The economy is expected to contract by 15% in the second quarter of 2020, a report from the EY Item Club has predicted. The forecast was originally 13% but the poor economic performance in April has led to the increase.
The GDP forecast for the UK economy overall has also been downgraded. There is now an expected 8% contraction for 2020, compared to the 6.8% predicted in April.
What is the EY Item Club?
The EY ITEM Club is the Independent Treasury Economic Model Club. The EY part is down to the fact that EY sponsor the club. EY have been the sole sponsor for 25 years and in 2012, it was officially renamed the EY ITEM Club.
The Item Club is independent, and uses the HM Treasury’s model of the UK economy to provide economic forecasts. They are the only forecasters to use the same model as the Treasury. The model used is used by the Treasury for its biannual Budget, which then allows the ITEM Club to explore the implications behind the forecasts and government policy. The fact that the Club uses the Treasury’s model for their own forecasts means that they can test whether Government claims are consistent and credible.
What has the EY Item Club found?
Unfortunately, the outlook found by the EY Item Club is bleak. Official figures showed the economy shrank by a record 20.4% in April. This has put the country on course for the worst recession in more than three centuries.
It is also predicted that the UK economy will not return to its pre-coronavirus size until early 2023. It is expected to begin its recovery from the third quarter of this year. This is as long as the government continues to ease restrictions.
Consumer spending is expected to contract 8% this year, before recovering by 5% in 2021. With non-essential shops opening this week, it is hoped that consumer spending will start to increase again. However, this all depends on unemployment. The looming unemployment crisis stemmed from industries being shut down and the furlough scheme ending has led to comparisons with the collapse of the coal mining industry.
In terms of investment, overall UK investment is expected to fall 13.7% in 2020. Business investment is expected to decline 14% while government spending is set to increase 4.5%.
What have the Bank of England said?
Well, the Bank of England have said that they are “ready to take action” to help the UK economy weather the incoming crisis.
The contraction experienced in April was three times greater than the decline seen during whole of the downturn in 2008-2009. However, some good news is that it is thought that April was likely to be the worst month.
The governor of the Bank of England, Andrew Bailey, has said that there were signs of the economy coming back to life as lockdown restrictions are eased. Another positive sign is that consumers are benefitting from a very low inflation rate. It is expected that consumer price inflation could fall as low as 0.2% this summer.
What happens next?
What happens next depends on whether the lockdown continues to ease and there is some semblance of ‘normality’ returning to our lives. There is some positivity, in that the year-on-year GDP growth is currently 5.6%, up from 4.5% which means that the economy could be back on track next year.
EY UK’s Chief Economist Mark Gregory has told City AM;
“Over the coming months, companies have a double challenge: they need to respond to the short-term impact of Covid-19 on their business, and they will also need to catch-up to long-term shifts in the economy which have been accelerated by the pandemic”.