a snapshot of the outlook for the uk economy · a snapshot of the outlook for the uk economy....

A snapshot of the outlook for the UK economyUpdated: 29 April 2020

kpmg.com/uk/en/macroeconomics

https://home.kpmg/uk/en/home/services/advisory/strategy/macroeconomic-strategy.html

2ted with KPMG © 2020 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved.

© 2020 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia

International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Summary— UK economy is expected to contract by 7.8% in 2020, recovering in 2021 with GDP

growth reaching 8.4%.

— Our analysis assumes an initial 10-week lockdown starting at the end of March, followed

by two further four-week lockdowns in August and November 2020.

— Despite an unprecedented level of support on offer for workers, the rate of

unemployment is expected to reach 8.8% this year, before gradually falling as the

economy recovers after the end of the pandemic.

— Monetary policy is almost certain to remain supportive for at least until the end of 2021,

with the headline policy rate unchanged at 0.1%.

— Despite this, inflation should stay below the Bank of England’s target level, averaging

0.7% in 2020 and 1.3% in 2021.

— The hospitality industry could see a loss of nearly a third of output in 2020, bearing the

brunt of the economic damage caused by the pandemic.

— Meanwhile, consumers focussing on essentials will see a modest increase in food and

drink purchases and a severe drop in demand for durable goods categories. For some

sectors, demand could remain weak throughout the year as the threat of reinfection

keeps shoppers and restaurant goers at home.

— The cost of battling the pandemic will be reflected in a sharp increase in government

borrowing, with debt set to rise to nearly 95% of GDP according to the OBR, for the first

time since 1962.

Document Class ifica tion: KPMG Public

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Document Classification: KPMG Public

© 2020 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative


Our forecasts for the UK economy2019 2020 2021

GDP 1.4 -7.8 8.4

Consumer spending 1.4 -13.5 14.8

Investment 0.4 -16 17.1

Unemployment rate 3.8 7.6 6.3

Inflation 1.8 0.7 1.3

Base interest rate 0.75 0.1 0.1

Source: ONS, KPMG forecasts. Average % change on previous calendar year except for unemployment rate, which is average annual rate. Investment represents Gross Fixed Capital

Formation, inflation measure used is the CPI and unemployment measure is LFS. Interest rate represents level at the end of calendar year.

— Our base case forecasts for 2020 sees GDP contracting by nearly 8% in 2020, before recovering in 2021. This reflects a sharp

setback in household consumption and in overall investment that is only partially offset by a significant increase in government

spending.

— We looked at the different goods and services consumed by households, categorising them by their exposure to the lockdown

and to any additional measures imposed once it is removed. We estimated that in total, the consumption of goods will fall by

30% at the peak of the crisis and the consumption of services will fall by 40%, making consumer spending fall by 13.5% in

2020 as a whole, before recovering by nearly 15% in the following year.

4




-15

-10

-5

0

5

10

15

Quart

er-

on

-quart

er

% c

hange

Our base case assumptionsLockdown periods

Source: ONS, KPMG analysis

— Our base scenario currently assumes that the lockdown remains in place until the end of May but some measures, such as

restrictions on social gatherings and travel, remain in place until 2021.

— We also assume additional secondary lockdowns, lasting around four weeks each, are imposed in the third and fourth quarters of

2020.

— We then assume that a vaccine becomes available in January 2021, allowing the removal of all restrictions shortly afterwards.

— GDP forecasts for 2020 reflect this pattern of stop-start economic activity, with the lockdown and continued social distancing

measures anticipated until a vaccine is found. This means fluctuations in output will be sharper than in previous recessions.

5




Deepest recession since WW1

-9.71%

-4.25%

-7.80%

-15%

-10%

-5%

0%

5%

10%

15%190

0

190

3

190

6

190

9

191

2

191

5

191

8

192

1

192

4

192

7

193

0

193

3

193

6

193

9

194

2

194

5

194

8

195

1

195

4

195

7

196

0

196

3

196

6

196

9

197

2

197

5

197

8

198

1

198

4

198

7

199

0

199

3

199

6

199

9

200

2

200

5

200

8

201

1

201

4

201

7

202

0

Real annual G

DP

gro

wth

, %

Historical ForecastWW1 WW2


— The current slowdown is unprecedented on a number of levels. One of them is the scale of contraction in output that is expected,

due to the lockdown and continued social distancing measures that we anticipate will stay in place until a vaccine is found.

— The size of contraction of the UK economy this year is expected to be larger than in any period since the aftermath of the First

World War.

6




W-shaped recession with a relatively quick recovery

80

85

90

95

100

105

0 1 2 3 4 5 6 7 8 9 10 11 12

GD

P index t

o p

re-r

ecessio

n p

eak (

100)

Quarters from pre-recession peak in real GDP

Mid 1970s recessions (from Q3-73)

Early 1980s recession (from Q1-80)

1990 recession (from Q3-90)

Great recession (from Q2-08)

COVID-19 (from Q1-20, forecast)

COVID-19 economic recovery compared to past recessions


— The good news is that, despite the severe shock to the economy, output is expected to return to pre-crisis level sooner than in

previous recessions.

— The recession could adopt a W shape as a result of the secondary lockdown measures later this year.

7




A longer pandemic will cause greater damage to business

420000

440000

460000

480000

500000

520000

540000

560000

2019 2020 2021

Real quart

erly G

DP

, 2016 m

illio

n £

Initial 16% GDP drop due

to lockdown

Upside

Full recovery after Summer 2020

Downside 1

Social distancing measures

continue until Summer 2021

Downside 2

Social distancing measures

continue beyond 2021

Base

Social distancing

measures continue

until January 2021


— While there is more information available on how to detect and treat the virus, there’s still no clarity over when we’ll reach crucial

milestones (like a viable vaccine). We have developed four simple scenarios to help planning for the next two years:

Upside Base Downside 1 Downside 2

Current lockdown ends End of may 2020 End of May 2020 End of May 2020 End of May 2020

Secondary lockdowns Aug and Nov 2020 Aug and Nov 2020 and

Feb and May 2021

Aug and Nov 2020 and

Feb and May 2021

Pandemic contained Sep 2020 Jan 2021 July 2021

Source: KPMG

— Current medical evidence points at the upside scenario as the least probable, while our base scenario and downside 1 scenario

most probable, and the downside 2 scenario a bit more probable than the upside.

— The four scenarios assume that government support, in the form of grants and loans, preserves as many businesses as possible. That

means their output can return to pre-crisis levels quickly once the pandemic is eradicated in the UK (see chart). As the pandemic

lingers, more permanent damage to business is likely and risks to the outlook are heavily weighted to the downside.

8




Only the public health sector will avoid a decline

5%

-2%

-3%

-3%

-12%

-13%

-26%

-26%

-29%

-30%

-35% -30% -25% -20% -15% -10% -5% 0% 5% 10%

Public sector, education, health and care

Information and Communication

Transport and logistics

Financial and professional

Utilities

Retail

Construction

Manufacturing

Restaurants, pubs and cafes

Hotels

Annual real GVA growth

Forecast GVA growth in 2020 for selected sectors


— Curbs on social gatherings, including after the lockdown is lifted, could see a third of output in hotels and restaurants lost this

year. The hospitality industry will also find it harder to recover lost output next year as cancelled travel plans and restaurant

bookings will mostly be gone for good. By contrast, manufacturing and construction should see a stronger rebound this year

thanks to back orders that can be filled once the lockdown is over, even if the initial fall in output during the lockdown will also be

considerable.

— The drop in manufacturing production, and to some extent the temporary closure of many workplaces, will reduce the amount

of energy required and lower utilities’ output this year. Financial and professional services could see more muted reductions in

output, although the type of services offered and the way they are delivered will change, with the majority of staff working from

home and focusing on servicing clients’ more immediate needs.

— A surge in demand for home deliveries could offset some of the fall in travel this year, providing support for the transport and

logistics sector. Similarly, the sharp rise in online communications and virtual meetings will provide support for the information

and communication services in the face of an overall fall in economic activity.

— Unsurprisingly, given the nature of this crisis, the main rise in output will be concentrated in public health services. We have

also factored in a small increase in public administration’s output as it draws in more help to address the immediate challenges.

9




Consumers focus on the essentials

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

Mar 2020 Sep 2020 Mar 2021

Year–

on

-ye

ar

% c

hange in r

eal

spendin

g

Food grocery

Alcoholic beverages

Vehicle purchases

Sports and leisure goods

Recreational and cultural services

Household goods

Clothing and footwear

Consumer spending on selected categories in 2020


— Our forecasts for consumer spending reflect the increased focus on essentials, as the lockdown restricts consumers’

opportunities to spend, and lower earnings coupled with changing preferences take their effect. Purchases of food and alcoholic

beverages show mild increases owing to the closures of pubs and restaurants, with the latter relying on home delivery to retain

some business during lockdown.

— The impact of the lockdown also shows up in the sharp fall in demand for recreational and cultural services, which are limited to

what can be supplied online. For many of these businesses, we expect the recovery to be more gradual than the recovery of the

overall economy, as the threat of reinfection may keep people away beyond the lockdown period until a vaccine becomes

available.

— While output of recreational and cultural services is likely to take a big hit, it is partially offset initially by strong demand for sports

and leisure goods that can be used at home. Demand for household goods that improve home stay also remain relatively

resilient.

— Clothing and footwear purchasing could see a significant drop, as working from home during the warmer months will eliminate

the need to update one’s summer wardrobe, while a large proportion of car purchases could be postponed until next year.

10




London’s services-based economy is the least affectedForecast of regional GVA growth in 2020 and 2021

-10.1%

-10.0%

-9.7%

-9.5%

-9.2%

-9.0%

-9.0%

-9.0%

-8.4%

-8.1%

-8.0%

-7.3%

11.3%

11.1%

10.8%

10.6%

10.2%

10.0%

9.9%

10.0%

9.3%

9.0%

8.9%

8.0%

-15% -10% -5% 0% 5% 10% 15%

West Midlands

East of England

East Midlands

North West

South East

Wales

Yorkshire and The Humber

South West

North East

Scotland

Northern Ireland

London

Annual real GVA growth, %

2020 2021


— The region that will feel the biggest impact of the pandemic in 2020 could be the West Midlands; we forecast its economy will

contract by just over 10%. This is because it is home to many automotive manufacturers; they make up nearly 6% of the local

economy. This sector faces a severe downturn as a result of supply-chain factors interrupting production and falling demand as

consumers cut back spending.

— In the East of England, the relatively high share of construction sector activity means the region is expected to undergo a 10%

fall in GDP this year. Current social distancing restrictions have put a halt on the majority of this sector’s activities.

— At the other end, we expect London will be the least affected region. We forecast the economy will contract by just over 7% in

2020. A relatively higher share of services that are less impacted by Covid-19, like financial and professional services, mean the

capital’s economy is more resilient to the restrictions imposed by the lockdown. An ONS survey conducted last year showed that

more than 34% of London workers had worked from home at least once, compared to 27% for the UK as a whole.

— Northern Ireland follows close behind London; we expect it will shrink by 8% in 2020. The region hosts a large share of food

manufacturing businesses, which continue to operate throughout the period of lockdown. It also has a strong presence of life

science businesses and government employment, which leads to a lower overall impact on the Northern Irish economy.

11




Lockdown is taking its toll on the labour marketTotal jobs affected by lockdown measures


— As many as 13 million jobs are in sectors highly affected by the lockdown, representing 36% of all jobs in the UK. Of these, nearly

2.2 million are self-employed and 10.6 million are employees.

— If we assume that three quarters of affected employees are placed in furlough during the lockdown and the rest are split 15% and

10% respectively between claiming unemployment and leaving the labour market, the unemployment rate could peak at 8.8%

during the lockdown period.

12




1984, 11.8

1993, 10.4

2011, 8.12020, 7.6

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005 2010 2015 2020

Unem

plo

ym

ent

rate

aged 1

6 a

nd o

ver,

%

Historical Forecast

Unemployment rate could stay below peaks seen in previous recessionsUnemployment rate


— Thanks to the government’s Job Retention Scheme, and to record low unemployment prior to the crisis, the unemployment rate

could be lower than in previous recessions, despite the severity of the downturn.

— We assumed that furloughed workers will resume active employment very rapidly when that becomes possible. We also

assumed that fear of renewed restrictions later in the year will make companies reluctant to bring back employment to pre-

lockdown levels straight away, particularly while they face weaker and uncertain demand. This could see unemployment falling

only gradually over the next two years.

13




A weaker inflation, but unremarkable for previous decade

1.8%

0.7%

1.3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1990 1995 2000 2005 2010 2015 2020

Avera

ge a

nnual year-

on

-year

incre

ase,

%

Historical

Forecast

Consumer Price Inflation


— Despite the weaker pound and cuts in output production, inflation is expected to remain low this year and next, at half the Bank of

England's 2% target on average. While the pandemic represents a shock to both the demand and supply capacity of the

economy, in practice it is the shock to demand that is expected to dominate.

— Outside of a few select goods categories, we should see weaker price pressures throughout the next two years, with inflationary

pressures remaining low while the job market slowly recovers.

— Consistent with moderate inflationary pressures and the need to support economic growth, the Bank of England's policy interest

rate is expected to stay at 10 basis points throughout the next two years.

14




251

95

0

50

100

150

200

250

300

1908-09 1918-19 1928-29 1938-39 1948-49 1958-59 1968-69 1978-79 1988-89 1998-99 2008-09 2018-19

Perc

ent

of G

DP

Historical

Forecast

Debt will rise as the government increases spendingHistorical ratio of UK government debt to GDP

Source: ONS, Bank of England and OBR

— Estimates published by the OBR show that government debt could rise to nearly 95% of GDP in the current fiscal year. This

combines an £85bn increase in government spending, a £130bn hit to revenues from additional measures to reduce and delay

the burden of taxes, and a slowing economy as well as a lower level of GDP, which pushes the ratio to its highest level since the

1962-63 fiscal year. This could be an underestimate as the OBR’s calculations do not cover the cost of loan guarantees for

businesses for example.

— However, a longer term perspective shows that the UK government’s level of debt was far higher for most of the first half of the

20th century, when it rose as a result of two world wars. At its peak UK debt reached a record 251% of GDP in the aftermath of

the Second World War.


Yael Selfin

Chief Economist

KPMG in the UK

Email: [email protected]

Dennis Tatarkov

Senior Economist

KPMG in the UK

Email: [email protected]

You can access more of our research on the economic

outlook here: kpmg.com/uk/en/macroeconomics

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such

information without appropriate professional advice after a thorough examination of the particular situation.

© 2020 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International. CRT127095A

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a snapshot of the outlook for the uk economy · a snapshot of the outlook for the uk economy....

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