6 minute read 27 Jul 2020
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UK economy past the worst but challenges remain

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 27 Jul 2020

The EY ITEM Club Summer Forecast 2020 sees UK GDP contraction of 11.5% in 2020, a substantially deeper drop than the 8.0% fall in GDP anticipated in our early June Interim Forecast.  

The EY ITEM Club Summer Forecast 2020 sees a further substantial downgrading of the outlook for the UK economy in 2020 and this is only partly compensated for by some upgrading of its expectation for 2021. Specifically, EY ITEM Club now expects GDP contraction in 2020 to be 11.5%; this compares to the 8.0% drop expected in the mid-June Interim Forecast 2020 and the 6.8% decline anticipated in the Spring Forecast 2020 back in April. GDP is now seen expanding 6.5% in 2021, up from respective growth projections of 5.6% in the June Interim Forecast 2020 and 4.5% in April’s Spring Forecast 2020.

Download the report for the full EY ITEM Club Summer Forecast – July 2020 

The UK economy may be past its low point but it is looking increasingly likely that the climb back is going to be a lot longer than expected. May’s growth undershot even the lowest forecasts. By the middle of this year, the economy was a fifth smaller than it was at the start. Such a fall creates more room for rapid growth later, but it will be from a much lower base.
Dr. Howard Archer
Chief Economic Advisor
WEBCAST:

Mark Gregory, EY’s UK Chief Economist, and Howard Archer, Chief Economic Advisor to the EY ITEM Club provide an overview of the EY ITEM Club Summer Forecast: 
PODCAST:

Mark Gregory shares his thoughts on the forecast, how businesses can respond to the economic shock and the role government policy is likely to play in the recovery efforts:

Foreword

By Mark Gregory, EY UK Chief Economist

Reality starting to dawn

A picture starting to emerge …

I have written before about the unprecedented scale and speed of the economic shock caused by the outbreak of COVID-19 and the policy response to it. While the changes were very visible, it has only been in recent weeks that the data allowing us to quantify the impact has started to come through. The data backs up early concerns: UK GDP fell 6.9% in the month of March and 20.3% in April. Unemployment rose and employers lodged claims for over nine million furloughed workers under the Coronavirus Job Retention Scheme, with another 2.5 million self-employed people receiving income support.

… caution replaces optimism …

Unsurprisingly, without hard data, a wide range of views on the performance and outlook for the UK economy emerged. In recent weeks, as the lockdown started to be eased, more optimistic voices could be heard — Andy Haldane, the Chief Economist of the Bank of England, prominent amongst them, suggesting that we might see a ‘V’ shaped recovery after all.

However, with GDP only growing by 1.8% in May and the public remaining reluctant to return to their normal activity patterns, a more pessimistic outlook appears likely. The EY ITEM Club’s latest forecast certainly suggests it is going to take some time before we return to the levels of activity we had achieved at the end of 2019. The EY ITEM Club forecasts that UK GDP will fall by 11.5% in 2020, a significant downgrade to the 8% it forecast in June, which was a downgrade on the 6.8% decline it predicted at the end of April.

And this is not necessarily the worst-case outcome. As the EY ITEM Club notes, there are downside risks from a second wave of the virus breaking out and of a rise in unemployment if the economy remains subdued. In addition, the UK has yet to agree a trade deal with the European Union, and a ‘no deal’ outcome is likely to provide a further challenge for the economy.

.... as the reality of living with the virus becomes clearer …

The data on travel patterns, shopping, workplace attendance, visits to hospitality venues and many other measures confirms that the public is not yet willing to return to pre-COVID-19 patterns of behaviour. As in other countries, there was a bounce back when restrictions were lifted, but the pace of change has not been sustained. Worries about contracting the virus appear to be the most important factor shaping behaviour. Sectors in which social distancing can be more easily managed, such as construction and some manufacturing, are tending to recover faster than those service sectors reliant on person-to-person contact — the arts and entertainment sectors were poorly performing sectors in May even as other industries showed signs of improvement.

The fact is, there is not a choice between controlling the virus and saving the economy: the two are linked. It seems unlikely that the economy can return to its full potential until the virus has been eliminated or a vaccine has been developed, or a mitigating treatment has been shown to significantly reduce the risk from contracting COVID-19. In a consumer-centric economy like the UK, reluctant consumers will limit the level of economic activity even with a shift to activity online.

… putting the spotlight back on economic policy …

In normal times, additional spending of over £30b as announced by the Chancellor on 8 July would be expected to provide a major boost to economic activity. The data since the announcement suggests more might be needed. The Chancellor is rightly concerned about minimising the drain on the UK’s resources, but a decline of 11.5% in GDP will put a strain on the economy and society across the country in any case. For now, concerns over an increase in the UK’s level of public debt should be secondary to the need to protect and rebuild the economy. After the Second World War, the UK reduced its debt pile primarily through growing the economy, and with borrowing remaining cheap by historic standards, the challenge now is to invest wisely. Difficult as the last few months have been, the Chancellor is now entering into the most difficult part of COVID-19 related policymaking.

UK GDP set to expand in 2021

6.5%

UK economy forecast to return to growth in Q3 this year, before continuing its recovery in Q4, with GDP set to expand to 6.5% in 2021

This remains a very uncertain environment with the outlook changing regularly with significant downside risks. Businesses must stay close to the emerging data and continue to use scenario planning to develop financial and operational responses for all significant potential outcomes.

… and challenging business

I have tended to overuse ‘unprecedented’ ever since the crisis began, but it does describe the situation which business finds itself in. This remains a very uncertain environment with the outlook changing regularly with significant downside risks. Businesses must stay close to the emerging data and continue to use scenario planning to develop financial and operational responses for all significant potential outcomes.

Government policy will be a more important influence on business outcomes than we have experienced for some time. Hence, corporates must continue to track policy announcements and proposals to identify how their businesses could be affected. There should be opportunities as the Government proceeds with its agenda in areas such as moving the UK to net zero and levelling up the economy. Working now to identify where these opportunities could be and how policy might deliver them would be a sensible use of time.

COVID-19 is also likely to accelerate changes that were already in progress. Net zero has been mentioned, and other trends include the adoption of digital technologies, a consumer focus on sustainability more generally and the shift from ever more globalisation. All these shifts create opportunities and pose questions for businesses. I recognise how demanding the short-term challenges are, but it is important to devote resources to strategy beyond the immediate crisis in order to ensure long-term sustainability.

Summary

  • GDP not expected to return to 2019 level until late-2024 as hopes of V-shaped recovery diminish.
  • EY ITEM Club forecasts UK GDP contraction of 11.5% in 2020, downgraded from the 8.0% it predicted in June and 6.8% in April.
  • UK economy forecast to return to growth in Q3 this year, before continuing its recovery in Q4, with GDP set to expand to 6.5% in 2021.
  • Consumer caution, unemployment and reduced business investment expected to weigh on growth in 2020.

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.