Britain’s Economic Output Expected To Fall Sharply This Year

Summary

• UK’s economy to slow down by 8 percent in 2020 – EY Item Club
• Bank of England projects the economy to shrink by 14 percent
• OECD expects an output drop of 11.5 percent
• Oxford Economics comes out with a downfall estimate of 8.3 percent

According to forecast released by EY Item Club, a British economic forecasting body, the United Kingdom’s economy is expected to shrink by up to 8 percent in the year 2020, due to the widespread impact of coronavirus pandemic. The Club has downgraded its annual forecast from 6.8 percent, that it projected in April, which shows a further deterioration in outlook.

Forecast also added that the country will take at least two more years to bounce back to its pre-corona GDP (Gross Domestic Product) levels. It expects this economic downturn to reverse in 2021, when the UK’s GDP is expected to grow by 5.6 percent.

This does not come as a shock, as recently released actual GDP numbers depict a lot of damage to the economy, already. Office of National Statistics (ONS), the UK Government’s official statistical body, has recently released figures of monthly economic activity in Britain. It revealed that the country’s economy shrank by 20.4 percent during April 2020. The economic growth was negative for the earlier month of March as well, with a fall of 5.8 percent, over the same period last year. Experts expect that the month of May will also be displaying an adverse impact of the lockdown.

The drop for April is, by far, the largest single monthly drop experienced in the British economy. Fiscal year in the country runs from 6 April of the current year to 5 April the next year. So the first month’s data is already quite worrisome. April was also the first month of complete lockdown in Britain, and it is expected that with gradual opening of various restrictions and restarting of the economy as usual, activity levels would improve, but this will be a gradual and long-drawn process.

Earlier, the EY Item Club had predicted a contraction of 13 percent for Q2 2020 in its Spring Forecast, made during this April. This has also been further downgraded, by 2 percentage points, to 15 percent.

Mark Gregory, Chief Economist, EY (United Kingdom) agreed that the country is undoubtedly undergoing very challenging times, and making predictions is a tougher job than ever before.

The uptake of economic activity is dependent on a decline in corona infections and deaths in the UK, along with relaxations in lockdown restrictions like the two meter social distancing rule. Businesses are affected deeply and many firms are going bankrupt across the UK, and laying off workforce, thereby unable to make any revenue.

Almost all the forecasts made about the UK economy share a similar gloomy story. The Bank of England predicted last month that the country’s GDP is estimated to shrink to its three-fourth size, depicting a huge fall of 25 percent, during April to June 2020, the time when businesses were worst hit due to being mostly in a lockdown. The central bank of the country had also projected that during 2020 as a whole, the economic output could drop by 14 percent.

It goes without saying that the UK is not alone in facing economic challenges. Many other countries around the world, where coronavirus pandemic has spread to serious levels, are experiencing similar economic contractions. But Britain is the worst hit in Europe, at least according to the recent forecasts made by the OECD (Organization for Economic Cooperation and Development), which projected British economy to slump by a level of 11.5 percent in the year 2020. It expects France’s GDP to fall by 11.38 percent for the year and Italy’s by 11.28 percent. OECD projections are negative for all the countries in Europe, with Denmark’s output likely to drop by 5.78 percent for the year.

OECD had also predicted that if coronavirus infections start to rise again in the UK and there is a need for another lockdown, then in that scenario, its economic production would fall by an even higher level of 14 percent for the year 2020.

On similar lines, few days back, the Oxford Economics estimates indicated that the United Kingdom’s economy is expected to slow down by 8.3 percent in the year 2020.

Government interventions will be required to reverse the fall

The pickup in business activity will be requiring regulatory support. Government has stood by the industry to bear impact of the shock till now, and will surely be attempting its level best to get things rolling even later. According to experts, private consumption is likely to remain subdued for at least a couple of months, till the fear of coronavirus is wiped out completely from the minds of people, even after the COVID-19 death toll touches a zero level across Britain.

Unemployment issue will become further worrisome after the furlough scheme completely ends in October. It is also yet to be seen if British businesses will be able to bear a part of the furlough bill, as it is being proposed by the Government. Employers’ have to start their contributions from August, when they will be shelling out staff national insurance and pension contributions. In September, they will also pay 10 percent staff salaries, which will grow to 20 percent in October, after which they are expected to foot the entire staff salary bill on their own. Unemployment levels in the UK are predicted to increase to 7 percent in Q4 2020, up from 4 percent in Q1 2020, according to Oxford Economics estimates.

It is clear that coronavirus has deeply hurt the British economy, with different agencies sharing their projections about the extent of the damage suspected. EY Item Club expects the UK economy to shrink by 8 percent, OECD predicts an 11.5 percent fall, Oxford Economics puts out a figure of 8.3 percent slowdown, while the country’s central bank calculates a 14 percent drop in economic produce for the year 2020. Only time will tell how close these projections are to reality, and will depend on a variety of market forces, apart from the type of Government support offered.