UK Economy May Take Four Years To Recover To Pre-Pandemic Levels

The British economy may take four years – i.e., late 2024 -- to recover from the COVID-19 pandemic, warned the EY ITEM Club, a U.K.-based economic forecaster.

In a report issued on Monday, the group said it expected the U.K. economy to shrink by 11.5% this year – a worse contraction than the 8% decline it predicted in early June.

After returning to positive growth in the third and fourth quarters of this year, Britain’s gross domestic product is then expected to expand by 6.5% in 2021 -- up from EY’s earlier growth forecast of 5.6% in June.

“The U.K. economy may be past its low point but it is looking increasingly likely that the climb back is going to be a lot longer than expected. May’s [1.8%] growth undershot even the lowest forecasts. By the middle of this year, the economy was a fifth smaller than it was at the start,” said Howard Archer, chief economic adviser at EY. “Such a fall creates more room for rapid growth later, but it will be from a much lower base.”

Archer noted that while lockdown restrictions have been gradually lifted, 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 U.K. economy over the rest of the year, alongside the impact of rising unemployment and low levels of business investment,” he added.

EY said it expects joblessness to jump to 9% by late 2020 or early 2021, from 3.9% in February.

Mark Gregory, EY’s U.K. Chief Economist, said that with Britain’s GDP only growing by 1.8% in May and the “public remaining reluctant to return to their normal activity patterns, a more pessimistic outlook appears likely.”

Gregory further warned that in the event of a second wave of COVID-19 infections, the economic picture could darken more.

“In addition, the U.K. has yet to agree [to] a trade deal with the European Union, and a ‘no deal’ outcome is likely to provide a further challenge for the economy,” he added. “The [British] public is not yet willing to return to pre-COVID-19 patterns of behavior. As in other countries, there was a bounce back when restrictions were lifted, but the pace of change has not been sustained. Worries about contracting the virus appear to be the most important factor shaping behavior.”

Gregory noted that sectors where social distancing can be more easily accomplished -- like construction and some manufacturing -- are recovering faster than those sectors dependent upon close personal contact.

“It seems unlikely that the economy can return to its full potential until the virus has been eliminated or a vaccine has been developed, or a mitigating treatment has been shown to significantly reduce the risk from contracting COVID-19,” Gregory added. “In a consumer-centric economy like the U.K., reluctant consumers will limit the level of economic activity even with a shift to activity online.”

EY’s economic projections were harsher than those from some other prominent voices.

Last week, BBC News reported that the Bank of England's chief economist Andy Haldane told Members of Parliament that the U.K. economy had "clawed back" about one-half the decline in output it suffered during the peak of the coronavirus lockdown in March and April.

In mid-July, the government’s independent Office for Budget Responsibility predicted the U.K. economy may shrink by 12.4% this year, but rebound by 8.7% in 2021. Under this assessment, the economy would recover by the end of 2022.