How the UK economy can stay resilient into the post-pandemic future

Economic challenges continue in the short term

The outlook remains difficult for the immediate future, with GDP likely to fall by 3% to 4% quarter-on-quarter in the first three months of 2021. This will be a much smaller shock than we experienced in 2020. With a free trade agreement (FTA) signed with the EU, albeit with clear challenges, a vaccine roll-out that appears to be progressing well and an economy more resilient to shocks, we are increasingly optimistic about the prospects for recovery after Easter.

The scene is set for renewed growth

EY ITEM Club is now forecasting growth of 5% in UK GDP in 2021 and 6.5% in 2022. If we can weather the first quarter of 2021, we can look forward to two years of strong growth – hopefully at a pace that will boost both consumer and business confidence.

There are signs from client discussions that the recovery could be even stronger:

• EY ITEM Club is now forecasting that unemployment could peak at 7% around mid-2021, significantly below the 9% to 10% that some forecasters were predicting. While this is still a huge shock, it does suggest we will lose less capability than feared.
• Although there has been a precipitous fall in business investment,  businesses have continued to use M&A to reshape their operations. And anecdotal evidence of productivity improvements remains strong — there’s a platform to build on. If this feeds through into profits, then business investment may rebound faster than currently expected.
• The household saving ratio remains very high — two to three times the normal level. This offers the possibility of a consumer surge once restrictions end and confidence returns.

The UK Budget will be critical

While the economy has now become less volatile, there is still significant uncertainty over the policy outlook — making the Budget on 3 March a critical event. The Chancellor has to articulate a clear plan for smoothly reducing public support for the economy, while simultaneously articulating a vision for the future. The Government has done a good job of generating interest in its plans for a green recovery, levelling up the country and creating a global Britain. Now it needs to provide businesses and investors with the details they need to plan and to allocate resources. Get it right, and the recovery could quickly gather pace. Fail to deliver, and capital may well go elsewhere.

Time to plan ahead for post-pandemic recovery

The conditions are in place for recovery, but questions remain. Although businesses need to ensure that they don’t fall at the final hurdle of managing their responses to COVID-19, now is the time to firm up on post-pandemic plans for expansion and transformation as the shape of the future economy becomes clearer.