The UK economy is unlikely to recover to pre-virus size until late 2024 as falling consumer confidence, employment and investment hold back growth, according to new analysis.
Figures released by the EY Item Club suggest both the pandemic’s impact so far and in the future will be significantly worse than feared only a month ago.
The forecasting group suggests the pandemic wiped 20% off GDP in the second quarter of this year, a downgrade on the 15% contraction expected last month.
The total value of goods and services produced in Britain is now expected to drop by 11.5% in 2020. It marks almost twice as severe a collapse as the group predicted only three months ago, and 3.5 percentage points worse than expected in June.
Unemployment is expected to reach around 9% in late 2020 and early 2021, leading to more subdued consumer spending.
The continued troubles of firms in the UK’s dominant services sector, despite easing lockdown rules, are behind the downgrades.
“Even though lockdown restrictions are easing, consumer caution has been much more pronounced than expected,” said Howard Archer, the group’s chief economic adviser.
“We believe that consumer confidence is one of three key factors likely to weigh on the UK economy over the rest of the year, alongside the impact of rising unemployment and low levels of business investment.”
The EY Item Club expects the economy next year to grow slightly more than its June forecast, predicting a 6.5% leap in GDP. But growth is only expected to return to positive territory in the third quarter of next year.
“The UK economy may be past its low point but it is looking increasingly likely that the climb back is going to be a lot longer than expected,” said Archer.
“By the middle of this year, the economy was a fifth smaller than it was at the start. Such a fall creates more room for rapid growth later, but it will be from a much lower base.”
Mark Gregory, chief economist at the club’s sponsor and consultancy firm EY, said more UK government support was likely to be needed.
“Policies such as VAT cuts are welcome, but they aren’t a complete solution, as they don’t resolve the concerns consumers may have about going to restaurants and bars in the first place,” he said.