Light at the end of the tunnel

With Hywel Ball, UK Chair and UK&I Regional Managing Partner at EY

With the positive news on vaccines, we are increasingly hopeful that we could be closer to the end than the beginning of the pandemic. Financial markets certainly believe so, with a significant rise in indices across the globe in the last couple of weeks.

However, the recent positive news comes after a deterioration in the outlook since the EY ITEM Club Autumn Forecast 2020 which was published in October. With the UK, like several other large economies, currently in a period of greater restriction on economic activity, EY ITEM Club has revised its year-end UK GDP forecasts down to a contraction of 11.6% compared to its forecast of a 10.1% contraction in October.

… things will get worse before they get better …

EY ITEM Club believes the impact in Q4 2020 from the national lockdown in England and other major restrictive measures should be markedly less than occurred in April, and overall in Q2 2020, following the March restrictions. The curbs on activity this time around are less severe, with schools, colleges and universities remaining open. Additionally, some lessons have been learned and experience gained in keeping activity going during the lockdown. Nevertheless, the downgrade reflects an expectation of a contraction of around 4% quarter-on-quarter (q/q) in Q4. Despite an improved medium-term outlook, the next few months will remain challenging.

And uncertainty remains a feature of life. In addition to no clarity on the timing and pace of the roll-out of the vaccine, the negotiations on a Brexit trade deal with the EU remain unresolved. The forecast assumes there will be a limited deal agreed, but there is clearly a downside risk that this will not happen.

… but a realistic prospect of an upside …

However, while the roll-out of the vaccine remains uncertain, sentiment may well recover before the roll-out is anywhere near complete. Vaccinating front-line workers and the vulnerable will both increase the capacity of the health care system and reduce the burden on families. As case numbers and deaths fall, confidence is likely to return, and output could benefit faster than the current forecast assumes. For now, EY ITEM Club expects the UK to grow by 6.2% in 2021.

… that may be better than we thought …

On a positive note, there are signs that we might emerge from the pandemic with less permanent scarring of the economy than we previously thought:

• Firstly, thankfully, the surge in unemployment has yet to materialise and the extension of the furlough scheme will provide further help. With migration data suggesting 700,000 to 800,000 foreign workers may have left the UK this year, there may be less competition for places when the economy recovers, helping reduce any adverse shock.
• Although business investment has fallen off a cliff, our client discussions provide strong anecdotal evidence of productivity improvements. Certainly, the efforts of the logistics and transport and health sectors ought to lead to future potential gains in productivity once demand starts to recover. If this feeds through into profits, then business investment may return faster than current sentiment implies.
• Clearly, sectors such as hospitality will face a challenge restarting, and demand is likely to be permanently lower in some city centres. However, the bounce back over the summer and the recent surge in online holiday searches are reminders of the need to be sceptical about relying too heavily on consumer surveys. CFOs are certain to try and slow the rise in business travel spend but consumer demand may surprise on the upside next year.
• Finally, if Government follows through on its commitment to boost investment spending to support its objectives of levelling up and moving to net zero, with interest rates remaining low we could have all sectors of the economy firing on all cylinders earlier than we currently expect.

… so be prepared.

COVID-19 continues to have a devastating impact on the lives and livelihoods of many families. While there are signs of hope, challenges lie ahead and it’s important that businesses start firming up their post-pandemic plans as the shape of the future economy becomes clearer. Close monitoring of developments in the health sector, the economy and Government policy is as important as it has been throughout 2020 but, as well as managing the immediate challenge, businesses should be readying themselves for what comes next.