GDP expected to shrink by between 11% and 12% in 2020 - but will return to growth in 2021

  • Most sectors will return to growth in 2021, including hard-hit sectors like retail and hospitality 

  • There is likely to be a sharp increase in the 2020/21 budget deficit to about £380bn-£430bn, but much of this rise will reverse in 2021/22

  • Regions may recover at different rates depending on their sectoral mix

  • Economic growth may be further buoyed next year if an effective vaccine is found

UK GDP is expected to contract by between 11% and 12% in 2020 before returning to growth of around 10% or 4% in 2021, according to new research published today by PwC. The prospects for growth in 2021 will depend on the spread of the virus and the measures needed to control it -  the UK economy may recover to pre-lockdown levels by the end of 2021 if the virus remains relatively contained but, should further outbreaks and a national lockdown ensue, recovery may take until mid 2023.

Most sectors will return to growth in 2021, with hard hit sectors like retail and hospitality also doing so, albeit from a low base in 2020. However, there may be regional variation when it comes to recovery from the economic crisis caused by COVID-19, largely due to the sectoral mix across regions. Regions which have seen targeted lockdown measures are more likely to experience bigger economic impacts, whereas London may recover more quickly as it was less impacted by the drop in output in 2020.

Jing Teow, senior economist at PwC, said:

“It’s not surprising the UK economy is expected to shrink significantly given the circumstances - the question is how quickly it can recover and the likelihood of scarring. For workers and households, there are likely to be long term impacts on employment and earnings.  Uncertainty over the economic outlook and job security, as well as the desire for more precautionary savings, mean that it will take time to recover to normality, even once economies are fully open, although a recovery in 2021 could be buoyed if there is a vaccine. The Government’s new measures to support skills for those out of work are sorts of interventions that may limit longer-term scarring on employment.

“For businesses, too, uncertainty over the outlook, potential overcapacity - especially in structurally challenged sectors such as air travel and tourism - as well as higher debt levels as a result of necessary crisis survival measures, could impact innovation and future productivity growth. However, with more money available once recovery has been achieved, a deals-led recovery is likely, with investment opportunities available for savvy businesses.”

Inflation is expected to pick up in 2021 in line with the economic recovery, with a rise in consumer demand and wages feeding into an increase in domestic price pressures. However, consumer confidence is dependent on peoples’ perception of health risks, which in turn influences the level of household spending. A significant rise in coronavirus cases could make consumers less willing to spend or more likely to hold onto precautionary savings. 

There will be a sharp increase in the 2020/21 budget deficit to around £380bn to £430bn, or around 19% to 22% of GDP, compared to just 10% in 2009/10 after the financial crisis. However, as the economy starts to recover in 2021/22, much of this rise will reverse, meaning a smaller deficit of around 6% to 12% of GDP. The extent to which the deficit improves will depend on whether any further fiscal stimulus measures are introduced, although with the deficit still above the 3% of GDP ceiling implied by current fiscal rules, there will need to be some longer-term fiscal tightening once full recovery has been achieved.

Jing Teow added:

“The focus of fiscal policy at this stage is to support the economic recovery. Although the latest measures announced by the Chancellor in the Winter Economic Plan are much more targeted than the ‘rescue’ package announced earlier in the year, there may need to be further fiscal measures, depending on the path of the recovery and the support required by businesses and workers in the face of any additional lockdowns.” 

                                                              ENDS

 

Notes to editors

To capture the range of likely outcomes following the lifting of lockdown restrictions, we designed two illustrative COVID-19 scenarios that capture the extent to which the outbreak is controlled and managed.

Under the “contained spread” scenario - we anticipate that R increases slightly above one in the autumn, resulting in a gradual but marked rise in the number of new reported cases as winter approaches. This could see the reimposition of lockdowns at the local level, but this is largely sufficient to prevent worse outbreaks of the virus. The successful implementation of NPIs including testing, contact tracing, quarantine and physical distancing would prevent exponential growth in the number of new cases. Warmer weather in the spring would see R falling below one, resulting in the decline in cases over next year.

Under the “further outbreak” scenario - we expect to see a more significant rise in infections leading to a number of simultaneous outbreaks in various parts of the country, possibly at levels close to the May peak, which precipitates the return of a national-level lockdown. Both scenarios assume that a vaccine becomes available in the middle of 2021.

The full UK Economic Update will be published on 1 October and can be found here

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