The end of the summer

All aboard the rollercoaster …

More than half a year since coronavirus (COVID-19) hit the UK, the levels of volatility and uncertainty in the economy are still very high. Whenever it seems that a trend is becoming established, something happens to change the outlook once again. Unsurprisingly, long-term forecasting is almost impossible, but even day-to-day predictions are far from reliable — businesses are being tested like never before.

The EY ITEM Club Autumn Forecast 2020 illustrates the problem perfectly. The economy performed better than the 12% expected in the July forecast, growing at 17% over the three summer months. The further easing of lockdown restrictions and the boost to the housing market from the stamp duty holiday played their part, and the Eat Out to Help Out Scheme drove a significant amount of incremental spending.

However, just as the green shoots of higher confidence among businesses and consumers started to appear, a surge in new cases of COVID-19 plunged many parts of the country back into lockdown. It does appear that encouraging people to go back to work and to dine out has contributed to an upturn in the number of confirmed cases.

… so hold on tight …

The return of restrictions at a local level adds to the challenges facing the economy in the final quarter of 2020 as the Coronavirus Job Retention Scheme (CJRS) is wound down, and doubts over the likelihood of a UK–EU free trade agreement (FTA) cast a shadow over business investment. As a result, the EY ITEM Club expects the economy to slow significantly during the autumn, with growth of only 1% over the final quarter of 2020.

The 2020 year-end forecast of a 10% fall in GDP appears better on the surface than the 11.5% fall forecast by EY ITEM Club in the summer, but the improvement derives from the faster growth in the second quarter. Although the Chancellor’s Winter Statement provided around £5b of additional support for the economy, all the signs are that the next one or two quarters will be very challenging unless there is a significant medical breakthrough — EY ITEM Club are assuming a vaccine will not be widely available in the first half of 2021.

EY ITEM Club assume a gradual return to growth in 2021 with GDP increasing by 6%. Growth is then forecast to slow to 2.9% in 2022 meaning the economy will not return to its Q4 2019 size until the second half of 2023. It is going to be a long, slow recovery.

… identify and manage risks …

While a vaccine could provide a positive boost, risks are weighted to the downside. A more significant outbreak of the virus during the winter months could plunge us back into lockdown with major implications for the economy. Even if we avoid a second wave, failing to achieve an FTA with the EU is another significant risk. EY ITEM Club forecast that a failure to agree even a bare-bones FTA would reduce GDP growth in 2021 by one-fifth to 4.8% over the year, and to 2.6% rather than 2.9% in 2022. Businesses should ensure that they have contingency plans in case things either improve or deteriorate — flexibility is very important in such a volatile environment.

… watch the labour market …

Businesses have borne the brunt of the shock to date, but pressure is now building on consumers via the labour market. The CJRS is coming to an end and the newly announced Job Support Scheme (JSS) is much less generous. With employers having to contribute a higher share of the payments to employees, the scheme is primarily likely to appeal to companies that want to retain their skilled employees such as in manufacturing or high value-added services. In sectors such as hospitality and retail where output is more directly linked to hours worked, the JSS does not appear likely to be heavily adopted. This will probably lead to a significant increase in unemployment and a corresponding drag on consumer spending as people see their incomes fall. More than ever, managing talent will be critically important.

… and track government policy

The only certainty is that everything is uncertain. This is a very difficult time to be making decisions, especially those with longer horizons such as capital investment. As yet, the UK Government has not communicated any detail of its plan for economic recovery. We know that ‘levelling up’ and moving towards net zero are priorities, but how these will be achieved remains unclear.

Nevertheless, there is little doubt that Government will play a more significant role in the economy than has been the case over the last three or four decades. While this could create challenges for businesses trying to anticipate policy moves, there will also be opportunities. Difficult as it is to look beyond the immediate challenges, now is the time to begin to think through what opportunities there might be to work with Government to help them achieve their objectives while creating commercial success.