The UK’s economic recovery from the Covid-19 crisis could take 18 months longer than expected with hopes of a V-shaped recovery fading fast, according to a leading economic forecaster.
Britain’s economic output is not expected to return to its 2019 level until the end of 2024, the EY Item Club said on Monday in its latest projections on the health of the UK economy. It had previously expected GDP to match fourth-quarter 2019 size in early 2023.
EY is predicting that Britain’s economy will shrink by a record 20% in the April to June quarter, rather than 15% as it forecast last month. The economy expected to return to growth in the third quarter, with a quarterly expansion of around 12%.
The economists also downgraded their 2020 forecast for the UK to an 11.5% contraction, worse than the 8% decline forecast in June. It has pencilled in a bounce back in growth of 6.5% next year, up from 5.6% predicted in June.
However, the UK is only slowly emerging from the Covid-19 lockdown, with gyms and swimming pools reopening at the weekend. Non-essential shops were allowed to re-open from 15 June and pubs, restaurants and hairdressers from 4 July.
The downgrades have been largely driven by weaker-than-expected growth of just 1.8% in May, according to official figures. The services sector has been particularly damaged by the coronavirus crisis even as restrictions eased.
Howard Archer, chief economic advisor to the EY Item Club, said: “Even though lockdown restrictions are easing, consumer caution has been much more pronounced than expected. We believe that consumer confidence is one of three key factors likely to weigh on the UK economy over the rest of the year, alongside the impact of rising unemployment and low levels of business investment.
“The UK economy may be past its low point but it is looking increasingly likely that the climb back is going to be a lot longer than expected. May’s growth undershot even the lowest forecasts. By the middle of this year, the economy was a fifth smaller than it was at the start. Such a fall creates more room for rapid growth later, but it will be from a much lower base.”
EY expects the unemployment rate to more than double to 9% at the turn of the year, from 3.9% in the three months to May. This will contribute to weak levels of consumer spending, forecast to fall by 11.6% this year before rising by 6.6% in 2021 as the jobs market starts to recover.
“The labour market’s performance is key to the economy’s prospects over both the short term and further out,” Archer said. “Job losses and poor real wage growth are expected to hold back consumer spending … It is possible that the chancellor will look to provide further help for the labour market in this autumn’s budget.”
According to the Resolution Foundation thinktank, British households have suffered the biggest hit to their finances since the oil crisis of the mid-1970s, with a 4.5% drop in the average household’s income in May. The government’s job retention scheme is due to close at the end of October.
The EY Item Club expects the Bank of England to pump a further £100bn into the economy in the autumn, taking total asset purchases to £845bn – but further interest rate cuts below the current 0.1% are seen as unlikely.
Mark Gregory, EY UK’s chief economist, said: “Government measures have provided significant short-term support, but many businesses are waiting for more certainty over the economic outlook before making longer term investment decisions.
“Policies such as VAT cuts are welcome, but they aren’t a complete solution, as they don’t resolve the concerns consumers may have about going to restaurants and bars in the first place.”