A strong economic recovery following the coronavirus pandemic is likely, with conditions ripe for a quick turnaround from this ‘short, if very sharp, shock’, according to Oxford Economics report
The unusual nature of this recession could be a silver lining for recovery, the report by Oxford Economics said. GDP has fallen because of a planned, partial economic shutdown, so in theory activity and demand should rebound as restrictions lift, particularly given fiscal and monetary support from government and the Bank of England since the crisis began.
The report, which was commissioned by ICAEW, predicts that the economy should return to growth in the second half of the year if the lockdown continues to be relaxed over the summer.
Some households and private sector companies will have saved cash during the crisis, which could lead to a spike in demand when the lockdown eases, particularly with inflation likely to reach zero in the summer.
The impact of coronavirus should hopefully be a short, if very sharp, shock, the report said, with most of the damage quickly repaired. With low interest rates likely to persist, and gilt yields at historic levels, reducing the deficit should not be an urgent government priority
Martin Beck, Oxford Economics lead UK economist, said: ‘Coronavirus and the restrictions on daily life imposed in response are inflicting a once-in-a-century downturn on the economy.
‘But the nature of the shock and the massive support put in place by policymakers mean a strong bounce back is achievable. However, with no precedents to draw on, the outlook is clouded by multiple risks.’
Overall, GDP could shrink by 14% in Q2, the report predicts. This would be the largest decline since 1921. However, unemployment will likely rise by a comparatively modest 3 percentage points, from 4% at the beginning of 2020 to 7% in Q4, reflecting take-up of the furlough scheme designed to protect jobs.
In total, the deficit is likely to reach £290bn this year, equal to 14% of GDP. This would be the biggest deficit since World War Two, and would exceed the previous record of 10.2% in 2009-10.
Risks to the economy are high, Oxford Economics said. Recovery could falter if lockdown is extended; if a second wave of coronavirus triggers another lockdown; if long-term economic damage is worse than expected; or if government support is withdrawn too early. A collapse of UK-EU trade talks could also hamper recovery.
Michael Izza, ICAEW chief executive, said: ‘As lockdown measures are eased, we would like to see a strategy designed to promote a sustainable economic recovery beyond the crisis.
‘The phasing out of government schemes will have to be carefully managed to avoid a wave of redundancies and company failures, and to restore business and consumer confidence.’
The scope of coronavirus support schemes mean government borrowing stands at wartime proportions, and could increase total borrowing in 2020-21 by £173bn, or 7.5% of GDP, the report said. Two-fifths of this was money for the job retention scheme.
Sectors of the economy
The largest losses have been in the hospitality, cultural and sporting sectors, as well as in education. Even with a strong rebound, output losses could be 25%.
The manufacturing sector faces a double whammy, taking hits from the coronavirus crisis and from the end of the UK-EU transition period, an impact most likely to be felt from the end of 2022.
The regional picture
London likely to be the fastest-growing region in the next five years and the North East the weakest performer. The West Midlands will most likely experience the largest output fall of any region this year, but should rebound in 2021.
Richard Holt, head of global cites research, Oxford Economics added: ‘London is probably suffering less than most places economically because so many people in the capital can work at home.
‘For more manufacturing-intensive regions such as the West Midlands, it has been much harder to adapt.’