Tuesday 24 November 2020 12:01 am

UK economy to contract in November amid second Covid-19 lockdown

The UK economy is set to suffer a significant contraction this month after Prime Minister Boris Johnson imposed a second national coronavirus lockdown.

After six consecutive months of growth, the economy is expected to shrink 5.7 per cent in November, before recovering a marginal 0.3 per cent in December, according to analysis by PwC.

Read more: UK business activity shrinks as fresh lockdown hits services sector

The UK had begun a cautious recovery following the shock of the initial Covid-19 lockdown, but fresh restrictions this month derailed growth and sparked a double-dip recession.

As a result, the fourth quarter is expected to deliver negative growth of between -2.1 per cent and -3.3 per cent, with annual GDP set to fall by between 11.2 and 11.4 per cent.

But progress in global Covid-19 vaccine development has raised hopes that Britain will return to growth next year.

GDP growth is forecast to range between 3.4 per cent and six per cent, depending on the success of a vaccine rollout and whether the UK can secure a trade deal with the EU.

“After a double dip, the economy should begin to rev up at the start of next year,” said Dr Jonathan Gillham, chief economist at PwC.

“While we initially anticipated that recovery would resemble a swoosh, we now envisage it being more of a W shape — albeit with a much smaller second drop.

“Although we expect a boost to economic activity as vaccines progress and confidence builds in the first half of 2021, the longer term outlook will very much depend on the nature and duration of further restriction measures and the outcomes of the UK-EU trade negotiation, which could weigh on growth.”

Although household spending remains 12 per cent below pre-pandemic levels, the report was bullish about a retail recovery during the festive period.

While PwC’s latest consumer sentiment index showed a significant drop in confidence in November. However, the announcement that shops will reopen after the national lockdown ends on 2 December means the high street could be given a pre-Christmas boost.

The figures also highlighted the rapid shift to online shopping as a result of the pandemic.

While it took seven years for online shopping to increase from 10 per cent to 20 per cent of total retail sales in February 2020, it took just two months to rise to 30 per cent by April. 

Read more: BoE governor Andrew Bailey: Vaccine ‘a big step forward’ for UK economy

“Although the structural shift to online could mean good news for Christmas shopping and provides a safety net for retail even if lockdown or other restrictions remain in place, on balance the risks to Christmas spending remain skewed to the downside,” said Hannah Audino, economist at PwC.

“While we have high levels of involuntary saving, the extension of the furlough scheme, and positive news regarding a vaccine, the considerable uncertainty surrounding the economic outlook and Christmas plans are likely to weigh on spending intentions.”

But Audino added that the outlook for January sales spending was more positive, with rising optimism over a vaccine rollout and the possibility of bumper sales to offload unsold stock.