- By October 2020, UK economic output had recovered about two thirds of the ground lost during the first lockdown. However, with the increased social distancing restrictions and lockdowns since the autumn, this recovery has gone into reverse. This is starting to feed through to the output figures, with a decline of -2.6% in November. The overall impact of the current lockdown will be significant, although not as severe as that experienced last spring, as more sectors of the economy remain open for business. The commencement of the COVID-19 vaccination programme means a greatly improved outlook from Q2, but the current lockdown is likely to remain largely in place until at least March.
- The agreement of the trade deal with the EU removes a key area of uncertainty and guarantees zero tariff and zero quota trade on goods that were worth £668bn in 2019. However, it will still result in significant costs and delays to businesses as cross-border traders face increased paperwork, and the new processes will take time to become established. The service sector is largely absent from the agreement, and in the important financial services sector, “equivalence” (which would enable continued access to EU markets) has only a very limited agreement in place so far.
Output
- The first lockdown in March 2020 precipitated an unprecedented fall in output of nearly 26% over a two-month period. To put this into context, output fell by just under 7% over a 12-month period during the global financial crisis in 2008/09.
- There was a significant rebound during summer 2020 as most sectors of the economy re-opened, and by July output was ‘only’ 11.4% below its pre-crisis peak. Since then, recovery has slowed, with monthly growth rates decelerating from 9.1% in June and 6.3% in July, to 1.0% in September and just 0.4% in October, taking output to 8.2% below its pre-crisis peak.
- The second and current third lockdowns in England and the increasingly high level of restrictions across the UK saw this progress go into reverse, with a fall in output of -2.6% in November. Consumer sectors such as retail and hospitality have been, and will continue to be disproportionately impacted, and office occupancy rates will have declined again. In addition, the second round of school closures will have a detrimental effect on employee productivity.
- Therefore, UK output is likely to record a fall in Q4 2020, with meaningful recovery delayed until Q2 this year, resulting in a double dip recession. However, the fact that businesses have already adapted to working in a COVID-19-secure way and to home working should reduce the contraction. The latest Treasury-compiled consensus forecast suggests a fall of -2.1% in Q4.
- Once recovery is under way, the bounce-back could be quite sharp, with confidence boosted by the vaccine programme and the EU trade deal, and the potential for a significant release of pent-up household savings. It is important that government support measures for firms continue for long enough to ensure that fundamentally sound business survive until consumer demand has returned.
Labour market
- There is a significant lag in the official unemployment data, which is now showing a marked rise, from 3.9% pre-COVID-19 to 4.9% in the three months to October 2020. Single-month estimates suggest a rise to 5.2% in October, up from 4.9% in September.
- There were 370,000 redundancies in the three months to October, compared with 153,000 over the previous three months. This was probably exacerbated by employers not expecting an extension to the furlough scheme, and it took total redundancies since February to 630,000. Early estimates indicate that the number of payrolled employees fell by 819,000 from February to November 2020.
- Following a sharp slowdown in pay growth over the summer, regular pay growth (excluding bonuses) has picked up considerably, rising by 2.8% in the three months to October compared with the same period a year ago, well ahead of inflation. Total pay (including bonuses) rose by a similar 2.7%.
- The Coronavirus Job Retention Scheme (CJRS) was due to have been replaced by the much more limited Job Support Scheme (JSS) from November 2020, but it has now been extended until the end of April 2021.
- The scale of the CJRS has been enormous, with 9.6 million jobs having been furloughed at some point, and claims (to mid-October) totalling more than £41 billion. 2.4 million people were furloughed at the end of October, down from 3.3 million in August, and a peak of 8.9 million in May.
- The extended CJRS will not prevent a continued rise in unemployment. The Treasury-compiled consensus forecasts expect a rise in unemployment from the current 4.9% (three months to October) to 5.9% by the end of 2020, remaining high at 6.7% by the end of 2021 – although these figures are lower than feared earlier in the COVID-19 crisis.
Inflation
- Weak consumer demand and spare capacity in the economy mean that inflation is currently very low. The annual CPI rate peaked at 1.8% in January 2020, and has been rather volatile over the last year, although within a range of 0.2% to 1.0% since April, well below the Bank of England’s target rate of 2%. The latest figure (December) is 0.6%, up from to 0.3% in November, with higher transport and clothing costs contributing to the increase.
- Inflation will almost certainly rise in 2021 as the economy recovers, with the Treasury Consensus for CPI currently suggesting 2.0% by Q4. Whilst inflation is not a key concern, there are risks that it could exceed the current forecasts, with the possibility of higher prices for some goods despite the agreement of the trade deal with the EU, and a risk that the supply side of the economy may not recover as quickly as demand.
Monetary policy and public finances
- The Bank of England’s Monetary Policy Committee again held interest rates at 0.10% at its December meeting. It did not further extend its programme of quantitative easing, following November’s purchase of an additional £150 billion of government bonds, which took its total stock of bond purchases to £875 billion.
- Falling tax receipts and the massive government support packages have combined to increase monthly government borrowing, which had fallen sharply in recent years to an average of under £4 billion per month in 2019. This figure rose sharply in the wake of COVID-19 to nearly £50 billion per month by April 2020. It has since moderated, but remains historically high at over £20 billion per month. As a result, public sector net debt has risen rapidly to 101% of GDP, the highest ratio since the early 1960s. With the second and third lockdown in England and extension of measures such as the CJRS, it will increase further.
- The Government has indicated that it will not follow the “austerity” policies adopted after the financial crisis and will be focusing on investment, particularly housing and infrastructure. Public sector debt is therefore likely to remain high into the medium term, although it should be manageable at this level given the ongoing low interest rate environment. Targeted tax increases are highly likely once the economy is firmly in recovery phase. The Budget on 3 March is therefore unlikely to announce immediate tax rises, but will be closely watched.
Longer-term trends
- The potential scale of longer-term structural change is becoming ever more apparent, with the pre-existing trends towards more home working and online shopping accelerating rapidly. This will have significant long-term impacts on the quantity, nature and location of commercial property requirements. The more recent phases of tightening COVID-19 restrictions will entrench this further.
- Changes to the planning system in England will also impact the property market. The Government has introduced legislation to permit greater change of use of commercial property without the need for planning consent, and adding space above existing buildings is also being given a fast-track approval process. This should allow commercial uses to shift more easily as demand evolves and the differentiation between uses becomes ever more blurred.
- Furthermore, the Government’s White Paper “Planning for the Future” was published in August. This sets out a proposed package of wide-ranging, fundamental reforms, set against the backdrop of the pledge to “build, build, build” and to “level up” the stark variations in prosperity between different parts of the country. Development will play an important role in the economic recovery, help to ensure that the built environment reflects the longer-term shifts in the type of property that will be required post-COVID-19, and assist with the Government’s “levelling-up” agenda.
Summary of key economic forecasts
|
2020 |
2021 |
Average, last 5 years (2015-2019) |
GDP growth |
-11.1% |
5.4% |
1.8% pa |
CPI inflation |
0.7% |
2.0% |
1.5% pa |
Unemployment rate (LFS) |
5.9% |
6.7% |
4.6% |
Employment growth |
-1.0% |
-2.2% |
1.2% pa |
Private consumption |
-14.0% |
5.5% |
2.3% pa |
House prices |
3.3% |
-2.6% |
4.4% pa |
Source: HM Treasury compilation of independent forecasts, December 2020 (forecasts); ONS, Experian, Carter Jonas (last 5 years)