Strong UK economic recovery likely
A strong economic recovery following the coronavirus pandemic is likely, with conditions ripe for a quick turnaround, a new report suggests.
The unusual nature of this recession could be a silver lining for recovery, the report by Oxford Economics said. GDP has fallen because of a planned, partial economic shutdown, so in theory activity and demand should rebound as restrictions lift, particularly given fiscal and monetary support from government and the Bank of England since the crisis began.
The report, which was commissioned by chartered accountancy body ICAEW, predicts that the economy should return to growth in the second half of the year if the lockdown continues to be relaxed over the summer.
Some households and private sector companies will have saved cash during the crisis, which could lead to a spike in demand when the lockdown eases, particularly with inflation likely to reach zero in the summer.
The impact of coronavirus should hopefully be a short, if very sharp, shock, the report said, with most of the damage quickly repaired. With low interest rates likely to persist, and gilt yields at historic levels, reducing the deficit should not be an urgent government priority.
Consequences for economic policy and public sentiment could endure, with post-pandemic government likely to be bigger than before the crisis.
Overall, GDP could shrink by 14% in Q2, the report predicts. This would be the largest decline since 1921. However, unemployment will likely rise by a comparatively modest 3 percentage points, from 4% at the beginning of 2020 to 7% in Q4, reflecting take-up of the furlough scheme designed to protect jobs.
In total, the deficit is likely to reach £290bn this year, equal to 14% of GDP. This would be the biggest deficit since World War Two, and would exceed the previous record of 10.2% in 2009-10.
Risks to the economy are high, Oxford Economics said. Recovery could falter if lockdown is extended; if a second wave of coronavirus triggers another lockdown; if long-term economic damage is worse than expected; or if government support is withdrawn too early. A collapse of UK-EU trade talks could also hamper recovery.
The scope of coronavirus support schemes mean government borrowing stands at wartime proportions, and could increase total borrowing in 2020-21 by £173bn, or 7.5% of GDP, the report said. Two-fifths of this was money for the job retention scheme.
Martin Beck, Oxford Economics lead UK economist, said:
“Coronavirus and the restrictions on daily life imposed in response are inflicting a once-in-a-century downturn on the economy. But the nature of the shock and the massive support put in place by policymakers mean a strong bounce back is achievable. However, with no precedents to draw on, the outlook is clouded by multiple risks.”
Michael Izza, ICAEW chief executive, said:
“While this report sets out clearly the challenges facing the UK economy, particularly a fall in GDP not seen for a century, it does provide some optimism that we will be able to rebound from this short, sharp shock.
“As lockdown measures are eased, we would like to see a strategy designed to promote a sustainable economic recovery beyond the crisis. The phasing out of government schemes will have to be carefully managed to avoid a wave of redundancies and company failures, and to restore business and consumer confidence.
“Without time, space and help for businesses to recover, 2021 will be an exceptionally difficult year, especially if the problems left behind by COVID-19 are compounded by a disorderly end to the EU transition period.”
Sectors of the economy
Different sectors of the economy have faced different fortunes during the pandemic, but the largest losses have been in the hospitality, cultural and sporting sectors, as well as in education. Even with a strong rebound, output losses could be 25%, Oxford Economics forecast.
The manufacturing sector faces a double whammy, taking hits from the coronavirus crisis and from the end of the UK-EU transition period, an impact most likely to be felt from the end of 2022.
The regional picture
Meanwhile, the report predicts that the current regional picture is likely to continue, with London likely to be the fastest-growing region in the next five years and the North East the weakest performer. The West Midlands will most likely experience the largest output fall of any region this year, but should rebound in 2021.
Rather than focusing on levelling up the regions by focus on growth, it is possible policymakers will instead focusing on greater resilience to combat both one-off shocks, such as the coronavirus pandemic, and longer-term structural problems such as unemployment, said Richard Holt of Oxford Economics.
Richard Holt, Oxford Economics added:
“Because the whole of the country is affected by lockdowns, and it is these that are having the biggest economic impact, the economic disruption is spread across the UK. However, London is probably suffering less than most places economically because so many people in the capital can work at home. For more manufacturing-intensive regions such as the West Midlands, it has been much harder to adapt.”
