UK economy to shrink by 8% in 2020, forecasters say

The British economy will shrink by 8% this year and is unlikely to recover from the damage wrought by the coronavirus crisis until 2023, according to a leading economic forecaster.

After official figures showed Britain’s economy shrank by a record 20.4% in April – putting the country on course for the worst recession in more than three centuries – the EY Item Club was moved to produce its first interim report between two quarterly updates to reflect the deteriorating outlook.

Mark Gregory, EY UK’s chief economist, said: “This is an undoubtedly challenging environment for businesses and forecasting is extremely difficult. We’ve made some significant adjustments to our GDP expectations compared to what the data told us just six weeks ago.”

Back in April the group of economists, which is the only non-government forecasting organisation to use the Treasury modelling of the economy, had predicted a 6.8% fall in output for 2020 but has downgraded that figure to 8%. It has also increased the size of the contraction expected in the second quarter of this year from 13% to 15%.

The Organisation for Economic Cooperation and Development predicted the UK economy would shrink by more than any other developed country as businesses struggle to recover from the pandemic. It estimates that the country’s GDP will contract by 11.5% in 2020 or 14% if the virus returns and forces a second lockdown.

The UK economy is still not expected to return to the size it was at the end of 2019 until early 2023, the report warns.

The EY report also warns consumer spending could slump 17% in the second quarter – and by 8.7% over the year as a whole – before rebounding in 2021. A key caveat, however, is unemployment, with job cuts due to the health crisis taking time to be replaced. The jobs crisis emanating from the grounding of air travel has prompted comparisons with the collapse of the coal mining industry in the 1980s.

“Many people have lost their jobs despite the government’s supportive measures,” said Howard Archer, the group’s chief economic adviser. “This will inevitably have some limiting effect on the economy’s recovery.”

With the EY Item Club also forecasting total investment to fall by 13.7% in 2020, a separate report by a cross-party thinktank, the Social Market Foundation (SMF), has identified pension reform as a way to fund a “green recovery”.

The SMF argues that ministers should encourage UK pension funds to merge into “superfunds” able to invest large sums in long-term projects such as building roads and communication networks. In Australia and Canada, such funds have successfully delivered major infrastructure investments, it said.

Richard Hyde, a senior researcher at the SMF, said: The best way to support the infrastructure the country urgently needs is to make better use of the billions of pounds held in pension funds that could be profitably invested in helping Britain on its way to a green recovery.”

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