- We have lowered our forecast for the U.K. economy and now expect a contraction of 9.7% for 2020 as a whole, before growth rebounds to 7.9% in 2021, but still leaving the economy short of pre-pandemic levels at least until 2024.
- The return of consumer spending means the U.K. recovery was off to a promising start. We think the economy could grow 15% in the third quarter alone.
- However, fresh restrictions to keep the emerging second-wave of COVID-19 infections in check, together with the abrupt switch to a bare-bones trade agreement with the EU in 2021, will curb the recovery's momentum.
- While new, recently announced government support will minimize damage from the second wave, it will not give much of a boost to growth.
The Return Of The Consumer
The U.K. recovery continues. Just as the lockdown-induced absence of consumers in shops and the wider economy triggered the downturn, the return of the consumer is now igniting a rebound, following the removal of the most severe COVID-19 restrictions. Data available so far suggest the U.K. economy could grow 15% in third quarter, following the unprecedented 20% drop a quarter earlier. We forecast a 9.7% contraction in GDP for this year as a whole and a 7.9% rebound in 2021.
|S&P Global Ratings' Economic Forecasts For The U.K.|
|10-year government bond||0.9||0.4||0.4||0.7||1.1|
|Exchange rate (euro per GBP)||1.14||1.11||1.08||1.12||1.13|
|Sources: ONS, Bank of England, S&P Global Ratings.|
A Difficult Winter Ahead
Despite the promising start, many hurdles are ahead on the path to recovery, and we now see the economy slightly worse off over the next three years, compared with our previous forecast. Most importantly, COVID-19 is proving hard to beat. The emergence of a second wave of infections in the U.K. has lead the government to introduce fresh restrictions, with further measures likely, at least temporarily. Some restrictions will remain in place until the middle of next year, when we expect a vaccine or effective treatment to be widely available. Even then the virus will not likely be purged entirely, but rather stay with us for some time. Meanwhile, changes in the behavior of consumers and businesses have--at least temporarily--shifted spending patterns. This will weigh on the pace of growth and its distribution across sectors. For example, retail sales as a whole returned to pre-COVID-19 levels in August, but in-store sales were down, and, as a stark reminder of how things have changed in a matter of months, online sales were still up 40%.
What will further weigh on growth is the switch in 2021 to a bare-bones agreement on trade between the U.K. and EU, which we continue to assume in our forecast. That could curb the recovery's momentum, particularly in first-quarter 2021, when some degree of trade disruption at customs is likely.
Fresh Government Support Should Offset Most Of the Extra Damage
The furlough scheme ending in October has been crucial in avoiding large-scale unemployment so far, and with it, a loss of household spending power. In conjunction with business funding programs deployed by the Bank of England and the Treasury, it has prevented even greater and longer-lasting damage to the economy than has already been wrought. It is no coincidence that when the government announced new restrictions, it also introduced at the same time a new job support scheme, along with extensions or easing of conditions in its various business support programs. The new German-style short-work scheme, lasting for six months from October, subsidizes employees' pay when they work fewer hours than normal (but more than one-third). The main benefit will be to prevent a spike in unemployment and conserve the relationship between employers and employees until the economy is strong enough to sustain higher employment on its own. However, while still more generous than regular unemployment benefits, the maximum subsidy of 22% of total wages will not do much to prevent a drop in household income and, therefore, will weigh on total U.K. household spending and the performance of the wider economy. In our view, the new support measures, taken together, will be just enough to broadly offset the economic impact of the second wave, with some downsides.
Unemployment Is Set To Rise Markedly, Even With Extended Support
Unlike the furlough scheme, the short-work scheme will do little to help the hardest-hit sectors, most of which already face a much slower recovery than the average, notably travel, transport, hospitality, and leisure, as well as sectors catering to them. And, of course, it cannot reverse the damage already done. In order to survive, some businesses have already cut jobs or will do so in the next months and quarters, as they adjust to the expected weakness in demand ahead and take a longer-term view than the government's job support scheme. We see unemployment (on the ILO measure) rising markedly, from 4.1% in July to a peak of 7.2% in first-quarter 2020, before it declines again.
The latest unemployment rate numbers, as well as those in our forecast, mask some of the labor market deterioration that has already taken place. Indeed, many who have recently lost their jobs are currently not actively looking for a new one, in view of the extremely unfavorable situation at the moment. This drop in the so-called participation rate means they are not counted as unemployed. If they were, the unemployment rate would be about 1.3 points higher over the next four quarters (see charts 2 and 3).
No Further Monetary Policy Easing For Now
Monetary policy is set to remain extremely accommodative over the next few years. While the Bank of England has appears to have excluded further easing for the time being, in line with its now significantly more positive view of the recovery, the central bank is also unlikely to tighten policy given the weakness in demand and few if any signs of accelerating inflation. Of course, the BoE would likely change its current stance and embark on further easing, though without venturing below zero, if controlling the second wave of infections were to require much more invasive restrictions or if the U.K. and EU were to trade without any deal at all from 2021--both also major risks to our broader macroeconomic forecast.
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
This report does not constitute a rating action.
|Senior Economist:||Boris S Glass, London (44) 20-7176-8420;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.