Interactive Investor

UK economy will take two years to recover, experts say

20th August 2020 14:39

Liz Bury from interactive investor


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Economists more negative than Bank of England on how long it will take the country to bounce back financially.

The UK economy will take at least two years to recover from the Covid-19 shock, as will household finances, economists say.

A Reuters poll of 70 economists suggests the UK economy will contract 9.7% this year, and recover some of that ground in 2021 by expanding 6.2%.

The findings contradict the Bank of England’s take that the economy will be back at pre-crisis levels by the end of next year.

But some financial experts think it could be the end of 2022 by the time the economy returns to the size it was in Q4 2019, before the impacts of the Covid-19 pandemic.

Florian Hense, economist at Berenberg, says the wealth advisor’s own forecast suggests an even longer time-frame for UK GDP’s return to pre-crisis levels.

“We’re saying 2023, two- to two-and-a-half years, and considerably later than what the Bank of England is considering,” says Hense.

He expects the UK to recover more slowly than Eurozone economies due to the government’s handling of lockdown and Brexit. 

“Crucially, having imposed lockdown later by a week or so, the UK had to keep it for longer and ease it way slower than Eurozone countries, which left a sizeable mark on Q2 GDP, and may still on Q3,” Hense says.

“And the Brexit cliff edge, even if it’s split into several smaller cliff edges through agreements, from 2021 is definitely going to affect the UK economy on top of what we’ve seen.”

The Office for National Statistics shows gross domestic product grew by 8.7% in June, but this still left the economy smaller by 17.2% against February.

Travel, hospitality and retail were hit particularly hard, with tens of thousands of job losses expected across the economy. These included hundreds at the likes of John Lewis, Marks & Spencer, Pizza Express, Arcadia, British Airways, Easy Jet and Debenhams.

John Philpott, labour market economist, says the worst may not yet be over on jobs.

He says:

“On output, my view is in line with Reuters’ findings, but for jobs, the recovery will take longer. The jobs market will get worse before it gets better, with unemployment peaking at 10% and then taking a couple of years to come down.”

“That clearly has an impact on household finances and in addition, we will see a squeeze on earnings, because businesses will continue to be strapped for cash, particularly in the hardest-hit sectors.”

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