Chief economist note : Upsides and Downsides

Chief economist note : Upsides and Downsides

Yael Selfin, Chief Economist in the UK discusses economic scenarios dependant on COVID-19 vaccine developments.

Yael Selfin - Chief Economist at KPMG in the UK.

Chief Economist

KPMG in the UK


Also on

Earnings in 2021 look vulnerable

- Despite the extremely rapid progress in developing a COVID-19 vaccine, next year's earnings look vulnerable.

- The range of vaccine scenarios to combat COVID-19 point at significant exposure of the tourism industry.

A light at the end of the tunnel?

As France and Spain announce plans to further ease the lockdown, more European countries are starting to lift restrictions. Schools have either reopened or are set to reopen shortly in Denmark, Norway, Germany and Switzerland. Certain categories of shops are also set to reopen, with Austria and Germany opening stores up to a limit of 400 and 800 square metres, respectively. In Spain, children can now leave their homes for an hour a day. And in Italy, people will soon be able to visit relatives, alongside other measures. So, yes, there is some light. But expect significant restrictions to stay in place in all countries as long as there is a threat of new waves of infection.

Here in the UK, some businesses are beginning to reopen. Carmakers across the country are looking to restart production in May and home improvement retailer B&Q is reopening stores. Despite these changes, some form of social distancing will need to stay in place. Businesses are looking at options such as shift work and the use of screens to keep their workers safe. This approach, of a careful return to work while ensuring the disease remains under control, forms the basis of the strategy published by the governments of Scotland and Wales.

Developing a vaccine will take time

The development of a vaccine remains the best hope for ending the pandemic and letting life get back to normal, but this takes time. Typical timelines for vaccines, including research, development, testing and regulatory approval, are 10 years. And many candidate vaccines fail during this process.

Progress on a vaccine for COVID-19 so far has been extremely rapid, with more than 70 candidate vaccines in development globally. If steps are taken in parallel, it is possible we could see a vaccine developed in just 12-18 months, according to analysis by the Wellcome Trust. Last week, researchers at Oxford University started a human trial for a potential vaccine based on a weakened version of a common cold virus. In addition, trials on potential vaccines are taking place in the US and in China, however the outcome will not be known before the end of this year.

Recovery is no guarantee of immunity

In the meantime, antibody tests are also being developed, which could help identify people who have already contracted and recovered from the disease. If this imparts some immunity, it opens the possibility of relaxing restrictions for those that have recovered from the virus.

For now the idea of an 'immunity passport' seems a long way off. Just last week, the World Health Organization warned that there is no evidence that people who have recovered from infection are immune to reinfection. In addition, the accuracy of antibody tests developed so far is unproven. For now, healthcare professions are treating the results with caution.

A longer pandemic will cause greater damage to business

While there is more information available on how to detect and treat the virus, there's still no clarity over when we'll reach crucial milestones (like a viable vaccine). We have developed four simple scenarios to help planning for the next two years:

Four potential scenarios for 2020 and 2021

Source: KPMG

Click here to view a larger version of the image.

The upside scenario assumes that the pandemic is contained by September and economic activity recovers to a 'new normal' from Q4 2020. We see it as the least probable scenario. In this scenario, the economy would contract by just under 5% in 2020 compared to our other scenarios that assume a contraction of around 8% this year. GDP could then rise by around 7.5% in 2021 as the economy recovers.

As efforts to contain the pandemic continue, we now see the probability of a vaccine being ready by around July next year (our downside 1 scenario) almost as likely as the probability of it being available by January 2021 (our base scenario). In the event the economy returns to a 'new normal' only by August instead of February, growth could halve next year. It would also wreak havoc on the busy summer season for international tourism both this year and in 2021.

Downside 2 scenario considers what could happen if no vaccine becomes available by the end of next year, with social distancing measures and sporadic lockdowns remaining in place. This is probably less likely than the downside 1 scenario, according to analysis by the Wellcome Trust and other scientists, but is more likely to occur than the upside scenario. Our analysis shows this would mean near flat growth next year.

Output projections by scenario over the next two years

Source: ONS, KPMG analysis

Click here to view a larger version of the image.

The four scenarios assume that government support, in the form of grants and loans, preserves as many businesses as possible. That means their output can return to pre-crisis levels quickly once the pandemic is eradicated in the UK (see chart). As the pandemic lingers, more permanent damage to business is likely and risks to the outlook are heavily weighted to the downside.

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