6 minute read 15 Jun 2020
Woman running on an empty road

UK economy likely to take time to fully recover from major coronavirus hit

By 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.

6 minute read 15 Jun 2020

Record GDP contraction forecast for Q2 2020, but economic recovery in sight for next year, according to the latest EY ITEM Club forecast.

The EY ITEM Club is now predicting an 8% GDP contraction for 2020 compared to the 6.8% fall it predicted in April. Since the release of its Spring Forecast 2020 in late April, the EY ITEM Club has also downgraded its Q2 2020 forecast from a 13% contraction to a record 15%. 

Positively, the EY ITEM Club now predicts year-on-year GDP growth of 5.6% in 2021, up from the 4.5% expected in its previous forecast. The report warns, however, that the UK economy is still not expected to return to its Q4 2019 size until 2023.

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

The UK economy had been disappointingly lacklustre over the first two months of 2020, even before COVID-19 started to become a factor. After a challenging first half, our forecast shows that the UK economy is expected to start to recover in Q3 2020 on the assumption that the Government continues to gradually relax lockdown restrictions.
Dr. Howard Archer
Chief Economic Advisor to the EY ITEM Club
WEBCAST:

EY economists, Mark Gregory and Peter Arnold, discuss UK economic recovery under different scenarios and the key issues to consider across regions and sectors: 
PODCAST:

Mark Gregory shares his thoughts on the forecast and how companies can respond to the unprecedented levels of change facing the UK economy:

 Foreword

By Mark Gregory, EY UK Chief Economist

A long road ahead

We are in unprecedented times …

Extraordinary times call for extraordinary measures. This is the first time to my knowledge that the EY ITEM Club has produced an interim forecast in the gap between two quarterly updates. Even during the global financial crisis and the post-Brexit referendum period, the outlook was still sufficiently stable to allow us to wait for regular updates.

The current situation - caused by the coronavirus (COVID-19) pandemic - is very different. As the EY ITEM Club demonstrates in its report, the scale of the shock and the level of uncertainty are both unprecedented. Moreover, the situation has changed so quickly that we are still waiting for data to understand the extent of the fall in UK economic activity to date, even before developing forecasts.

… with the situation changing daily …

In the six weeks or so since its Spring Forecast 2020, the EY ITEM Club has increased its expected fall in UK GDP in 2020 from 6.8% to 8% and upped its estimated fall in GDP in the second quarter from 13% to 15%. It is not alone — forecasts are being regularly revised as the data emerges. As quoted in the EY ITEM Club report, Public Sector Net Borrowing excluding banks (PSNB ex) is likely to be at least £320b (15.6% of GDP) in 2020/21, whereas the Office for Budget Responsibility (OBR) had forecast a total for 2020/21 of £54.b in the Budget on 11 March.

… but significant uncertainty remains …

With the lockdown restrictions on behaviour being relaxed in the UK and daily deaths and case numbers apparently on a downward trend, the indicators suggest that economic activity is starting to pick up gradually. However, the levels are way below those we would normally expect. Even though its forecast of a fall of 8% in UK GDP signals a major fall in UK output, EY ITEM Club identifies a number of downside risks to its forecast including the possibility of a second wave outbreak of coronavirus, a possible reluctance of consumers to engage in previous levels of activity, and the risk that the economy suffers permanent damage during the lockdown. In addition, the risk of no trade deal being agreed between the EU and the UK remains a possibility.

… meaning planning must be flexible …

This is a challenging environment for businesses as forecasting is extremely difficult. The variability of outcomes is such that scenario-based planning is required to understand the range of potential impacts. As the discussion in the EY ITEM Club report identifies, the drivers of the scenarios include: the spread of the virus; the policy responses by Government both in terms of restrictions on activity and the support provided to the economy; and consumer and corporate responses. These drivers can be used to develop economic scenarios that in turn can be deployed to help identify the operational consequences of different outcomes as the basis for preparing response strategies.

The scenario development must be sufficiently detailed to reflect the high degree of variability we are observing in the economy. Individual sectors are being impacted very differently — food retail is performing strongly while clothing sales have been under pressure — and there will be significant variations in performance by geography, both within the UK and internationally, reflecting different medical and economic situations across places.

UK GDP contraction in 2020

8%

UK GDP is now expected to contract by 8% in 2020, before returning to positive growth of 5.6% in 2021.

Over the coming months, companies have a double challenge: they need to respond to the short-term impact of COVID-19 on their business, and they will also need to catch-up to long-term shifts in the economy which have been accelerated by the pandemic.

… supported by ongoing vigilance

This is a difficult economy to understand, as traditional relationships do not have the productive power that they offer in stable situations. As well as monitoring the traditional economic and financial data more closely than normal, it is also important to consider how new sources of information might help shed light on the outlook. For example, travel data is being used to identify how people may be returning to normal patterns of activity and, as economies reopen, indicators such as cinema ticket sales and restaurant bookings are being scrutinised for insights into consumer confidence.

The economy will remain challenging for some time, but the better the understanding a business can develop, the greater the likelihood of being able to respond effectively to the challenges and to exploit opportunities as they emerge. We will continue to provide as much support as we can with regular updates on the EY ITEM Club outlook.

Summary

  • EY ITEM Club forecasts UK GDP contraction of 8% in 2020, downgraded from 6.8% predicted in April
  • Record estimated contraction of 15% likely in Q2 2020, downgrading previous estimate of 13%
  • UK economy forecast to grow 5.6% in 2021, up from 4.5% in previous analysis, but still not expected to return to its late 2019 size until 2023
  • Uncertainty prompts first ever interim forecast released between two quarterly EY ITEM Club updates
  • Bank of England expected to provide further stimulus at June MPC meeting; but not expected to adjust interest rate 

About this article

By 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.