5 minute read 28 Jan 2021
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How the UK economy can stay resilient into the post-pandemic future

Authors
Hywel Ball

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

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

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

Former Chief Economic Advisor to the EY ITEM Club

A leading voice of the UK and global economy.

5 minute read 28 Jan 2021
Related topics Growth COVID-19 Brexit Workforce

EY ITEM Club has improved its estimate of the UK’s economic performance in 2020 – and forecasts a rebound in growth over the next two years.

In brief
  • EY ITEM Club estimates that UK GDP contracted by only 10.1% in 2020, a smaller fall than it projected in December.
  • While the economy has been relatively resilient to the recent COVID-19 restrictions, a further GDP decline of 3% to 4% is forecast for the first quarter of 2021.
  • However that fall should be followed by a return to growth, with UK GDP forecast to rise by 5% in 2021 and 6.5% in 2022.

No sooner had we started to celebrate the launch of the UK’s vaccination programme than we were plunged into another national lockdown. Despite the huge human cost of the pandemic, the UK economy has proven to be remarkably resilient: GDP fell only 2.6% due to restrictions on activity in November, about one-eighth of the fall suffered in April. As the vaccine roll-out demonstrates, government, businesses and individuals have found ways to adapt to changing circumstances. As a result, the EY ITEM Club now expects that the UK economy shrank by 10.1% in 2020, an improvement on its December estimate of 11.6%.

Download the report for the full EY ITEM Club Winter Forecast – January 2021

Over the course of 2020, the economy has become quicker to adapt to new COVID-19 restrictions and while new restrictions may still cause disruption, lessons learned from previous lockdowns are rapidly being put into place.
Dr. Howard Archer
Former Chief Economic Advisor to the EY ITEM Club

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.

UK GDP contraction in 2020

10.1

EY ITEM Club expects the UK economy contracted by 10.1% in 2020, less than its previous estimate of 11.6%.

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.

Summary

The UK economy held up better than anticipated under the impact of ongoing social distancing restrictions in late 2020, meaning the decline in GDP for the year as a whole will be less than previously projected. And while the new national lockdown will see GDP continue to fall between January and March, there is now a solid platform for growth to resume from Easter onwards. As a result, EY ITEM Club’s Winter Forecast predicts that UK GDP will rise by 5% in 2021, followed by a stronger increase of 6.5% in 2022. 

About this article

Authors
Hywel Ball

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

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

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

Former Chief Economic Advisor to the EY ITEM Club

A leading voice of the UK and global economy.

Related topics Growth COVID-19 Brexit Workforce