Economy unlikely to reach pre-COVID level until early 2023 says new report

The continuing impact of the COVID-19 virus is expected to see the UK economy contract by 10.3% in 2020, but a second lockdown of even just four weeks could exacerbate the drop in GDP to -12.6%, according to KPMG UK’s latest quarterly Economic Outlook.

However, given advancements in vaccine developments for COVID-19, there is a high chance that the pandemic will be overcome by mid-2021. Growth is expected to pick up to 8.4% next year if a vaccine is rolled out by April with the economy reaching pre-COVID level by early 2023.

Three alternative scenarios were considered for the timing of the recovery, based on potential different dates of the vaccine being approved and then rolled out in the UK – and a Brexit deal outcome.

KPMG’s base scenario assumes that a vaccine will be approved in January, immediately reducing uncertainty, and rolled out by the end of April enabling all social distancing measures to be removed.

It also assumes the UK and the EU reach an agreement on their future relationship before the end of the transition period this year. But even just a three-month delay in rolling out the vaccine could see GDP growth fall to 7.1% in 2021, instead of 8.4%.

A range of risks is also considered, where the outcome will impact potential growth. They include a no deal with the EU next year and limited progress in eradicating the pandemic. If these play out, growth in 2021 could fluctuate by between 8.4% and 4% at the least.

KPMG has forecasted a GDP decline in the South West of 9.4%* for 2020, with Plymouth, Cheltenham and South Somerset expected to be worst hit with an 11.3% fall in GDP predicted. Swindon is expected to be the least hardest hit, with a 7.3% decline this year.

The region’s largest cities are not immune, and are likely to be hit hard. Bath (and NE Somerset) could see a drop in GDP of 10.6%, closely followed by Bristol with a decline of 9.2%.

Andrew Hodgson, senior partner for KPMG in Bristol, comments: “This is a uncertain and demanding time for businesses in the South West. There are also mixed messages about how the consumer is reacting as we come out of lockdown and how sustainable any early signs of recovery are. Especially when you consider that unemployment is growing and the impact of the unprecedented fall in GDP bites. Businesses are cancelling their investment plans and there is a concern that persistently weak business investment could hold back the UK’s recovery.”

Yael Selfin, Chief Economist at KPMG UK, concludes: “The pandemic has had a more significant impact on sectors that are more labour-intensive – and the recession will generate permanent change in some of them, meaning there will be a bigger effect on the labour market than the fall in GDP would imply.

“The government has an important role to play. Not just in continuing to provide short-term support to the economy but in readying the UK for a more productive future, including upskilling a significant part of the workforce and upgrading the UK’s telecommunications network. If we get this right, we could come out of this crisis with a better economy.”