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.