PwC | UK

UK Economic Update

As well as having serious implications for people’s health and the NHS, the coronavirus (COVID-19) pandemic continues to have a significant impact on businesses and the economy. As the situation develops, we’re updating our analysis of the UK economic impact regularly to help you with your response and planning. New and updated insights will be available on a regular basis.

Key points

Recent developments in the UK economy

The UK economy is following a kinked recovery profile. Following two consecutive quarters of negative growth in the first half of the year, quarter on quarter growth in Q3 stood at 16.0%. However, following a national lockdown in England in November and the introduction of tougher Tier 4 restrictions in England, we expect the UK to end the year with quarterly growth of -3.7% for Q4.

The labour market remains under pressure. In the three months to October, redundancies set a new record high - rising by a record 217,000 on the previous quarter to 370,000. These figures reflect the tightening of COVID restrictions in October, with the introduction of the tiered local lockdown system. However, there were some tentative positive signs as well. Despite the tightening of restrictions in October, total hours worked continue to recover, increasing by 12% in the quarter. Vacancies also continue to increase. For the three months to November, there were 547,000 vacancies, representing a quarterly increase of 110,000. Although, levels do remain 32% below what we were seeing pre-pandemic.

The outlook for the UK economy

Our projection of annual UK GDP growth for 2020 is -11.0%. We expect economic output to remain 12% below pre-pandemic levels by the end of the year.

Looking forward, we have revised our projections for the UK economy. Under our ‘slow recovery’ and ‘quick recovery’ scenarios, the expected annual GDP growth rates range from around 2.2% to 4.8% in 2021, accelerating to around 5.1% to 6.3% in 2022 before slowing down to about 1.7% and 2.0% in 2023. Under the ‘quick recovery’ scenario we expect 2021 to be an important year in which most of the output loss caused by the first national lockdown would be recovered.

However, there is still significant uncertainty over the pace and the path of the recovery in 2021, including the speed of the vaccine rollout and its effectiveness in limiting the spread of the virus, especially its new variants. Additional key risks include the duration of England’s third national lockdown, the extent to which businesses adapt to new trading arrangements with the EU, the outcome of the US-UK trade negotiations, and the degree of economic scarring.

Sector impacts

We anticipate that most sectors will return to growth in 2021, including the hard-hit sectors such as accommodation and food services, as they recover from a low base in 2020.

The health sector will be boosted by the vaccine rollout, while the financial services sector could face some challenges initially in 2021 as firms adjust to losing access to EU passporting. Although better prepared, the services sector would need to brace itself for additional non-tariff measures (NTMs) and services regulations from the new year.

Outlook for inflation

We expect inflation to gradually pick up in 2021, as the economic recovery boosts demand and this feeds through to an increase in prices. We expect that inflation could average around 1.4-1.5% in 2021.

However, an uptick in COVID cases post-Christmas, combined with the end of the furlough scheme in April, could mean consumers are less willing to spend, putting downward pressure on prices. The end of the transition period with the EU, on the other hand, will likely create upward pressure on domestic prices, as the cost of imports from the EU raises prices. We expect Brexit to result in an 10% increase in food prices.

Our predictions for 2021

There could be fewer babies born in 2021 than in any year since records began.

We expect the health, social and economic effects of the pandemic to result in a ‘baby bust’, where the postponement of pregnancies during the pandemic translates into a dramatic decline in birth rates in 2021.

London’s population is expected to decline for the first time in the 21st century.

COVID-19 has fundamentally changed the way we view cities. We anticipate that in 2021, a shift away from city-living is likely to both increase the number of people moving out of the capital, and decrease the number of people moving in.

Net migration with the EU could turn negative in 2021.

We expect that within the year, the number of EU nationals who leave the UK could be more than those who settle. This will be driven by the end of the transition period, and the disproportionate impact of COVID-19 on the sectors where EU migrants are highly represented.

The UK’s unemployment rate is expected to record its largest ever quarterly increase in Q2.

Despite tentative signs of an economic recovery in 2021, we expect to see the unemployment rate jump by a record 2.5 percentage points in the second quarter, as the government’s furlough scheme comes to an end.

Over 10m people could experience food poverty of some kind.

We expect that existing inequalities will be worsened by rising food prices, which could increase by as much as 10%, as well by projected increases in unemployment.

Gender and ethnicity pay gaps are expected to increase in 2021, potentially reversing a decade of progress on the former.

We expect that the economic impact of the pandemic will be felt disproportionately by women and people from BAME backgrounds, as they are overrepresented in the sectors that have been most affected by social distancing restrictions.

One in eight cars newly registered in Great Britain are likely to be electric or hybrid.

With the transport sector accounting for a third of all carbon dioxide emissions, the UK will have to transition away from petrol and diesel cars if it is to meet its target of net zero emissions by 2050. Following years of progress, the UK has the potential to see 1 in 8 new cars be electric or hybrid in 2021.

By the end of 2021, the majority of electricity generated in the UK could be from renewable sources.

If it is to meet its net zero targets, the UK will need to transition away from fossil fuels and towards renewable energy sources. In the same year it is hosting the COP26, the UK could reach this historic milestone, showcasing its progress on the green agenda.