I have been watching with interest how various economists and commentators see the coming year or two and found that the FY ITEM Club Summer Forecasts sits in the middle of the range of views. This week, it has significantly downgraded the near-term economic outlook for the UK with GDP now expected to contract by 11.5% over the course of 2020.
This compares to the 8.0% contraction predicted just last month in the EY ITEM Club’s Interim Forecast, and almost double the 6.8% contraction expected in April’s Spring Forecast.
With hopes of a V-shaped recovery fading, the UK economy is now not expected to match its Q4 2019 size until late-2024 – much later than the early-2023 prediction from the June forecast. Additionally, the EY ITEM Club now expects the Q2 GDP contraction to come in at a record 20% – a sizeable downgrade from the 15% contraction predicted last month.
Positively, growth prospects for 2021 have been raised slightly, with the economy now forecast to grow 6.5% over the year, up from the 5.6% predicted in June’s forecast, and up from 4.5% in April’s forecast. The EY ITEM Club expects the economy to return to growth in Q3 2020 with expansion around 12% quarter-on-quarter (q/q).
The downgrades to the EY ITEM Club forecast for 2020 have been largely driven by weaker-than-expected growth of just 1.8% in May, with the services sector particularly hampered by COVID-19 even as restrictions ease.
The issues are manyfold, with both business and consumers unwilling to spend and invest. For business, there is the double whammy of the unknown Brexit transition period, uncertain international trade whist many consumers just do not want to go out more that they need are also looking to conserve cash.
Howard Archer, chief economic adviser to the EY ITEM Club, commented: “Even though lockdown restrictions are easing, consumer caution has been much more pronounced than expected. We believe that consumer confidence is one of three key factors likely to weigh on the UK economy over the rest of the year, alongside the impact of rising unemployment and low levels of business investment.
We live in the mother of all interesting times. Industrial Revolution 4.0 is moving at alarming speed, with the current situation catalysing changes that would normally have taken years to come through to happen in months. The extraordinary move to digital is effecting retail, consumer good, office space, travel, manufacturing and numerous other industries. I was on a webinar hosted by the economist yesterday where it was estimated that 40% of the jobs that have been (or are about to be lost) will never replaced. Those people and millions more will need to be re-skilled. In the meantime they will to receive appropriate assistance from the state if we wish to avoid the worst excesses of a house price crash or increased poverty.
So what is going “well”. An easy answer – Business related to the digital world. We are seeing huge appetite from UK and international investors for these businesses. Just look at the combined value Apple, Microsoft, Facebook and Amazon is now close to $5 trillion – greater than the GDP of Germany and approaching that of Japan (the worlds third largest economy). with Apple claiming the top spot at nearly $1.5 trillion (about the GDP of Canada – the worlds 10th largest economy. Do you know what? I think I am going to blog on this separately.
So back to the UK. We are in the midst of a huge dislocation – as business owners, we need to move very swiftly to ensure we are fit for the 4th industrial revolution: a world driven by technology, climate change awareness and an understanding our our responsibility to our employees and the world at large. Do this right, and we can still make plenty of profits – just don’t shout about it too much!
UK GDP is now expected to contract by 11.5% over the course of 2020
The combined value Apple, Microsoft, Facebook and Amazon is now close to $5 trillion – greater than the GDP of Germany