Chief Economist’s note: the end of the beginning
Chief Economist’s note: the end of the beginning
Yael Selfin, Chief Economist in the UK, provides a view on the race to find a vaccine.
- Latest evidence points to a weaker economic performance this year with GDP contracting by between 10% and 13%
- Progress in finding a vaccine increases the likelihood of an end to social distancing by May or September next year
- This could see growth of up to 10% in 2021
As we leave the initial lockdown behind and enter the second phase of the pandemic, the medium-term outlook is mixed. Good progress on the quest for a vaccine increases the chances of an end to the pandemic next year. However, the UK’s recovery could be weaker due to uncertainties around the future relationship with the EU and the significant dent the pandemic is having on the performance of the economy.
Progress in finding a COVID-19 vaccine
Recent developments added some optimism to the prospect of a vaccine. The UK government has struck deals with manufacturers, gaining access to 190 million doses of vaccines that are in development so that they can become quickly available to the UK public. This includes 100 million doses of the Oxford vaccine, 30 million doses of the BioNtech/Pfizer vaccine and 60 million doses of the Valneva vaccine, although the latter is at a slightly earlier research stage. There may be more deals forthcoming.
For the UK, Oxford University and AstraZeneca are jointly developing the leading candidate. The research team reported promising results on 20 July for its Phase II clinical trial and has already started its global programme for Phase III trials. This involves trials in the US, Brazil and South Africa. AstraZeneca has agreed to scale up manufacturing capacity and start supplying to the market by the end of this year. The Government is committed to fast-track approval and quick roll-out once the vaccine is proven to be safe and effective at scale.
Given the latest developments, we have adjusted our scenarios:
- Vaccine approved at the start of next year – this scenario assumes there will be enough doses available as soon as the vaccine is approved at the start of next year. This will immediately lift a significant part of the uncertainty around the pandemic and will allow households and businesses to better prepare and resume investment plans. The vaccine is expected to be rolled out to the UK public over four months, and by the end of April a significant proportion of the UK population could become immune to COVID-19, allowing social distancing measures to be removed.
- Vaccine approved in April 2021 – this scenario assumes that the UK will have access to an effective vaccine and/or treatment by the end of April. It would allow the Government to remove social distancing measures by the end of August.
- No effective vaccine or treatment found by the end of next year –even considering the extraordinary resources that governments and the international scientific community are dedicating to finding a vaccine, this scenario is still possible.
At the moment, we consider the probability of the first two scenarios quite high; each have around a 40% chance of becoming a reality. We still see a significant possibility – of around 20%– of no vaccine becoming available by the end of next year.
Economy under strain until vaccine reaches a large proportion of UK population
Anecdotal evidence so far points to a weak summer, despite an easing of social distancing restrictions. While the flash PMI survey for July was strong, data for June indicated mounting job losses with 660,000 fewer employees. Non-food store retail was also down by almost a third compared to February and there were 94% fewer passengers going through Heathrow. The threat of localised outbreaks continues to be high meaning the Government’s social distancing guidance could change in an instant. This means businesses and households are reluctant to embark on any significant spending plans.
At the same time, we have also seen anecdotal evidence of businesses planning for at least a partial wind down in August, to allow workers and management to take some time off before resuming work in earnest in September. This implies that we could see a contraction in output in 2020 of between 10% and 13%, which is higher than we anticipated in our June Outlook. The threat of reinfection, capacity constraints imposed by social distancing, and the erosion of consumer confidence pushing households to hold back consumption, will hold back economic growth after the first easy wins of re-opening have been exhausted.
A recovery should hopefully be in train from 2021. The more benign scenario, where the vaccine is approved in January and enough people are vaccinated so restrictions can be lifted at the end of April, could see a potential growth of around 10% in 2021.
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