The latest insight on the UK economy from Yael Selfin, Chief Economist for KPMG in the UK.
Two weeks into lockdown we have revised our forecasts taking into account evidence of the breadth of economic impact and the likelihood that disruptions will continue, even when lockdown is lifted (see table).
Our forecasts are extremely dependent on how the pandemic evolves and the measures taken to combat it. Our base scenario currently assumes that the lockdown remains in place until the end of May but some measures, such as restrictions on social gatherings and some travel remain in place until 2021. We also assume additional secondary lockdowns, lasting around four weeks each, are imposed in the third and fourth quarters of 2020, representing a milder version of the strategy proposed by Professor Neil Ferguson in the paper he co-wrote with colleagues at Imperial this year. We then assume that a vaccine becomes available in January 2021, allowing the removal of all restrictions shortly afterwards.
Gross domestic product (GDP) forecasts for this year reflect this pattern of stop-start economic activity, and for the year as a whole GDP contracts by nearly 8 percent in 2020, before recovering in 2021. This reflects a sharp setback in household consumption and in overall investment that is only partially offset by a sharp ramp-up in government spending.
Change in household spending habits
Households’ spending habits are likely to have changed dramatically with the lockdown, as people seek to beef-up home entertainment and working from home capacity at the start of the lockdown, while also stocking up on grocery and toiletries. Items such as clothing and footwear, on the other hand, should see less demand now that people are housebound for weeks.
We looked at the different goods and services consumed by households, categorising them by their exposure to the lockdown and to any additional measures imposed once it is removed. We estimated that in total, the consumption of goods will fall by 30% at the peak of the crisis and the consumption of services will fall by 40%, making consumer spending fall by 13.5 percent in 2020 as a whole, before recovering by nearly 15 percent in the following year.
The impact on employment
Our analysis shows that as many as 13 million jobs are in sectors highly affected by the lockdown, representing 36 percent of all jobs in the UK. Of these, nearly 2.2 million are self-employed and 10.6 million are employees (see chart below).
The heaviest impact falls on the construction, manufacturing, as well as on the pub and restaurant sectors, which together account for over half of jobs affected. The construction sector also consists of a high proportion of self-employed jobs, at 36 percent, with many self-employed workers more likely to experience short-term cash-flow shortages.
Nearly one million people applied for Universal Credit support in the last two weeks of March. While this figure points at the severe strain that the crisis has placed on a notable proportion of households, the impact on unemployment is likely to be somewhat smaller. It hinges on the ability of businesses to retain employees through the period of lockdown and access the government support on offer.
If we assume that three quarters of affected employees are placed in furlough during the lockdown and the rest are split 15 percent and 10 percent respectively between claiming unemployment and leaving the labour market, the unemployment rate could peak at 8.8 percent during the lockdown period. We then assumed furloughed workers will resume active employment very rapidly when that becomes possible, but that fear of renewed restrictions later in the year will make companies reluctant to bring back employment to the level prior to the lockdown straight away, particularly while they face weaker and uncertain demand. This could see unemployment falling only gradually and averaging 7.6 percent in 2020 and 6.3 percent in 2021.
Inflation and interest rates
Despite the weaker pound and cuts in output production, inflation is expected to remain low this year and next, at nearly half the Bank of England’s 2 percent target on average. While the pandemic represents a shock to both the demand and supply capacity of the economy, in practice it is the shock to demand that dominates. This means that outside of a few select goods categories, we should see weaker price pressures throughout the next two years, with inflationary pressures remaining low while the job market slowly recovers. Consistent with moderate inflation pressures and the need to support economic growth, the Bank of England’s policy interest rate is expected to stay at 10 basis points throughout the next two years.
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