Region’s outlook marred by uncertainty and risks of hard Brexit

The continuing impact of the COVID-19 virus is expected to see the West Midlands economy contract by 9.1% in 2020, compared to 7.2% for the UK, with the economy unlikely to be able to fully restart until a vaccine or effective treatments for the virus are available.

KPMG UK’s latest quarterly Economic Outlook warns the region could start 2021 with another negative shock to the economy due to the end of the transition period with the EU, with GVA rising by 4.3% next year.

KPMG’s forecasts assume that a deal will be reached by the end of this year and this will enable the UK to trade with the EU with no tariffs or quotas and will cover some services. However, even without tariffs, some additional trade friction may not be avoided due to the need for customs and other inspections.

Therefore, exports are expected to fall back at the start of next year despite some recovery in many of the West Midlands and the rest of the UK’s export markets. An end to the transition period with no deal, or with a more limited trade deal, would see a much weaker economic recovery next year.

Karl Edge, Midlands regional chair at KPMG, said: “With the automotive and transport manufacturing industries both having experienced a sharp drop in demand, many businesses across the West Midlands are potentially feeling vulnerable and somewhat nervous about the future. Our region has demonstrated incredible resilience and resolve in recent years, and it’s home to a number of key players and sectors, so my belief is that we’re in a strong position to weather the storm in the long-term. However, with the prospect of a hard downturn, collaboration between businesses and local government is absolutely critical – not only to try and support the people and businesses hardest hit, but also the industries that will create jobs in the future.”

Four alternative scenarios were considered for the timing of the recovery, based on potential different dates of the pandemic being eradicated in the UK. KPMG’s main one assumes that a vaccine will be available from July 2021, enabling all social distancing measures to be removed and pandemic-related uncertainty to dissipate by the following month. In this case, with lockdown restrictions lifted in the summer, activities could resume more fully in the second half of 2020. However, the UK could start 2021 with another negative shock to the economy due to the end of the transition period with the EU, with GDP contracting at least during the first quarter of the year. This would see UK GDP recover only modestly next year, rising by 2.8%.

Yael Selfin, chief economist at KPMG UK, commented on the report: “These are difficult times. The UK economy is amidst the most severe economic downturn in modern times, with no clear end to the current crisis. Considerable uncertainty remains around the timing of a vaccine which will impact the timing and speed of the recovery, as well as the extent of any permanent damage to the economy.

“That said, there are some tentative signs of a pick-up in activity and we expect to see a partial recovery in the second half of this year as the gradual easing of restrictions brings light to more corners of the economy. However, a full resumption of activity is unlikely until a vaccine or effective treatments for COVID-19 is found.”