February 2021
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.
The UK economy grew by 1% in the fourth quarter of 2020. The November monthly GDP estimate surprised to the upside, with a monthly growth of -2.3% compared to consensus projections of -5%. Monthly growth in December stood at 1.2%, despite the local tiered system keeping much of the country in lockdown. This reflects how business and people are continuing to adapt to restrictions.
However, there is still some way to go before recovery. The UK economy remains 8.6% smaller than its size at the end of 2019, which is equivalent to every person in the UK being roughly £3,000 worse off than they were in 2019 on a net basis.
The labour market remains under pressure, but there continue to be some tentative positive signs. In the three months to December, redundancies set a new record high yet again - reaching a peak of 395,000. In addition, since February 2020, the number of payroll employees has now fallen by 827,000. These figures reflect the tightening of restrictions in Q4. However, there were some preliminary positive signs as well. Despite the tightening of restrictions, economic inactivity has stabilised, while vacancies and total hours worked continued to gradually recover over the quarter.
Our projection of annual UK GDP growth for 2021 is between 3.4% and 4.6%. Under the ‘quick recovery’ scenario, we expect economic output to remain 3.1% below pre-pandemic levels by the end of the year. We expect the economy to contract by 2.6% in January 2021, as predicted by our nowcasting model, before gradually returning to growth of 0.4% and 1.1% in February and March 2021, respectively.
Under our ‘slow recovery’ and ‘quick recovery’ scenarios, the expected annual GDP growth rates range from around 4.4% to 5.6% in 2022 before slowing down to about 1.2% and 1.7% in 2023. Under the ‘quick recovery’ scenario we expect 2022 to be an important year, in which most of the output loss caused by the first national lockdown would be recovered.
With around £125bn involuntarily-accumulated savings, household spending is expected to drive the UK’s recovery once restrictions are lifted, but the extent to which this pent up demand is released could be tempered by job uncertainty and caution regarding going out because of COVID-19. Government spending will start to wind down as various government support schemes, such as the furlough scheme, come to an end, but output in healthcare and education will be strong in 2021. Business investment will be cautious this year, due to continued uncertainty and weak balance sheets over the past year. We also anticipate sluggish growth in UK-EU trading in the short-term as businesses take time to adapt to the new trading environment, but a resumption of economic activity and spending across the world will boost trade.
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 with regards to new variants. Additional key risks include the duration of the current 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.
UK output across the regions is estimated to have contracted by between 8.9% and 10.5% in 2020. The loss of output in Wales, for example, is equivalent to each household being roughly £5,000 worse off than they were in 2019 on a net basis, compared to £12,000 in London.
We expect growth in most regions to accelerate in 2021, with annual GVA growth ranging from 2.5%-6.2% under our ‘quick recovery’ and between 1.7%-4.1% under the ‘slow recovery’ scenario.
The Southeast and London are expected to lead growth in 2021, with annual GVA growth of around 4% - 6% under our two scenarios. While being more densely populated, these regions are more resilient mainly because of the prominence of sectors like ICT and professional services, while relying less on manufacturing where working from home is not always possible. London’s younger and more active population also contributes significantly to its resilience from both an economic and health point of view.
Scotland and Wales are among those which are likely to recover at a similar rate to the UK average, while additional non-tariff barriers under the new UK-EU trading arrangement is expected to put pressure on Northern Ireland’s growth.
According to our projections, on average the UK is expected to claw back between 30% and 42% of the loss in output caused by the pandemic in 2021. This is equivalent to between approximately £2,100 and £2,900 per household. However, aggregate levels mask a more diverse regional picture. Under the ‘quick recovery’ scenario, London and the South East are expected to recover about 62% and 54% of lost output in 2020, respectively, compared to just 22% and 27% in the North East and Yorkshire and the Humber. This has significant implications for the ‘levelling up’ agenda.
Consumer price inflation remained subdued at the start of the year. The headline 12-month CPI rate stood at 0.7% in January, a small rise from 0.6% in December.
We expect inflation to remain low in the first quarter of the year, and then to pick up towards the Bank of England’s 2% target over the course of the year. This will occur as the effects of spare capacity, weak demand, and temporary COVID-related factors unwind as the pandemic is brought under control.
Consumers will likely see an increase in the price of things like petrol, utilities and services this year, as global demand for oil picks up and demand recovers for the service sectors most impacted by restrictions, along with the VAT cut for hospitality coming to an end in April. On the other hand, rising unemployment - expected with the end of the furlough scheme in April - will increase spare capacity in the labour market and subdue wage growth, putting downward pressure on prices.
Chief Economist and Director of Econometrics and Economic Modelling, PwC United Kingdom
Tel: +44 (0)7714 567297
