2022 meaning the economy will not return to its Q4 2019 size until the second half of 2023. It is going to be a long, slow recovery.

… identify and manage risks …

While a vaccine could provide a positive boost, risks are weighted to the downside. A more significant outbreak of the virus during the winter months could plunge us back into lockdown with major implications for the economy. Even if we avoid a second wave, failing to achieve an FTA with the EU is another significant risk. EY ITEM Club forecast that a failure to agree even a bare-bones FTA would reduce GDP growth in 2021 by one-fifth to 4.8% over the year, and to 2.6% rather than 2.9% in 2022. Businesses should ensure that they have contingency plans in case things either improve or deteriorate — flexibility is very important in such a volatile environment.

UK GDP growth in 2021

6.0%

UK economy forecast to continue its recovery, with return to pre-pandemic size after mid-2023.

While a vaccine could provide a positive boost, risks are weighted to the downside. A more significant outbreak of the virus during the winter months could plunge us back into lockdown with major implications for the economy

… watch the labour market …

Businesses have borne the brunt of the shock to date, but pressure is now building on consumers via the labour market. The CJRS is coming to an end and the newly announced Job Support Scheme (JSS) is much less generous. With employers having to contribute a higher share of the payments to employees, the scheme is primarily likely to appeal to companies that want to retain their skilled employees such as in manufacturing or high value-added services. In sectors such as hospitality and retail where output is more directly linked to hours worked, the JSS does not appear likely to be heavily adopted. This will probably lead to a significant increase in unemployment and a corresponding drag on consumer spending as people see their incomes fall. More than ever, managing talent will be critically important.

With the labour market key to the economy’s recovery, an important task for businesses will be managing their talent. Many business leaders will be thinking carefully about how they can best support their people, while balancing the changing demands on their business
Hywel Ball
UK Chair

… and track government policy

The only certainty is that everything is uncertain. This is a very difficult time to be making decisions, especially those with longer horizons such as capital investment. As yet, the UK Government has not communicated any detail of its plan for economic recovery. We know that ‘levelling up’ and moving towards net zero are priorities, but how these will be achieved remains unclear.

Nevertheless, there is little doubt that Government will play a more significant role in the economy than has been the case over the last three or four decades. While this could create challenges for businesses trying to anticipate policy moves, there will also be opportunities. Difficult as it is to look beyond the immediate challenges, now is the time to begin to think through what opportunities there might be to work with Government to help them achieve their objectives while creating commercial success.

Summary

  • EY ITEM Club forecasts UK GDP contraction of 10.1% in 2020, an improvement on the 11.5% fall expected in July’s Summer Forecast.
  • GDP likely grew around 16-17% q/q in Q3 2020 – four to five percentage points faster than had been expected.
  • However, the EY ITEM Club expects Q4 growth will be 1% or less.
  • The UK economy is predicted to grow 6.0% in 2021, down from the 6.5% expansion previously anticipated.
  • EY ITEM Club does not expect UK economy to return to pre-pandemic size until after mid-2023.

About this article

Authors

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

Howard Archer

Chief Economic Advisor

Chief Economic Advisor to EY ITEM Club. A leading voice of the UK and global economy.

Hywel Ball

UK Chair and UK&I Regional Managing Partner, Ernst & Young LLP

UK Chair and UK&I Regional Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.