The UK economy will shrink by 6.8% this year amid a short, deep recession, according to the EY Item Club Spring Forecast.
But it cautioned that widespread job losses and company closures could shoot down hopes of a quick partial recovery next year.
The spring forecast puts GDP growth at 4.5% next year, as long as the lockdown is eased in May, with more restrictions lifted in June. But even with the fiscal and monetary stimulus announced by the Treasury and the Bank of England , the UK economy will not recover to 2019 levels until 2023.
Mark Gregory, EY UK’s chief economist, said businesses must test their resilience in preparation for technological changes and the move towards a net-zero economy accelerated by Covid-19.
He said: “I appreciate how difficult it is to look beyond the immediate challenges, but businesses need to prepare for a period of prolonged change. Based on the forecast for this year alone, around 44% of consumer spending – the major engine of UK growth over the last couple of decades – is at risk of either being delayed or lost completely.
“In this highly uncertain environment, businesses need to think differently about how they plan in order to test the resilience of their operations and finances against a range of plausible shocks and how they adapt to longer term changes in customer behaviour.
"The coronavirus is likely to accelerate some of the emerging trends we’ve seen in recent years, particularly around deglobalisation, the rapid introduction of new technologies and decarbonisation. So, while the UK economic impact will hopefully be short lived, the business impact is expected to be of a longer duration.”
EY Item Club forecasts:
- Consumer spending to contract by 7.5% in 2020 but grow by 4.9% in 2021
- Businesses investment to fall 13.6% in 2020 but rise by 1.2% in 2021 and 6.5% in 2022
- Consumer Price Inflation (CPI) to fall as low as 0.5% over the summer but rise to 2% in 2021
- Unemployment to hit 6.8% in Q3 2020, up from 4% in Q1
- Exports of goods and services to fall by 5.3% and imports by 4.9%.
- Trade deficit to widen in 2021 as export growth of 6.3% is compare with 8.4% for imports
The report warns that figures could be worse if the UK is hit by a new wave of coronavirus wave after lockdown is lifted, if consumers remain cautious for longer or if a large number of jobs are lost and companies go bust.
Howard Archer, chief economic advisor to the EY ITEM Club, said: “The UK economy is clearly in for a very difficult year with GDP expected to contract around 13% quarter-on-quarter in Q2. To put this into perspective, the largest quarter on quarter contraction suffered during the 2008/9 financial crisis was 2.1% in Q4 2008. Our report assumes that the Government’s measures aimed at supporting businesses and saving jobs will have a significant positive impact, which is absolutely crucial to limiting the potential longer-term damage to the economy.”
Source: Insider News