Chief Economist's note: The UK's deepening sectoral divide

The UK's deepening sectoral divide

Yael Selfin, Chief Economist in the UK assess the impact of the UK lockdown and social distancing on sectors’ prospects this year.

Yael Selfin - Chief Economist at KPMG in the UK.

Chief Economist

KPMG in the UK


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Key Points

  • Today's release of Q1 GDP data highlights the significant impact the lockdown has had on transport and hospitality industries.
  • Exposure to lockdown and social distancing key to sectors' prospects this year.
  • Seven out of ten most affected sectors have productivity lower than the UK average, accentuating UK's sectoral divide.

Data for March offers a glimpse of the impact the lockdown has had on the UK economy. Sharp falls in rail and water transport, and in air transport in particular, were matched by a similar contraction in transport manufacturing. Hotels were even more severely hit, contracting by twice as much as bars and restaurants.

Looking ahead, we should expect sectors' performance to alter significantly for the rest of this year, with those that cannot function during the lockdown or are heavily affected by social distancing measures afterwards are most at risk. These include the hospitality and travel industries, which could shrink by between 40% and 50% this year according to our analysis. While restaurants may be allowed to reopen in July, some of the owners I have spoken to say it might not be practical; social distancing rules will eat in to their already thin margins.

Our analysis found air transport to be disproportionally affected compared to other transport sectors this year (45% contraction compared to 35% for rail transport). This reflects the divide between the likely recovery of domestic and international travel. Interestingly, the higher downfall and slower recovery of air travel have produced an outlier: Transport manufacturing. We do not expect it to mirror the typical manufacturing pattern, with a 45% fall in 2020 vs. an average of 14%. As transport manufacturing includes significant share of aircraft production, which is likely to be hit hard by a fall in demand.

Performance by sector in 2020

Source: ONS, KPMG analysis

Click here to view a larger version of the image.

Food manufacturing is expected to be amongst the least affected sectors, largely stagnating this year, as it captures some of the eating out market. Textile and wood and paper manufacturing are expected to see a drop of around 20%, as they experience problems with supply chains as well as a fall in demand, with clothes retailers reporting record high levels of stock and demand for office supplies plummeting. Wholesale and retail trade could contract by around 12% this year, although online retail should experience rapid growth. Construction could see a similar fall in output this year.

Many professional services, including accounting, legal, and management consulting services have adapted to working from home and as such, we expect will be shielded from the worst effects of the lockdown and will shrink by up to 10%, below the economy average. Banking, one of the UK economy's largest sectors, could see a modest fall of around 3% this year.

Some industries stand to benefit from the shifts in demand triggered by the pandemic. Industries supporting stay-at-home infrastructure and more localised production, including IT communication, warehousing and logistics, broadcasting, telecomm, and postal services could see growth of up to 10% in 2020. The health crisis will provide opportunities for the pharmaceutical sector, with manufacturing output potentially rising by 4% this year, unlike other areas of manufacturing.

It is too early to tell how the current crisis will impact the UK's productivity overall. No doubt some aspects of the ‘new normal' business reality, such as increasing resilience by reconfiguring supply chains and reducing just-in-time methods, could reduce productivity. In the short term at least, the most productive sectors seem to fair relatively better compared to the worst hit sectors. This poses an interesting question: will productivity translate to resilience in the new world? And with seven out of the ten most affected sectors having productivity between £9 and £23 per hour, considerably below the economy's average of £36 per hour, will this crisis deepen the UK's sectoral divide?

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