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PwC publishes weekly UK Economic Update

Posted: 29th April 2020
  • PwC estimates for GDP growth in 2020 now range from around -5% to -10% in alternative scenarios, as compared to -3% to -7% previously, reflecting more recent economic data.
  • The budget deficit is now expected to be around 10-15% of GDP in 2020/21, but should fall relatively rapidly to around 4.5-7% of GDP in 2021/22.
  • New home working survey shows that around 60% of workers (that were still employed) are able to work from home.
  • The survey also finds that higher-income workers are much more likely to have remained employed since mid-March than lower-income workers.

UK GDP growth is expected to range from around -5% to -10% for 2020, according to new analysis from PwC, reflecting growing evidence that the short term decline in activity due to the lockdown will be greater than originally anticipated. This is a downward shift from the previous estimate of -3% to -7% made a month ago, but a gradual recovery is still expected by the end of 2021.

John Hawksworth, chief economist at PwC, said:

“It is clear the COVID-19 crisis will lead to a sharp fall in GDP in Q2 2020, perhaps by around 12% to 16%. This is due to the unprecedented nature of the lockdown, as well as lower consumer spending and business investment due to confidence and income effects.

“However, we assume output will recover gradually as lockdowns are eased and  economic life slowly returns to normal. We estimate that output could therefore be back to only around 1.5% to 4% below its pre-crisis trend levels by the end of 2021 in alternative scenarios, although considerable uncertainty remains around any such estimates.”

Given the sharper drop in economic activity this year and announcements of further government economic support over the past couple of weeks, PwC’s public finance scenarios have also been revised. The estimated scenario range for the budget deficit in 2020/21 is now around £210-315bn, or around 10-15% of GDP, as compared to around 10% of GDP in 2009/10 after the financial crisis and around 8-12% of GDP in previous PwC estimates.

However, this budget deficit is then expected to fall relatively rapidly to only around 4.5-7% of GDP in 2021/22 as temporary measures come to an end and the economy recovers after the crisis. This would still be above the 3% of GDP ceiling implied by current fiscal rules, so some longer term fiscal tightening may be needed after full recovery has been achieved.

John Hawksworth added:

“In our ‘Smooth exit’ scenario, public debt excluding the impact of Bank of England schemes might stabilise at around 80% of GDP in 2021/22, so in this case there should be no major threat to longer term fiscal sustainability. But the debt profile looks less sustainable in a ‘Bumpy exit’ scenario as that may be associated with a larger permanent loss of GDP and, hence, of tax revenues. In that less favourable case, there may be a need for future tax rises in the longer term, but this should only be considered once we are well past the end of the current crisis. Bank of England gilt purchases mean there is no problem with the government borrowing more for now.”

New survey results on home working and employment

The latest PwC Research survey (16-19 April) finds that around 60% of a representative sample of around 600 currently employed UK workers are able to work from home, but for some, this comes at a cost of lower productivity, such as in financial and business services. The majority of workers in the transport and logistics (76%), hospitality and leisure (57%) and consumer and retail sectors (56%) are unable to work from home.

In addition, lower income workers were significantly less able to work from home than higher paid workers, as in our previous survey, with higher-income groups far more likely to have remained employed compared to lower-income groups.

Jing Teow, senior economist at PwC, said:

“Higher-income groups are far more likely to have remained employed compared to lower-income groups. For example, over half of those earning more than £50,000 a year have been able to keep working their usual hours, whereas only around 30% of those earning less than £20,000 a year could do so (though a significant proportion of lower earners have been furloughed on at least 80% of normal pay).

“In addition, the share of people who remain, or have become, employed is around 76% for the highest income earners (£50K+), significantly higher than 49% for lower income earners (<£20K). This suggests the negative economic impact of COVID-19 may be greater for lower socio-economic groups, particularly those exposed to harder hit sectors like leisure and hospitality, although the government’s furlough scheme will help soften the blow for many workers.”

Notes to editors

Our GDP growth scenarios for 2020 are less negative than the recent illustrative projections by the OBR predicting a 13% fall in 2020. But the OBR assumes a very sharp 35% drop in Q2 2020, which seems rather an extreme assumption. Both the latest IMF forecast for the UK and consensus forecasts as surveyed by the Treasury in April are more comparable to our ‘Smooth exit’ scenario, but are more optimistic in comparison to our ‘Bumpy exit’ scenario.

In addition, while our revised estimates of the budget deficit in alternative scenarios (10-15% of GDP) are now broadly in line with the OBR’s analysis, we do not expect as sharp a fall in the deficit in 2021/22 as we assume some longer term scarring effects on the economy.

The home working survey referenced above consisted of an online survey of 1,000 individuals (representative of the UK population aged 18 and over) and was conducted by the PwC Research team from 16-19 April 2020 to understand some of the impacts of COVID-19. Respondents were asked to fill in basic demographic information, what sectors they worked in and their income levels. The sample was selected to include individuals from across the UK on a statistically representative basis.

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