Wednesday, September 23, 2020

UK’s post-COVID economic recovery could take 18 months longer than expected

The EY ITEM Club Summer Forecast has significantly downgraded the near-term economic outlook for the UK with GDP now expected to contract by 11.5% over the course of 2020.

This compares to the 8.0% contraction predicted just last month in the EY ITEM Club’s Interim Forecast, and almost double the 6.8% contraction expected in April’s Spring Forecast.

With hopes of a V-shaped recovery fading, the UK economy is now not expected to match its Q4 2019 size until late-2024 – much later than the early-2023 prediction from the June forecast. Additionally, the EY ITEM Club now expects the Q2 GDP contraction to come in at a record 20% – a sizeable downgrade from the 15% contraction predicted last month.

Positively, growth prospects for 2021 have been raised slightly, with the economy now forecast to grow 6.5% over the year, up from the 5.6% predicted in June’s forecast, and up from 4.5% in April’s forecast. The EY ITEM Club expects the economy to return to growth in Q3 2020 with expansion around 12% quarter-on-quarter (q/q).

The downgrades to the EY ITEM Club forecast for 2020 have been largely driven by weaker-than-expected growth of just 1.8% in May, with the services sector particularly hampered by COVID-19 even as restrictions ease.

Howard Archer, chief economic advisor to the EY ITEM Club, says: “Even though lockdown restrictions are easing, consumer caution has been much more pronounced than expected. We believe that consumer confidence is one of three key factors likely to weigh on the UK economy over the rest of the year, alongside the impact of rising unemployment and low levels of business investment.

“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.”

Unemployment rate set to more-than-double by end of 2020

The EY ITEM Club forecasts that the unemployment rate will rise to around 9.0% in late-2020 and early-2021, up from 3.9% in the months to May. This is also expected to contribute to more subdued levels of consumer spending. The EY ITEM Club forecasts consumer spending to fall 11.6% over the course of 2020, before rising 6.6% in 2021 as the labour market starts to recover.

Howard Archer says: “The labour market’s performance is key to the economy’s prospects over both the short term and further out. Job losses and poor real wage growth are expected to hold back consumer spending, although the Chancellor’s instinct to focus on jobs in his Summer Statement should provide some support. It is possible that the Chancellor will look to provide further help for the labour market in this autumn’s budget.”

Business investment subdued for 2020 before slight pick-up in 2021

The EY ITEM Club’s Summer Forecast predicts that business investment could fall 22.3% over the course of 2020. Despite a forecast of overall growth in business investment of just 1.3% in 2021, significant q/q improvements are expected as the year progresses.

In addition, net trade is expected to make a negative contribution of 1.1% to 2020 GDP, with exports of goods and services falling faster (23.9%) than imports (20.3%). Exports are expected to grow by 5.9% in 2021, with imports up by 7.7%.

Suzanne Robinson, Managing Partner for EY in Yorkshire and the Humber, says: “Government measures have provided significant short-term support, but many businesses across Yorkshire and the Humber are waiting for more certainty over the economic outlook before making longer term investment decisions.

“Although progress has been made with devolution deals for South and West Yorkshire, recent times have only highlighted the need for increased autonomy right across the North. It’s vital that our regions and communities have the necessary powers and the right blend of public and private sector investment.

“The Government has set out a vision around infrastructure, skills and innovation and I welcome the recent announcement about the Transpennine rail upgrade, but most of the detail isn’t yet available. With lower demand and margins under pressure because of the need to spend on making workplaces, products and consumer experiences COVID-safe, there’s a risk that the current uncertainty could lead to a fall in long-term investment into the whole region.

“It will become increasingly important for the region’s private sector to align itself with government investment priorities to support the future development of our towns and cities across Yorkshire, if we are to successfully navigate through the pandemic and onto a path of sustained economic recovery.

“While short-term support measures announced so far have been unprecedented, more direct support is likely to be needed in the future to give consumers the assurances they need. Policies such as VAT cuts are welcome, but they aren’t a complete solution, as they don’t resolve the concerns consumers may have about going to restaurants and bars in the first place.”

Fiscal stimulus measures

According to the Summer Forecast, the EY ITEM Club is expecting Government investment to increase 4.3% over 2020, with public spending rising by 2.5%. Meanwhile, the budget deficit (measured by Public Sector Net Borrowing excluding banks – PSNBex) is set to hit £335bn for 2020-21 – 16.9% of GDP and six times higher than the £54.8bn forecast by the Office for Budget Responsibility at March’s Budget. Government investment is forecast to increase 13.5% in 2021.

Finally, the EY ITEM Club expects a further £100bn round of Bank of England asset purchases to be announced in the autumn (taking total purchases to approximately £845bn) – but further interest rate cuts below the current 0.1% are seen as unlikely.

Howard Archer concludes: “The economic outlook remains highly uncertain, with significant revisions to forecasts and official data becoming the norm, but the short-term outlook is certainly gloomier than it was.

“The Treasury and Bank’s fiscal and monetary stimulus has helped, and there should be a fair degree of pent-up demand from consumers, aided by low inflation in the near-term. Global economic activity should also be stronger later in the year as economies’ recoveries kick into gear. That said, the labour market will take time to recover from 2020’s job losses. This will have a dampening effect on consumer spending.”

A message from the Editor:

Thank you for reading this story on our news site - please take a moment to read this important message:

As you know, our aim is to bring you, the reader, an editorially led news site and magazine but journalism costs money and we rely on advertising, print and digital revenues to help to support them.

With the Covid-19 lockdown having a major impact on our industry as a whole, the advertising revenues we normally receive, which helps us cover the cost of our journalists and this website, have been drastically affected.

As such we need your help. If you can support our news sites/magazines with either a small donation of even £1, or a subscription to our magazine, which costs just £31.50 per year, (inc p&P and mailed direct to your door) your generosity will help us weather the storm and continue in our quest to deliver quality journalism.

As a subscriber, you will have unlimited access to our web site and magazine. You'll also be offered VIP invitations to our events, preferential rates to all our awards and get access to exclusive newsletters and content.

Just click here to subscribe and in the meantime may I wish you the very best.




Latest news

Stockpiling for Brexit – what you need to know

The UK is no longer a member of the EU, but that's not the end of Brexit. As you probably know, officials are trying...

£100m investment approved to deliver regeneration projects in Huddersfield and Dewsbury Blueprint plans

Kirklees Council’s Cabinet has approved a £100 million investment which will help deliver key town centre regeneration projects as part of the Huddersfield and...

Activity returns to pre-COVID levels for Fulcrum

A lifting in lockdown restrictions has seen activity return to pre-COVID-19 levels for Fulcrum Utility Services, the Sheffield-based utilities business. By 31 August 2020, Fulcrum’s...

Harrogate energy consultancy expands into Scotland

Harrogate-headquartered niche energy consultancy, Padd Energy, is expanding north of the border with a new office in Scotland. The company said the decision to establish...

Sheffield start-up launch software to boost manufacturing capacity

A Sheffield tech start-up has launched software that will help manufacturing businesses improve capacity. Dubbed the ‘Fitbit for manufacturing’, the new Manufacturing Execution System will...

AMRC awarded £2m to open food, drink packaging sustainability centre

The University of Sheffield’s Advanced Manufacturing Research Centre (AMRC) will create a Food and Drink Packaging Sustainability Centre at AMRC Cymru after securing £2...

Related news

Stockpiling for Brexit – what you need to know

The UK is no longer a member of the EU, but that's not the end of Brexit. As you probably know, officials are trying...

£100m investment approved to deliver regeneration projects in Huddersfield and Dewsbury Blueprint plans

Kirklees Council’s Cabinet has approved a £100 million investment which will help deliver key town centre regeneration projects as part of the Huddersfield and...

Activity returns to pre-COVID levels for Fulcrum

A lifting in lockdown restrictions has seen activity return to pre-COVID-19 levels for Fulcrum Utility Services, the Sheffield-based utilities business. By 31 August 2020, Fulcrum’s...

Harrogate energy consultancy expands into Scotland

Harrogate-headquartered niche energy consultancy, Padd Energy, is expanding north of the border with a new office in Scotland. The company said the decision to establish...

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close