UK Economy: Gradual recovery after a severe recession if a large second wave of the pandemic can be avoided

The Covid-19 pandemic has led to a severe drop in economic output in the United Kingdom. The lockdown of the economy has been somewhat stricter and some containment measures have remained in effect longer than in several other countries. As elsewhere, travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. After gross domestic product (GDP) fell by 2.2 percent in the first quarter of 2020 (that includes the month of March when the lockdown started), it is estimated to have fallen by 20.4 percent in the second quarter according to the Office for National Statistics. The recession in the United Kingdom was more pronounced than in other countries (in Germany, output dropped by 10.1 percent in the second quarter; in the United States, the rate of contraction was at 9.5 percent). In particular, private consumption dramatically decreased by 23.1 percent. The fall in investment was also very high, but somewhat less severe. The recovery seems to have started in June. For the third quarter, one may expect a rebound of perhaps 10 to 15 percent, but obviously, we have to wait until the data will be published. Since forecasts or scenarios are of course associated with very high levels of uncertainty at the moment, I still do not publish a detailed economic forecast. The economic recovery will continue during the fall, but at a more moderate pace. Various large fiscal and monetary policy measures support the economic recovery and cushion the effects of the crisis on the labor market (but the unemployment rate will almost surely increase in the coming months). In particular, the government plans to considerably increase spending on infrastructure projects (if properly implemented, this may boost the recovery in 2021). For the whole year of 2020, I still expect a severe recession and a contraction of the economy of perhaps 9 to 10 percent and unemployment will strongly increase. This will hopefully be followed by a relatively strong rebound of 6 to 7 percent in 2021. In a more dramatic scenario (for instance, if there is a large second wave of the pandemic), the contraction in 2020 will be at around 13 percent. As I mentioned above, such forecasts are obviously associated with a high degree of uncertainty. Especially, there is the risk of a second wave of the pandemic. Moreover, and perhaps even more importantly, it is still not clear how exactly Brexit will occur and whether it will cause additional risks to the economy – at least in the short term. Recent developments suggest that turbulent weeks lie ahead of us. At the global scale, worldwide tensions could increase – especially between the United States and China.

While I use several models in my forecasts, my published numbers are also strongly influenced by my personal experience and judgment.

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