01 July - The UK economy has contracted less than expected during the third lockdown in Q1 2021 and could be on course to recover to pre-pandemic levels by the start of 2022 - one year earlier than previously expected, according to the new economic analysis released by PwC.
The full edition of the June 2021 Economic Outlook has found that the UK economy contracted by 1.5% in the first quarter of 2021, which is 18 percentage points lower than Q2 in 2020. In April the UK recorded monthly growth of 2.3% for the third month in a row meaning that 83% of the growth lost from the first lockdown has now been recovered. This upward trend is expected to continue through May, June and July.
In acknowledgement of the uncertainties surrounding future variants of Covid-19, PwC has prepared two projections for a ‘quick’ and ‘slow’ recovery. In the ‘quick’ recovery the UK could report growth of 7.2% in 2021 and return to pre-pandemic levels by the end of Q1 in 2022; in the slow recovery projection growth could be 6.5% and recover fully by the end of 2022.
Jonathan Gillham, chief economist at PwC says,
‘The UK economy has proven more resilient than expected during the third lockdown and we have been able to upgrade our predictions for recovery. In particular, the success of the Government’s vaccination programme and size of its economic support has raised hopes that consumers will start to spend an estimated £180bn worth of savings and release pent-up demand in the economy.
‘The four week delay to ending lockdown restrictions announced on 14 June is likely to moderate potential GDP growth for the next month, but is unlikely to hamper overall recovery since many parts of the economy have already reopened. However, concern over further restrictions caused by new variants as well as the winding down of the furlough scheme from September may affect business and consumer confidence in the short to medium term.’
An uneven recovery across sectors
PwC expects most sectors to return to growth in 2021, albeit at uneven rates. At the top end, the health and social sector, construction and education are likely to lead growth in 2021, growing between 9%-23% under our ‘quick recovery’ scenario and between 7%-19% under the ‘slow recovery’ scenario.
Already surpassing their pre-crisis levels, growth in construction and education sectors are expected to be supported further by growing demand for larger properties post-lockdown, home upgrades and education support to help school children catch up from their lost learning last year.
But lingering effects from the pandemic will drag on growth in the hospitality and entertainment sectors. Despite expected strong growth, both sectors are likely to remain 34%-40% and 23%-26% below their pre-crisis levels by the end of 2022.
Hoa Duong, economist at PwC, says,
‘Continued restrictions or social distancing requirements, spending pattern changes and consumer caution could weigh down on recovery of these sectors, which are likely to remain subdued during 2021. Going into next year, we expect a large vaccinated UK population, supported by behaviour changes post-pandemic, to assist the recovery of the sectors, with the hospitality sector to grow between 25%-31% in 2022, and entertainment output to increase by 8%-10% under our two scenarios.’
Unemployment falls but inflation rises
The health of the labour market appears to be improving. The headline LFS unemployment rate fell to 4.7% in the three months to April, down from 5% in the previous quarter. It is expected the unemployment rate will average around 5% in 2021, rising to a high of around 5.5%.
Hannah Audino, economist at PwC says,
‘There is still a long road to recovery, as payroll employees remain 553,000 below pre-pandemic levels. While we are unlikely to experience a “big bang” of unemployment, we are also unlikely to see a completely smooth transition of all furloughed workers back to their old jobs.’
Inflation is expected to peak between 2.5% and 2.8% in Q4 this year, and then to gradually return to target from 2022 onwards. In the short term, inflation is unlikely to follow a smooth path, with multiple and opposing factors feeding irregularly into the monthly data.
‘In general, inflation is likely to follow an upwards trend as the economy continues to reopen. It is expected that the Bank of England will continue to prioritise supporting the recovery with low interest rates, over reducing inflation,’ Audino added.
Uncertainty over future of post-Brexit trade
Total UK trade with EU countries was 27% lower in the first four months of this year compared to the same period in 2019. This is a much larger fall compared to the 13% drop in trade with non-EU countries, meaning total imports and exports with EU countries has been lagging behind non-EU countries, reversing pre-pandemic and pre-Brexit trends.
Jonathan Gillham says,
‘The data illustrates the challenges businesses are facing adapting to new trading arrangements, but it is too early to draw conclusions given the volatility of the global economy.
‘There is a risk, however, that these trends may become structural as a result of long-term trade barriers or if new trading patterns become established, resulting in a loss of existing trade relationships.’