Monday 27 April 2020 12:45 am

UK economy will take three years to recover from coronavirus, say analysts

The UK economy could take three years to return to its 2019 size after the coronavirus pandemic has passed, a new report has warned, as consumer spending and business investment plunge.

The report from economics forecaster EY Item Club said UK GDP would likely shrink 6.8 per cent in 2020 and unemployment would surge to 6.8 per cent. Yet it said if the economy was gradually reopened from next month then it could rebound with growth of 4.5 per cent in 2021.

Read more: Coronavirus: Bank of England says 35 per cent GDP drop ‘not unrealistic’

It comes as the UK government debates when to reopen the economy, which has been effectively shut down since the end of March.

Prime Minister Boris Johnson, who returns to work today after being hospitalised with Covid-19, has urged caution and wants to avoid a second wave of infections. However, “hawks” such as chancellor Rishi Sunak are more keen to ease lockdown measures in an effort to revive the economy.

EY Item Club’s prediction said that if some lockdown restrictions are eased in May and more in June, the UK economy will shrink by close to seven per cent in 2020. Unemployment will rise to 6.8 per cent from around four per cent in three months to February.

This is largely driven by consumer spending – a key driver of the economy – contracting by 14 per cent.

The economy is predicted to recover strongly in 2021. But this would not be enough to make up the lost ground, the report said. The UK economy is not expected to return to its fourth quarter of 2019 size until 2023.

Read more: Bank of England policymaker: UK economy in worst slump ‘in centuries’

However, EY said things could be “significantly” worse than this forecast “if coronavirus affects the economy longer than expected”. 

It added that there is still great uncertainty about whether large numbers of companies will go under and jobs will be lost. EY said this could hold back the recovery.

The report praised government interventions, saying the unprecedented fiscal and monetary stimulus “should provide serious support to activity once the coronavirus impact starts to wane”.

Yet it said that even with these policies in place, the outlook for the UK economy is dire. Howard Archer, chief economic advisor to the EY Item Club said GDP could fall by 13 per cent in the second quarter.

“The largest quarter on quarter contraction suffered during the 2008/9 financial crisis was 2.1 per cent in the fourth quarter of 2008,” he said.

Business investment, another key driver of the economy that has suffered in recent years amid Brexit uncertainty, is expected to plunge 13.6 per cent in 2020. It will rebound mildly to 1.2 per cent in 2021 and 6.5 per cent in 2022, EY Item Club said.

Read more: UK economy suffers unprecedented slump amid coronavirus lockdown

The prediction is more optimistic than some other groups have suggested, however. The UK Office for Budget Responsibility (OBR) has laid out a “scenario” in which GDP plunges 35 per cent in the second quarter and 13 per cent in 2020 overall.

The OBR said the economy could quickly bounce back. But Bank of England governor Andrew Bailey has struck a more pessimistic tone, suggesting there could be some “scarring” from the coronavirus pandemic.