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Outlook marred by uncertainty and risks of hard Brexit

Outlook marred by uncertainty and risks of hard Brexit

Yael Selfin, Chief Economist at KPMG UK, commented on the report Outlook marred by uncertainty and risks of hard Brexit.

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  • KPMG forecasts UK GDP decline of 7.2% for 2020, with GDP growth of merely 2.8% in 2021 assuming a vaccine is available by July 2021.
  • Significant spike in unemployment is expected in the second half of 2020 as the Job Retention Scheme unwinds.
  • Recovery in 2021 could be hampered by Brexit and lack of breakthrough on pandemic.  

Despite some encouraging recent data, the continuing impact of the COVID-19 virus is expected to see the UK economy contract by 7.2% in 2020, with the economy unlikely to be able to fully restart until a vaccine or effective treatments for the virus are available, according to KPMG UK’s latest quarterly Economic Outlook.

Four alternative scenarios were considered for the timing of the recovery, based on potential different dates of the pandemic being eradicated in the UK. KPMG’s main one assumes that a vaccine will be available from July 2021, enabling all social distancing measures to be removed and pandemic-related uncertainty to dissipate by the following month. In this case, with lockdown restrictions lifted in the summer, activities could resume more fully in the second half of 2020. However, the UK could start 2021 with another negative shock to the economy due to the end of the transition period with the EU, with GDP contracting at least during the first quarter of the year. This would see UK GDP recover only modestly next year, rising by 2.8%.

Yael Selfin, Chief Economist at KPMG UK, commented on the report: “These are difficult times. The UK economy is amidst the most severe economic downturn in modern times, with no clear end to the current crisis. Considerable uncertainty remains around the timing of a vaccine which will impact the timing and speed of the recovery, as well as the extent of any permanent damage to the economy.

“That said, there are some tentative signs of a pick-up in activity and we expect to see a partial recovery in the second half of this year as the gradual easing of restrictions brings light to more corners of the economy. However, a full resumption of activity is unlikely until a vaccine or effective treatments for COVID-19 is found.”

Table 1. KPMG’s June forecasts for the UK economy (main scenario) 

  2019 2020 2021

GDP

1.4

-7.2

2.8

Consumer spending

1.1

-9.5

1.3

Investment

0.6

-12.6

1.8

Unemployment rate

3.8

8.6

11.0

Inflation

1.8

1.0

0.8

Base interest rate

0.75

0.10

0.10


Source: ONS, KPMG forecasts. Average % change on previous calendar year except for unemployment rate, which is average annual rate. Investment represents Gross Fixed Capital Formation, inflation measure used is the CPI and unemployment measure is LFS. Interest rate represents level at the end of calendar year.

Crisis takes its toll on employment

Despite heavy support from the government’s Job Retention Scheme (JRS), the current crisis is having a material impact on the labour market. Lockdown restrictions imposed to combat the pandemic have created a weaker economic environment which could see the unemployment rate averaging 8.6% this year and 11% in 2021.

While the JRS could help shield millions of workers from redundancy, further job losses during 2020 may be inevitable as the economy adjusts to the new economic environment. In addition, it is likely that the scheme will end before employers can absorb all furloughed workers, triggering a fresh spike in unemployment later this year.

Brexit risk to outlook

Economic recovery next year could be hampered by Brexit. KPMG’s forecasts assume that a deal will be reached by the end of this year and this will enable the UK to trade with the EU with no tariffs or quotas and will cover some services. However, even without tariffs, some additional trade friction may not be avoided due to the need for customs and other inspections. Therefore, exports are expected to fall back at the start of next year despite some recovery in many of the UK’s export markets. An end to the transition period with no deal, or with a more limited trade deal, would see a much weaker economic recovery next year.

Yael Selfin, Chief Economist at KPMG UK, concludes: “Uncertainty about the course of the pandemic and the nature of future relationships with the EU is making it harder for businesses to plan and operate. Government should aim to provide as much clarity as possible and offer more flexible support for businesses in the meantime.  

“The pandemic will leave a lasting mark on the economy. We all need to adjust to a new future, not just to the current recession, and make the most of the hand we’ve been dealt to build something better for us all. That could be doing more to help the environment, investing more in our essential workers, or matching our universities with local businesses to improve regional productivity. If we get this right, the future may well be a lot brighter.”

-ENDS-

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Gill Carson, KPMG Corporate Communications

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KPMG Press Office: +44 (0)207 694 8773

Email: gill.carson@kpmg.co.uk

About the research

The forecasts were produced by the KPMG macroeconomics team using a suite of external and in-house models capturing the main inter-relationships in the UK economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly. For more details, please see the full “Economic Outlook” at: www.kpmg.com/uk/economicoutlook

About KPMG

KPMG LLP, a UK limited liability partnership, operates from 21 offices across the UK with approximately 17,600 partners and staff.  The UK firm recorded a revenue of £2.40 billion in the year ended 30 September 2019. KPMG is a global network of professional firms providing Audit, Tax, Legal and Advisory services. It operates in 154 countries and has 200,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.  Each KPMG firm is a legally distinct and separate entity and describes itself as such.

© 2020 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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