UK economy could take four years to recover, says EY
The UK economy will take four years to return to its 2019 size as consumer caution and high levels of unemployment weigh on growth, economic forecaster EY Item Club has predicted.
EY Item Club said it expects the UK economy to shrink by an enormous 11.5 per cent this year and then grow by just 6.5 per cent next year. It said hopes of a ‘V-shaped’ recovery were fading.
It marks a severe downgrade in the forecaster’s expectations. Just a month ago, Item Club forecast a contraction of eight per cent this year.
“Even though lockdown restrictions are easing, consumer caution has been much more pronounced than expected,” said Howard Archer, chief economic adviser to EY Item Club.
“The UK 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.”
Archer pointed to worse-than-expected growth in May, when the economy expanded just 1.8 per cent after crashing 20.3 per cent in April. Economists had expected 5.5 per cent growth.
Unemployment to hold back UK economy
On top of weak consumer spending, unemployment will hold back the economy, EY Item Club said.
It expects unemployment to surge to nine per cent by late 2020 or early 2021, up from 3.9 per cent in February. That would put more than 3m people out of work.
The Item Club’s predictions were more pessimistic than the “central scenario” laid out by the Office for Budget Responsibility (OBR) earlier this month.
Although the OBR said the UK economy is likely to shrink 12.4 per cent this year, it said growth could be 8.7 per cent in 2021. Under its main scenario, the economy would recover to its pre-coronavirus size by the end of 2022.
EY Item Club said weak business investment would also weigh on growth. It said investment by firms could slump by an astonishing 22.3 per cent this year and only grow 1.3 per cent in 2021. It said investment would likely pick up by the end of next year, however.
Mark Gregory, EY UK’s chief economist, said: “Government measures have provided significant short-term support, but many businesses are waiting for more certainty over the economic outlook before making longer term investment decisions.”