The continuing impact of the COVID-19 virus is expected to see the UK economy contract by 10.3% in 2020.
The continuing impact of the COVID-19 virus is expected to see the UK economy contract by 10.3% in 2020, but a second lockdown of even just four weeks could exacerbate the drop in GDP to -12.6%, according to KPMG UK’s latest quarterly Economic Outlook.
However, given advancements in vaccine developments for COVID-19, there is a high chance that the pandemic will be overcome by mid-2021. Growth is expected to pick up to 8.4% next year if a vaccine is rolled out by April with the economy reaching pre-COVID level by early 2023.
Three alternative scenarios were considered for the timing of the recovery, based on potential different dates of the vaccine being approved and then rolled out in the UK – and a Brexit deal outcome. KPMG’s base scenario assumes that a vaccine will be approved in January, immediately reducing uncertainty, and rolled out by the end of April enabling all social distancing measures to be removed. It also assumes the UK and the EU reach an agreement on their future relationship before the end of the transition period this year. But even just a three-month delay in rolling out the vaccine could see GDP growth fall to 7.1% in 2021, instead of 8.4%.
A range of risks is also considered, where the outcome will impact potential growth. They include a no deal with the EU next year and limited progress in eradicating the pandemic. If these play out, growth in 2021 could fluctuate by between 8.4% and 4% at the least.
Yael Selfin, Chief Economist at KPMG UK, commented on the report: “While it feels like the worst of the COVID-induced economic crisis is behind us, there are still many challenges.
“There could be a second wave of infection this year, although we expect any future lockdown to be less severe – and the timing and speed of the economic recovery will be impacted both by vaccine developments and Brexit outcomes.”
Table 1. KPMG’s September forecasts for the UK economy (base scenario)
|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 continues to take its toll on employment
The government’s Job Retention Scheme (JRS), has protected the UK’s workforce and has been effective in keeping unemployment down during the peak of the crisis. But as the scheme unwinds and the economy continues to operate below capacity, unemployment could rise to over 9% in Q4 2020. The unemployment rate is expected to average 5.9% this year and 8.2% in 2021.
Unemployment is expected to fall very gradually because of the intertwining of structural changes and the economic shock created by the pandemic. Jobs in some sectors will become obsolete and will require concrete efforts by government to upskill workers for new jobs in new areas of the economy. Over time this could help accelerate the recovery in jobs and revitalise UK’s productivity growth.
Yael Selfin, Chief Economist at KPMG UK, concludes: “The pandemic has had a more significant impact on sectors that are more labour-intensive – and the recession will generate permanent change in some of them, meaning there will be a bigger effect on the labour market than the fall in GDP would imply.
“The government has an important role to play. Not just in continuing to provide short-term support to the economy but in readying the UK for a more productive future, including upskilling a significant part of the workforce and upgrading the UK’s telecommunications network. If we get this right, we could come out of this crisis with a better economy.”
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Notes to Editors
*The forecasts assume that it will take 4 months for a vaccine to be rolled out after approval.
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
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