On 24 June PWC released their latest economic review providing updated UK economic data, including the results from the Office for National Statistics (ONS) Business Impact of Coronavirus Survey, and highlighting April’s GDP data, retail sales and the labour market. There is also a special focus on the impact of COVID-19 on UK trade and its prospects for 2020.
In our latest blog, CSS Partners highlights some of the areas of the UK economy seeing early signs of recovery as well as PWC projections for the rest of 2020 and into 2021.
The full report is available here.
Early Signs of Recovery
- UK retail sales are up, with positive growth in non-food stores as they began to reopen as well as a sharp increase in online sales. Non-store retailing now accounts for one-third of all retail sales, the highest proportion on record.
- The lockdown has resulted in fewer outlets for household spend resulting in an estimated 21.9% reduction in average weekly budget. The average £182 pent-up cash per week is expected to further boost retail sales.
- Businesses are beginning to emerge from lockdown. ONS business surveys show that 79% of UK businesses have remained in operation, with a further 9.3% having either resumed trading in the last two weeks or are intending to restart in the next two weeks. This is expected to continue with the re-opening of non-essential shops on 15 June and also further restrictions on pubs, restaurants, hotels, cinemas and some other leisure businesses opening from July 4th.
- A business survey by the ONS, conducted between 18 May and 31 May, showed business cash reserves remain relatively unchanged from the previous ONS survey, with around 43% of businesses having cash reserves for up to six months.
- Government funding schemes have resulted in businesses making less than 1% of their workforce permanently redundant on average.
- 43% of UK businesses are supporting their workforce by topping-up furloughed payments.
The Latest Data
The COVID-19 crisis has caused the UK economy to shrink by around 25% to the end of April compared to pre-lockdown levels. The decline was broad-based and not just the sectors directly affected by lockdown.
PWC predicts a recovery towards the end of 2020 that will gather pace in 2021. Latest estimates are that the rally in Q3 and Q4 will result in UK GDP being down by between 8% and 12% for the year.
Consumer Price Inflation – 12 month rates fall for the fourth consecutive month
Headline inflation, declined from 0.9% to 0.7%, driven by the falling prices in motor fuel and some recreational and cultural goods, partially offset by an increase in prices for food and drink. The Consumer Price Index (CPI) will be a key indicator of inflationary pressures as we see demand pick-up as social distancing measures are lifted.
UK retail sales showing signs of recovery
Retail sales declined by nearly one-fifth in April following the closure of all non-essential retailers since 23 March, wiping out more than a decade of gains in retail sales volumes. May data suggests a partial rebound in retail sales by 12% on the previous month, driven by positive growth in online sales and non-food stores as these began to reopen in May.
PWC Projections for the UK economy
PWC have considered two likely outcomes following the UK government’s phased approach to lifting lockdown restrictions and re-opening of retail activity. Both scenarios assume a continuation of some elements of lockdown over the coming months, but for varied periods and at varying levels of intensity.
The modelling assumes there will not be a vaccine widely available in the UK until June 2021. As such, up to that point, the speed of the recovery depends upon the success of non-pharmaceutical interventions (NPIs) to contain the spread of COVID-19.
The “smooth exit” scenario assumes a gradual reduction of NPIs allowing the economy to recover to just 1.5% below pre-crisis trend levels by end of 2021.
The “bumpy exit” scenario assumes there will be a number of spikes in the pandemic leading to a slower release of NPIs and also to the re-introduction of lock-down measures in some local areas. The extended period of restrictions on consumers and businesses will negatively impact consumer confidence, business spending, supply chains and labour supply. These factors will slow the speed of recovery and result in the economy being an estimated 7% smaller by the end of 2021 than if the pandemic had not occurred.
The UK government has put in place a £133bn stimulus package to provide support to businesses and workers. Under PWCs “smooth exit” scenario an additional £7bn will be required in 2020/21 and an additional £20bn in 2021/22. Under the “bumpy exit” scenario and additional £37bn will be required in 2020/21 and a further £30bn in 2021/22.
In the “smooth exit” scenario, PWC feel that government public debt levels of 90-100% of GDP in 2021/22 will be sustainable. In the case of a “bumpy exit” the higher public debt levels will mean there may be a need for future tax rises or renewed spending restraint in the longer term.
Without knowing how the COVID-19 pandemic will continue to circulate around the world, particularly during Autumn and Winter months, there remain many uncertainties for UK businesses.
The latest report from PWC indicates UK businesses have retained the vast majority of their work forces and are positioned to take advantage of an anticipated increase in retail sales through 2020 and 2021. A lot will depend on the size and frequency of any bumps along the way.
As we start on the road to recovery, business owners will hope that the worst is behind us.
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COVID-19 UK Economic Update – PWC 24 June 2020