EY Spring forecast downgrades near-term outlook for UK

The EY ITEM Club Spring Forecast 2020 has substantially downgraded its near-term outlook for the UK economy, with predictions of a deep, short recession this year due to the impact of COVID-19. Even before coronavirus crisis took hold, construction activity was disappointing.

The forecast says that UK GDP is now expected to contract by 6.8% in 2020, before returning to positive growth of 4.5% in 2021. The forecast is based on the assumption that some lockdown restrictions will start to be eased in May, with even more in June. EY ITEM Club says that the substantial fiscal and monetary stimulus that has been enacted by the Treasury and the Bank of England should provide serious support to activity once the coronavirus impact starts to wane but, even with these measures, the UK economy is not expected to return to its Q4 2019 size until 2023.

Even allowing for construction activity taking a hit from very wet weather in February, the economy’s performance over the first two months of 2020 was very disappointing. Construction output contracted 1.7% month on Month (m/m) in February after a drop of 0.2% m/m in January.

The job retention scheme for PAYE and self employed could cost up to £60 billion. Firms are now waiting for the first payments to be made. There will be a point where the support ends and the economy will have to end.

In the Chancellors’s first budget he emphasised that infrastructure investment was a key component of the Government’s levelling up strategy. Confirmation of HS2 proceeding has given the construction sector a boost and more and more sites are starting to get ready to re-open including those run by Mace and Lendlease. Four major house builders, Vistry, Taylor Woodrow, Persimmon and Redrow has all confirmed plans to re-open sites.

Housing market made strong start to 2020 as was boosted by uncertainties and increased confidence after the general election. However, the housing market has been brought to a standstill by coronavirus impact. Once restrictions start to be lifted on people’s movements, the housing market activity should progressively pick up. Even so, the housing market looks unlikely to return to the levels seen at the start of 020 for some time and some forecasts predict transaction will fall significantly.

Download the report for the full EY ITEM Club Spring Forecast – April 2020.