Record GDP contraction forecast for Q2
The EY ITEM Club has further downgraded its GDP forecast for the UK economy this year and is now predicting an 8% contraction for 2020 compared to the 6.8% fall it predicted in April.
Since the release of its Spring Forecast 2020 in late April, it has also downgraded its Q2 2020 forecast from a 13% contraction to a record 15%.
The gloomier forecast figures reflect a poor economic performance in April due to the lockdown and deeper than expected contraction in Q1 (a 2.0% quarter-on-quarter decline, greater than the expected 1.3% q/q contraction).
However, the EY ITEM Club now predicts year-on-year GDP growth of 5.6% in 2021, up from the 4.5% expected in its previous forecast. But the report warns that the UK economy is still not expected to return to its Q4 2019 size until early 2023.
Today’s report is the EY ITEM Club’s first ever interim report between two quarterly updates – due to the rapidly changing economic environment and uncertainties ahead.
Howard Archer, chief economic advisor to the EY ITEM Club, says: “The impact of COVID-19 on the UK economy will depend on just how long the pandemic lasts, how many people are affected and how long restrictions to activity have to be in place. The hope is that while there will undoubtedly be a substantial impact on the economy, it will be restricted in terms of time and there will be limited longer-term repercussions.
“The UK economy had been disappointingly lacklustre over the first two months of 2020, even before COVID-19 started to become a factor. After a challenging first half, our forecast shows that the UK economy is expected to start to recover in Q3 2020 on the assumption that the Government continues to gradually relax lockdown restrictions.
“The substantial fiscal and monetary stimulus that has been enacted by HM Treasury and the Bank of England should provide serious support to activity as coronavirus cases wane and life returns to the new normal. Global economic activity should also be significantly stronger from the latter months of 2020 onwards as other economies start to recover.”
Simon O’Neill, EY’s Midlands managing partner, comments: “This is an undoubtedly challenging environment for businesses and forecasting is extremely difficult, particularly with different countries and sectors recovering at different rates as lockdown restrictions are eased. With this interim forecast, there are some significant adjustments to our GDP expectations compared to what the data told us just six weeks ago.
“The Midlands is known for its expertise and strength in the manufacturing sector, however, this has been one of the most affected during the COVID-19 pandemic. Certainly, businesses are going through further transition, with a focus on evaluating their positions, and creating leaner business models and processes, in the post-COVID landscape. They will also need to make the most of technology and innovation as they look forward to the next 6-12 months.
“Companies have a double challenge: they need to respond to the short-term impact of COVID-19 on their business, and they will also need to catch-up to long-term shifts in the economy which have been accelerated by the pandemic. Things like deglobalisation and the digital economy mean the ‘new normal’ will be different to what’s gone before.
“With so much government support in the economy, it will also be important for the private sector to align itself with government initiatives.”
