UK economy set to slow in final quarter of 2020

In its latest forecast, the EY ITEM Club said GDP rose around 16 to 17 per cent in the third quarter of 2020 – much faster than the 12 per cent growth predicted in July’s summer forecast – but growth of 1 per cent or less is expected in the fourth quarter.

The growth forecast for 2021 has been lowered from 6.5 per cent to 6.0 per cent.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “The UK economy has done well to recover faster than expected so far.

“Consumer spending has bounced back strongly while housing sector activity has also seen a pick up, in part thanks to the Stamp Duty holiday.

“Government intervention continues to provide much needed support but, even with this boost, many of the factors that supported the pick up in growth in Q3 are now beginning to fade, notably the release of pent up demand and relaxation of lockdown restrictions.”

After the third quarter boost, the EY ITEM Club now expects the economy to contract by 10.1 per cent in 2020, an improvement on the 11.5 per cent contraction forecast in the summer.

The strong third quarter performance was driven by consumer spending and the release of pent up demand as Covid-19 restrictions were relaxed.

However, EY ITEM Club said these effects will wane heading into the fourth quarter, while the economy could also face the end of the furlough scheme and likely higher unemployment, tighter Covid-19 restrictions and uncertainties around the future of the UK-EU trading relationship.

Conversely, Brexit could provide a lift to fourth quarter growth if uncertainties over a deal result in stock building ahead of the December 31 deadline.

EY ITEM Club said the UK economy is now predicted to regain its pre-pandemic size in the second half of 2023.

Government spending and investment are forecast to contribute significantly to growth in 2021, with Government investment up 10.7 per cent following a 10.5 per cent increase in 2020.

Consumer spending was a key factor in the economy’s third quarter performance and was supported by unemployment levels remaining relatively low, Government schemes like “Eat Out to Help Out” and sector-specific cuts to VAT.

However, with the possibility of the furlough scheme ending in October, unemployment is forecast to reach 7 per cent by the end of the year before peaking at 7.7 per cent in mid-2021.

The forecast rise in unemployment to 7 per cent by the end of 2020 is an improvement on the 9 per cent expected in the summer forecast.

Consumer spending is forecast to fall 12.8 per cent in 2020 as a result of a record 23.6 per cent contraction in the second quarter and rising unemployment later in the year – before increasing 7.6 per cent in 2021.

Next year’s improvement will be helped by low inflation and an improving labour market as the year progresses, although the EY ITEM Club report warns that not all jobs lost in 2020 will be recovered quickly.

Average earnings are expected to grow by 2.4 per cent in 2021 after falling 0.3 per cent in 2020.

Suzanne Robinson, managing partner for EY in Yorkshire and the Humber, said: “With the labour market key to the region’s economic recovery, an important task for businesses will be managing their talent.

“Many business leaders across Yorkshire and Humber will be thinking carefully about how they can best support their people, while balancing the changing demands on their business.

“It’s positive that the Government has sought to replace the furlough scheme which has undoubtedly helped many of the region’s companies to retain staff. While unemployment across Yorkshire is sadly still likely to rise once the furlough scheme ends, lower than expected unemployment levels should help support regional and national economic growth later on.”