Forecast points to delay

Bounce back will take 18 months longer, says EY

lock on gates at bar

Restaurants and bars will struggle to recover

A revival of the UK economy will take 18 months longer than earlier forecasts, according to the EY Item Club. 

Researchers say hopes of a V-shaped recovery are fading and the the economy will now contract by 11% this year compared to the Item Club’s earlier forecast of 8%.

Howard Archer, chief economic adviser to the EY Item Club, said: “Consumer caution has been much more pronounced than expected.”

He said 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 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 economy is expected to return to growth in Q3 2020 with expansion around 12% quarter-on-quarter (q/q).

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The downgrades to the 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.

Mr Archer said: “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.”

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. Consumer spending is expected to fall 11.6% over the course of 2020, before rising 6.6% in 2021 as the labour market starts to recover.

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.

Consumers show renewed confidence

UK consumers emerge from the second quarter in a cautious but slightly more positive mood, according to the latest Deloitte Consumer Tracker.

Despite significant caution on the state of the economy, and continued concerns about job security and career progression, consumers intend to start spending again in the quarter ahead, albeit below year-on-year comparables. 

Deloitte’s analysis is based on responses of more than 3,000 UK consumers between 19 and 23 June, as some of the UK’s lockdown measures were lifted and non-essential shops reopened. 

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