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Deep, short recession due

UK economy ‘not back to pre-virus size until 2023’

Port of Grangemouth

Trade will be hit sharply

Britain’s economy is not expected to return to its pre-coronavirus size until 2023, according to new research.

EY Item Club is forecasting a “deep, short recession” this year with GDP expected to plunge by 6.8% in 2020, but rebounding with growth of 4.5% next year.

Its spring forecast is based on the assumption that some lockdown restrictions will start to be eased in May, and further in June.

It says that the substantial fiscal and monetary stimulus from the Treasury and the Bank of England should provide serious support to activity once the coronavirus impact starts to wane but, even with these measures, the UK economy is not expected to return to its Q4 2019 size until 2023.

Howard Archer, chief economic adviser to the EY ITEM Club, says: “The UK economy is clearly in for a very difficult year with GDP expected to contract around 13% quarter-on-quarter in Q2.

“To put this into perspective, the largest quarter on quarter contraction suffered during the 2008/9 financial crisis was 2.1% in Q4 2008.

“Our report assumes that the Government’s measures aimed at supporting businesses and saving jobs will have a significant positive impact, which is absolutely crucial to limiting the potential longer-term damage to the economy.”

Item Club forecasts that consumer spending will contract by around 14% in Q2 compared to the previous three months, and by 7.5% over 2020 as a whole, before rebounding to growth of 4.9% in 2021.

The report says that there should be a fair degree of pent-up demand following a collapse in consumer spending in Q2 this year due to the lockdown.

Consumer Price Inflation (CPI) is expected to fall as low as 0.5% over the summer and to start edging up in the latter months of 2020, before then heading towards 2% in 2021. Low inflation for much of the year should support consumer spending.

However, the report warns that the UK labour market is unlikely to recover all the job losses suffered in 2020 and that will also have some limiting impact on consumer spending.

Indeed, the report predicts that the unemployment rate could rise as high as 6.8% in Q3 2020, up from 4.0% in the three months to February. Combined with significantly lower levels of consumer confidence and reduced income for many workers, the Item Club says this is likely to weigh heavily on discretionary spending.

The report predicts that UK exports will be hit in 2020 sharply by the contraction of key overseas markets for the UK, notably the EU and the US. Furthermore, some exports could be affected by production problems in the UK if coronavirus significantly affects workforces.

Business investment will be heavily impacted in Q2 this year and likely beyond with many companies focused on getting through the near-term crisis.

It is expected to fall 13.6% in 2020 and to be up 1.2% in 2021 and 6.5% in 2022 as the economy and confidence recover.

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