The UK economy might not reach its pre Covid level until 2024 according to a report out this morning.
The EY Item Club expects a record recession as the economy contracts by 11.5 per cent this year, downgraded from the 8.0% it predicted in June and from 6.8% in April.
With hopes of a V-shaped recovery fading, the UK economy is now not expected to match its fourth quarter 2019 size until late-2024 – much later than the early-2023 prediction from the June forecast.
Additionally,they now expects this year’s second quarter contraction to come in at a record 20%,a sizeable downgrade from the 15% contraction predicted last month.
They also forecast that the unemployment rate will rise to around 9.0% in late-2020 and early-2021, up from 3.9% in the months to May.
This is also expected to contribute to more subdued levels of consumer spending. The EY ITEM Club forecasts consumer spending to fall 11.6% over the course of 2020, before rising 6.6% in 2021 as the labour market starts to recover.
Howard Archer says: “The labour market’s performance is key to the economy’s prospects over both the short term and further out. Job losses and poor real wage growth are expected to hold back consumer spending, although the Chancellor’s instinct to focus on jobs in his Summer Statement should provide some support. It is possible that the Chancellor will look to provide further help for the labour market in this autumn’s budget.”
Positively, growth prospects for 2021 have been raised slightly, with the economy now forecast to grow 6.5% over the year, up from the 5.6% predicted in June’s forecast, and up from 4.5% in April’s forecast. The EY ITEM Club expects the economy to return to growth in the third quarter of this year with expansion around 12% quarter-on-quarter ).
The downgrades have been largely driven by weaker-than-expected growth of just 1.8% in May, with the services sector particularly hampered by COVID-19 even as restrictions ease.
Howard Archer, chief economic advisor to the EY ITEM Club, comments: “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.”