Coronavirus: UK economy set for ‘most severe downturn in modern times’
The coronavirus pandemic has dragged the UK into the “most severe economic downturn in modern times” with the economy set to contract over seven per cent this year, new forecasts suggest.
The UK economy is expected to shrink 7.2 per cent in 2020 and is unlikely to fully recover from the impact of Covid-19 until a vaccine or effective treatment for the virus is available, according to KPMG’s latest quarterly economic outlook.
“The UK economy is amidst the most severe economic downturn in modern times, with no clear end to the current crisis,” said KPMG chief economist Yael Selfin.
“Considerable uncertainty remains around the timing of a vaccine which will impact the timing and speed of the recovery, as well as the extent of any permanent damage to the economy,” she added, warning that the pandemic would leave “a lasting mark” on the economy.
While KPMG expects to see a partial economic recovery in the second half of 2020, it warned that there could be a fresh spike in unemployment later in the year as the government’s Job Retention Scheme (JRS) comes to an end.
The scheme, which is currently paying the wages of almost nine million furloughed employees, is set to close at the end of October. It is likely that employers will not be able to take all furloughed workers back on before the JRS ends, the report said.
The audit firm considered four alternative scenarios for the timing of the economic recovery from the pandemic, based on different dates for the virus being eradicated in the UK.
Its main outcome assumes that a vaccine will be available from July next year, which it estimates would help bring GDP growth to 2.8 per cent for 2021.
Economic recovery in 2021 could also be hampered by Brexit, the report said.
KPMG’s forecasts assume that the UK will reach a trade deal with the EU without tariffs or quotas by the end of 2020, but predicts that exports could still fall back at the start of next year due to additional trade frictions.
If the transition period ends without a deal being reached, or if a more limited deal is struck, economic recovery would be “much weaker”, it added.
“Uncertainty about the course of the pandemic and the nature of future relationships with the EU is making it harder for businesses to plan and operate,” Selfin said.
“Government should aim to provide as much clarity as possible and offer more flexible support for businesses in the meantime.”