5 minute read 1 Dec 2020
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Why now is the time for business to prepare for the post-pandemic economy

Authors
Hywel Ball

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

UK Chair and UK&I Regional 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

Chief Economic Advisor

Chief Economic Advisor to EY ITEM Club. A leading voice of the UK and global economy.

5 minute read 1 Dec 2020
Related topics Growth COVID-19 Finance

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

In brief
  • EY ITEM Club forecasts UK GDP contraction of 11.6% in 2020, a deterioration on the 10.1% decline expected in October’s Autumn Forecast.
  • GDP grew 15.5% q/q in Q3 2020, down from the 16-17% forecast in October.
  • The UK economy is expected to expand 6.2% in 2021, a slight improvement from previously expected growth of 6.0%.

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

The forecast bears in mind recent promising vaccine announcements, and assumes that a little growth has been pulled into 2021 from 2020 by the national lockdown in England and other restrictions on activity imposed during Q4 2020
Dr. Howard Archer
Chief Economic Advisor

Uncertainty remains the 'new normal'

EY ITEM Club believes the impact in Q4 2020 from the national lockdown in England and other major restrictive measures should be markedly less than occurred in April, and overall in Q2 2020, following the March restrictions. The curbs on activity this time around are less severe, with schools, colleges and universities remaining open. Additionally, some lessons have been learned and experience gained in keeping activity going during the lockdown. Nevertheless, the downgrade reflects an expectation of a contraction of around 4% quarter-on-quarter (q/q) in Q4. Despite an improved medium-term outlook, the next few months will remain challenging.

And uncertainty remains a feature of life. In addition to no clarity on the timing and pace of the roll-out of the vaccine, the negotiations on a Brexit trade deal with the EU remain unresolved. The forecast assumes there will be a limited deal agreed, but there is clearly a downside risk that this will not happen.

However, while the roll-out of the vaccine remains uncertain, sentiment may well recover before the roll-out is anywhere near complete. Vaccinating front-line workers and the vulnerable will both increase the capacity of the health care system and reduce the burden on families. As case numbers and deaths fall, confidence is likely to return, and output could benefit faster than the current forecast assumes. For now, EY ITEM Club expects the UK to grow by 6.2% in 2021.

UK GDP growth in 2021

6.2%

UK economy forecast to continue its recovery, with return to pre-pandemic size in late 2023.

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
The time to start shaping the post-Covid world isn’t after this crisis, it's during this crisis. Purpose and long-term value should be central to business planning.
Hywel Ball
UK Chair and UK&I Regional Managing Partner, Ernst & Young LLP

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.

 

Summary

For a second time this year, the major uncertainties and significantly changing circumstances facing the UK economy due to COVID-19, have led the EY ITEM Club to produce an interim forecast. Specifically, the introduction of the national lockdown in England from 5 November to 2 December, amid a renewed sharp rise in COVID-19 cases, markedly changed the near-term outlook.

About this article

Authors
Hywel Ball

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

UK Chair and UK&I Regional 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

Chief Economic Advisor

Chief Economic Advisor to EY ITEM Club. A leading voice of the UK and global economy.

Related topics Growth COVID-19 Finance