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.