Outlook marred by uncertainty and risks of hard Brexit, says KPMG

FacebooktwitterredditpinterestlinkedinmailFacebooktwitterredditpinterestlinkedinmail

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)

 201920202021
GDP1.4-7.22.8
Consumer spending1.1-9.51.3
Investment0.6-12.61.8
Unemployment rate3.88.611.0
Inflation1.81.00.8
Base interest rate0.750.100.10

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.”