Why now is the time for business to prepare for the post-pandemic economy

EY ITEM Club has downgraded the near-term growth prospects for the UK economy but expects slightly improved expansion in 2021 

With the positive news on vaccines, we are increasingly hopeful that we could be closer to the end than the beginning of the pandemic. Financial markets certainly believe so, with a significant rise in indices across the globe in the last couple of weeks.

However, the recent positive news comes after a deterioration in the outlook since the EY ITEM Club Autumn Forecast 2020 which was published in October. With the UK, like several other large economies, entering a period of greater restriction on economic activity, EY ITEM Club has revised its year-end UK GDP forecasts down to a contraction of 11.6% compared to its forecast of a 10.1% contraction in October.

Download the report for the full EY ITEM Club Interim Forecast – December 2020

Light at the end of the tunnel

On a positive note, there are signs that we might emerge from the pandemic with less permanent scarring of the economy than we previously thought:

• Firstly, the surge in unemployment has yet to materialise and the extension of the furlough scheme will provide further help. The job losses appear to have been concentrated at the lower-paid end of the labour market, suggesting we have not seen a significant loss of skilled work. With migration data suggesting 700,000 to 800,000 foreign workers may have left the UK this year, there may be less competition for places when the economy recovers, helping reduce any adverse shock.
• Although business investment has fallen off a cliff, our client discussions provide strong anecdotal evidence of productivity improvements. Certainly, the efforts of the logistics and transport, and health sectors ought to lead to future potential gains in productivity once demand starts to recover. If this feeds through into profits, then business investment may return faster than current sentiment implies.
• Clearly, sectors such as hospitality will face a challenge restarting, and demand is likely to be permanently lower in some city centres. However, the bounce back over the summer and the recent surge in online holiday searches last week are reminders of the need to be sceptical about relying too heavily on consumer surveys. CFOs are certain to try and slow the rise in business travel spend but consumer demand may surprise on the upside next year.
• Finally, if Government follows through on its commitment of levelling up and moving to net zero, with interest rates remaining low, we could have all sectors of the economy firing on all cylinders earlier than we currently expect

Building a resilient future

It is not time to pop open the champagne yet, but it is time to be firming up on post-pandemic plans for expansion and transformation as the shape of the future economy becomes clearer. Close monitoring of developments in the health sector, the economy and Government policy is as important as it has been throughout 2020, but as well as managing the immediate challenge, businesses should be readying themselves for what comes next.