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.