A long road ahead

We are in unprecedented times …

Extraordinary times call for extraordinary measures. This is the first time to my knowledge that the EY ITEM Club has produced an interim forecast in the gap between two quarterly updates. Even during the global financial crisis and the post-Brexit referendum period, the outlook was still sufficiently stable to allow us to wait for regular updates.

The current situation — caused by the coronavirus (COVID-19) pandemic — is very different. As the EY ITEM Club demonstrates in its report, the scale of the shock and the level of uncertainty are both unprecedented. Moreover, the situation has changed so quickly that we are still waiting for data to understand the extent of the fall in UK economic activity to date, even before developing forecasts.

… with the situation changing daily …

In the six weeks or so since its Spring Forecast 2020, the EY ITEM Club has increased its expected fall in UK GDP in 2020 from 6.8% to 8% and upped its estimated fall in GDP in the second quarter from 13% to 15%. It is not alone — forecasts are being regularly revised as the data emerges. As quoted in the EY ITEM Club report, Public Sector Net Borrowing excluding banks (PSNB ex) is likely to be at least £320b (15.6% of GDP) in 2020/21, whereas the Office for Budget Responsibility had forecast a total for 2020/21 of £54.8b in the Budget on 11 March.

… but significant uncertainty remains …

With the lockdown restrictions on behaviour being relaxed in the UK and daily deaths and case numbers apparently on a downward trend, the indicators suggest that economic activity is starting to pick up gradually. However, the levels are way below those we would normally expect. Even though its forecast of a fall of 8% in UK GDP signals a major fall in UK output, EY ITEM Club identifies a number of downside risks to its forecast including the possibility of a second wave outbreak of coronavirus, a possible reluctance of consumers to engage in previous levels of activity, and the risk that the economy suffers permanent damage during the lockdown. In addition, the risk of no trade deal being agreed between the EU and the UK remains a possibility.

… meaning planning must be flexible …

This is a challenging environment for businesses as forecasting is extremely difficult. The variability of outcomes is such that scenario-based planning is required to understand the range of potential impacts. As the discussion in the EY ITEM Club report identifies, the drivers of the scenarios include: the spread of the virus; the policy responses by Government both in terms of restrictions on activity and the support provided to the economy; and consumer and corporate responses. These drivers can be used to develop economic scenarios that in turn can be deployed to help identify the operational consequences of different outcomes as the basis for preparing response strategies.

The scenario development must be sufficiently detailed to reflect the high degree of variability we are observing in the economy. Individual sectors are being impacted very differently — food retail is performing strongly while clothing sales have been under pressure — and there will be significant variations in performance by geography, both within the UK and internationally, reflecting different medical and economic situations across places.

… supported by ongoing vigilance

This is a difficult economy to understand, as traditional relationships do not have the productive power that they offer in stable situations. As well as monitoring the traditional economic and financial data more closely than normal, it is also important to consider how new sources of information might help shed light on the outlook. For example, travel data is being used to identify how people may be returning to normal patterns of activity and, as economies reopen, indicators such as cinema ticket sales and restaurant bookings are being scrutinised for insights into consumer confidence.

The economy will remain challenging for some time, but the better the understanding a business can develop, the greater the likelihood of being able to respond effectively to the challenges and to exploit opportunities as they emerge. We will continue to provide as much support as we can with regular updates on the EY ITEM Club outlook.