Q1 2021 could see GDP growth contract by 2.6% after an estimated growth of 1.5% in Q4 2020.
While the current national lockdown could see output fall by 2.6% in Q1 2021, following an estimated growth of 1.5% in Q4 2020, the impact is expected to be significantly milder than seen at the start of the pandemic, with a subsequent recovery helped by robust consumer spending in Q2 and growth picking up again in autumn, according to KPMG’s latest Economic Outlook.
KPMG’s main scenario assumes that the roll out of the vaccines reaches all vulnerable groups by April, heralding a gradual easing of social restrictions with a return to normal by the autumn. This could see GDP grow by 4.2% in 2021 and the economy return to pre-Covid level by the first quarter of 2023.
The outlook for this year is largely dependent on progress in combating the pandemic, with the length and severity of social distancing restrictions key to the growth outlook. Uncertainty about progress could see growth in 2021 oscillate between 5.6% in KPMG’s upside scenario and 2.2% in its downside one. Also, while the UK managed to secure a deal with the EU, avoiding significant disruptions to trade, the realities of the new trading relation will seep growth away from the economy at least for a while.
Yael Selfin, Chief Economist at KPMG UK, commented on the report: “The new year saw a setback in the fight against the COVID-19 pandemic, with a third nationwide lockdown likely to see the economy contract slightly in the first quarter of this year, albeit to a much milder extent than the fall seen at the beginning of the pandemic.
“Even though we expect the lockdown to last until the end of March, more businesses are expected to be operating this time and many have now adapted successfully to remote working and are managing to grow their output despite the restrictions.”
Table 1. KPMG’s January forecasts for the UK economy (main scenario)
|Base interest rate||0.1||0.1||0.9|
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.
Inflation and interest rates: mostly below target
Better economic performance, the roll out of vaccines already underway, and low inflation mean that the Bank of England is unlikely to resort to negative interest rates in this crisis with rates staying just above zero for some time.
The analysis assumes the gradual lifting of restrictions over the summer will see inflation remain around 1.7% from the middle of this year and into 2022 with the prospects of a rate rise in the distant horizon only.
Public sector finances: spend now, pay later
Tension about the length of government support schemes will rise as the economy recovers and public finances continue to deteriorate. Despite slightly better estimates of the deficit this year, debt as proportion of GDP could reach £2.7tn by fiscal year 2023-24 and the Chancellor will be under pressure to rein in spending and raise revenue through taxes. One way to improve public finances is by removing all social distancing restrictions as early as possible hence a quick roll out of the vaccine is central to improving them.
Yael Selfin, Chief Economist at KPMG UK, concludes: “While we can hopefully see the light at the end of the tunnel when it comes to the Covid-19 pandemic, there are further challenges ahead for the UK economy.
“Investment will need to pick up and Brexit frictions smoothed to enable the economy’s growth potential to rise, while at the same time the hole in public finances will need to be addressed. So a lot to do post-Covid with not many resources at the government’s disposal.”
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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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