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COVID-19
UK Economic UpdateFor more information on the potential business impact of COVID-19, please visit www.pwc.co.uk/covid19
4 June 2020
PwC
Contents
2
Summary
1. This week’s data
3
4
2. Focus on: Consumer spending 11
3. UK GDP scenarios 23
4. UK sector impacts 29
Annex – methodological details 33
4 June 2020
PwC
Summary
• 24% of businesses which have temporarily closed expect to start trading again within the next four weeks: 31% of businesses expect to start trading again
in more than 4 weeks, whereas 46% have indicated they are unsure. This suggests there is still a high level of uncertainty about when businesses can resume.
However, this survey was conducted between 4 and 26 May prior to the announcement of non-essential retail shops being able to reopen on 15 June.
• Extension of government job retention and salary support schemes: This week the Chancellor announced the extension to the Coronavirus Job Retention
Scheme, extending the current programme until the end of October. However, starting in September the government is easing the proportion of employee wages
covered by the job retention scheme, reducing its contribution to monthly wages to 70% in September and 60% in October.
• The downward spiral in workforce demand seems to have stabilised after a steady decline: Online job search engine data from Adzuna shows job vacancies
in some industries are no longer declining week-on-week. The week to 22 May saw total job openings on Adzuna increase by 3.3%.
• 38% of consumers surveyed by PwC indicate their financial position in the next 12 months will be worse than this year: Those on low incomes are hardest
hit as a third of workers in the lowest decile of earners are employed in shutdown sectors, compared to 5% in the top decile. This is supported by our survey results
which show 38% of households with income below £20,000 have seen a decrease in their cash balances since lockdown.
• There could be some ‘pent up’ consumer spending: 21% of consumers surveyed report an increase in their cash balances, broadly ranging from £200 to £500.
The majority of the savings comes from fewer spending outlets, such as reduced social activities, not having to commute and savings from eating at home. This
suggests there could be some ‘pent up’ consumer spending that could be released, especially once the lockdown is lifted. This could take time to filter through:
nearly half of all consumers with additional cash balances are likely to engage in precautionary savings. However, up to 36% of consumers are planning to spend
some or all of the cash.
• The most popular categories of spend are for home improvements and household furnishings which could be a result of the increased amount of time spent at
home during lockdown. Spending on holidays, cars and eating out are lower on the list of priorities, perhaps reflecting uncertainty as to when broader lockdown and
travel restrictions will be lifted. Younger age groups have indicated they are more likely to spend the additional cash.
• After lockdown ends, we may see spending behaviours move towards more local and ethical businesses: 34% of consumers surveyed said they would buy
from brands or stores which look after their staff after lockdown, and 31% indicated they would buy from brands or stores which support the NHS and vulnerable.
3
This week’s edition provides an update on the UK’s latest economic data, including the results from wave five of the ONS Business Impact of Coronavirus Survey, and highlights from more recent data on businesses looking to reopen, the furlough scheme and other labour market statistics. We also provide a special focus on the impact of COVID-19 on consumer spending with the results from PwC’s consumer survey.
4 June 2020
This week’s data
PwC
Comparison of 2020 Q1 GDP growth figures
GDP growth in Q1 2020 (% change compared to previous quarter – non-annualised)
China saw a significant decline in economic activity as a result of the lockdown starting in late January. However, even for countries that implemented widespread social distancing measures only in March, the measures represented a major shock to economic activity. Overall Eurozone GDP is estimated to have fallen by 3.8% in Q1, the sharpest drop since records were first compiled in 1995, ranging from -4.7% to -5.8% in Italy, Spain and France. The US economy shrank by 1.2%, its largest decline since the financial crisis. The UK saw the biggest quarterly decline in output (2%) since the financial crash, though the estimated monthly decline of 5.8% between February and March was larger than anything recorded before. A more accurate view will be available for the UK on 12 June as the ONS will release the GDP monthly estimate for April.
Source: US Bureau of Economic Analysis, China National Statistics Bureau, Eurostat, Refinitiv, ONS
-9.8%
-5.8%-5.2%
-4.7%
-3.8%
-2.2% -2.0%
-1.2%
China France Spain Italy Eurozone Germany UK US
5
4 June 2020
PwC
Businesses are expecting to resume trade in the next few weeks
As the UK government announces the easing of lockdown measures, around a quarter of UK businesses are expecting to begin and resume usual trade within four weeks. Restaurant booking data from OpenTable shows other countries have already seen signs of increased trade in previously locked down sectors, with countries such as Germany already having significantly more restaurant bookings than a month ago when the country was in lockdown.
OpenTable restaurant bookings, compared to previous year (18
February to 30 May)
-100%
-80%
-60%
-40%
-20%
0%
20%
18-F
eb
25-F
eb
03-M
ar
10-M
ar
17-M
ar
24-M
ar
31-M
ar
07-A
pr
14-A
pr
21-A
pr
28-A
pr
05-M
ay
12-M
ay
19-M
ay
26-M
ay
Global Germany United Kingdom United States
Percentage of surveyed businesses who have temporarily closed
or paused trading, UK, 4 May to 17 May 2020*
0% 10% 20% 30% 40% 50%
Not sure
Expect to start trading in more than 4 weeks time
Expect to start trading in the next 2 weeks
Expect to start trading in the next 2 to 4 weeks
*Businesses were asked for their experiences for the reference period 4 May to 17 May 2020, but for questions regarding
expectations in the next two weeks businesses may respond from the point of completion of the questionnaire (18 May to 26
May 2020)
Source: ONS Business Impacts of Coronavirus Survey (BICS) Wave 5, OpenTable bookings
6
4 June 2020
PwC
Continued rise in businesses applying for government support
79% of all businesses have applied to the UK government’s Coronavirus Job Retention Scheme, which is a 3% increase compared to last week’s ONS survey results. More businesses that have temporarily closed or paused trading have also applied to the scheme compared to last week’s data, as more businesses look to fund the wages of their employees through the scheme rather than using their own cash reserves or making their employees redundant.
75%
94%
79%
13%
24%
15%
13%
31%
16%
23%
4%
20%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Businesses currently trading
Businesses temporarily closed or paused trading
All businesses (excluding those permanently ceased trading)
Not applied for any of these schemes Business grants funded by the UK and devolved governments
Government-backed accredited loans or finance agreements Coronavirus Job Retention Scheme
Proportion of businesses applying to government schemes, by trading status, UK, 4 May to 17 May 2020
Source: ONS Business Impacts of Coronavirus Survey (BICS) Wave 5
7
4 June 2020
PwC
Cash reserves for businesses remain unchanged
New ONS business survey data collected between 4 May and 17 May, showed business cash reserves remain relatively unchanged from the previous ONS survey, with businesses that have temporarily closed or paused trading maintaining significantly weaker cash positions than those businesses that were continuing to trade during the lockdown. Nearly one-third of businesses that have continued to trade reported sufficient cash buffers to last six months or more, and roughly a quarterof all businesses were unsure what their cash reserves were. This reflects the high uncertainty businesses are facing in terms of the recovery and for some, when they might be able to restart trading.
Proportion of businesses with set amounts of cash reserves, by trading status, UK, 4 May to 17 May 2020
3%
7%
4%
39%
58%
42%
35%
11%
30%
23%
24%
23%
0% 20% 40% 60% 80% 100%
Businesses currently trading
Businesses temporarily closed or paused trading
All businesses (excluding those permanently ceased trading)
No cash reserves Less than 6 months More than 6 months Not sure
Source: ONS Business Impacts of Coronavirus Survey (BICS) Wave 5
8
4 June 2020
PwC
Furlough scheme extended to end of October
This week, the Chancellor announced the extension of the Coronavirus Job Retention Scheme from the end of July to the end of October while the Self-Employed Income Support Scheme was also extended, with those eligible now being able to receive a second and final grant capped at £6,570. However, the extended furlough scheme will see contributions from the UK government towards employee wages decrease, with the expectations that businesses should begin to remunerate their employees as lockdown measures are eased. The government will contribute 70% and 60% of wages in September and October respectively up to specific wage caps.
Number of individuals (in millions) claiming either the furlough or the self-employment wage support
schemes (as of 27 May 2020)
Worth £15bn
Worth £6.8bn
Source: BBC
9
4 June 2020
PwC
Labour demand appears to have stabilised
Data from online job search engine Adzuna shows the initial sharp decline in demand for workers, as captured by vacancies, appears to have levelled off. Industries such as the education and healthcare & social care sectors experienced the first week-on-week increase in the number of posted online job adverts since early March, highlighting demand for labour may be recovering after a sustained decline since March.
Total weekly job adverts on Adzuna, UK: index 2019 average = 100
0
20
40
60
80
100
120
140
160
Num
ber
of
weekly
job a
dvert
s
Healthcare and social care Education Wholesale and retail Catering and hospitality
UK lockdown begins –
23rd March
Source: ONS Business Impacts of Coronavirus Survey (BICS) Wave 5
10
4 June 2020
Focus on: Consumer spending
PwC
Fall in consumption and retail sales at record lowRetail sales declined by nearly one-fifth in April following the closure of all non-essential retailers since 23 March, wiping out more than a decade of gains in retail sales volumes. 4.3% of stores reported zero turnover in April. Household consumption fell by 1.7% in Q1 compared to the previous quarter.
There are three key factors driving this: lockdown of retail sectors, increase in unemployment and increase in precautionary saving which has reduced spending. However, as shops gradually reopen (particularly from 15 June onwards) there should be a boost to spending from those who have some ability to spend.
83.8
70
75
80
85
90
95
100
105
110
115
Apr 2008Apr 2009Apr 2010Apr 2011Apr 2012Apr 2013Apr 2014Apr 2015Apr 2016Apr 2017Apr 2018Apr 2019Apr 2020
Jan 2016 = 100
Apr
2012
Apr
2014
Apr
2010Apr
2013
Apr
2015
Apr
2011
Apr
2020
Apr
2018
Apr
2016
Apr
2017
Apr
2019
UK Retail sales volumes, seasonally adjusted
Source: ONS – Monthly Business Survey – Retail Sales Inquiry
Increase in unemployment
Sector lockdowns
Increase in precautionary savings
1
2
3
12
4 June 2020
PwC
Workers fit into three broad categories
1. Unemployed / struggling 2. Furloughed / uncertain 3. Employed / stable
• Claimant count data suggest a significant
increase in unemployment (with claimants
reaching 2.1 million as of April 2020).¹
Unemployment is likely to reach above 10%
later this year.
• Younger workers and those in precarious jobs
have been disproportionately impacted, as a
large proportion work in shut-down sectors.
Demographics
• These households are likely to experience a
material drop in income.
• Indebtedness in this group is increasing as
they no longer have a stable source of income.
• This group may use government support such
as mortgage payment holidays (take-up was
1.8 million as of 22 May).³
• Workers in this group may need to consider
re-skilling for future occupations if their pre-
COVID-19 jobs cease to exist.
Impact from COVID-19
• The number of employees covered by the government
furlough scheme has reached around 8.4 million (as of
24 May).²
• However, the scheme is closing to new applications on
10 June and it has been announced the scheme will
stop at the end of October, creating uncertainty for
furloughed workers later this year.
Demographics
• Incomes for furloughed workers are currently protected
(although not 100%).
• There has been a 25% reduction in hours worked
across the economy compared to 2019 in the
equivalent week.¹
• Uncertainty is likely to defer discretionary expenditure.
• Concerns of what happens at the end of furlough and
migration of cost back to employers.
• Provision of government support has led to a huge,
unsustainable cost to the Treasury, potentially
impacting the support available in the future.
Impact from COVID-19
• This group covers around 65% to 70% of all
workers.
• Approximately 50% are working from home, as
sectors such as IT and financial services have
largely adapted to working remotely.
• The remaining proportion of workers are in
essential roles, such as healthcare, transport
and utilities.
Demographics
• Constrained expenditure due to lockdown,
such as reduced commuting costs and
expenditure related to socialising, results in
stable household finances or a higher cash
balance available to spend.
• Net wealth position likely to be down (for
example from poor investment performance).
• Healthy retirees may also see an increase in
cash balances as they have less opportunity
to spend.
Impact from COVID-19
Workers in the UK broadly fit into the following three categories, experiencing different impacts from COVID-19:
¹ ONS; ² HM Revenue and Customs; ³ HM Treasury
13
4 June 2020
PwC
Furloughed staff and the unemployed have uncertain outlook
What is your impression of how your personal financial
situation will change in the next 12 months? 'I believe my
financial situation will be…'
Results from our consumer survey (22-24 May) into the impact of COVID-19 on saving and spending habits during lockdown, indicate a high proportion of consumers (38%) who consider their personal situation to be worse in the next 12 months. Analysis by the IFS and other bodies suggest lower-income groups will be hit hardest: IFS analysis shows 34% of employees in the bottom decile of earners work in sectors affected by lockdown. This compares to 5% in the highest earning bracket.
Source: PwC Research, IFS
14.8%
40.6%38.1%
6.5%
0%
10%
20%
30%
40%
50%
Better than this year Same as this year Worse than this year Not sure
Percentage of employees working in shut-down sectors by
earnings decile
34%
27%
23%
19%
16%
13%
10%
8%6% 6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1 2 3 4 5 6 7 8 9 10
% e
mplo
yees
Earnings Bracket (Lowest = bottom 10% of earners)
14
4 June 2020
PwC
However, for many in work, bank balances have increased
How has the cash balance in your current account changed
since before COVID-19 lockdown?
Our research also reveals that 21% of consumers have seen their bank balance rise during lockdown. The majority of those who reported an increase in bank balances have seen an increase of between £200 and £500. A significant proportion (14%) of consumers reported a cash balance increase of £1,000 or more. On the whole, Bank of England data suggests overall household deposits have increased since the lockdown began, rising by £16bn in April, compared to the previous month.
Source: PwC Research
20.8%
45.8%
33.4%
0%
10%
20%
30%
40%
50%
Increased Stayed the same Decreased
How has the cash balance in your current account changed since
before COVID-19 lockdown? (for those who reported an increase)
6.3%
5.1%
7.8% 7.4%
15.6%
12.7%
5.6%
12.1%
3.7% 4.0%4.7%
1.2%
13.8%
0%
10%
20%
Under£50
£50 £100 £150 £200 £300 £400 £500 £600 £700 £800 £900 £1,000or
moreOf the 21% with an increase in
cash balance, the majority has
been between £200 and £500
15
4 June 2020
PwC
Higher-income households now have higher cash balances
How has the cash balance in your current account changed since before the COVID-19 lockdown? %
of respondents by income level
Our survey shows 38% of lower-income households (less than £20,000) now have lower cash balances in their current accounts than before the crisis. This largely reflects the disproportionate impact of the crisis on the jobs and incomes of lower-income households, which are more exposed to sectors under lockdown. This compares with just 31% in both higher household income groups who have reported a decrease in cash balances, while more than one-fifth of consumers in these groups have experienced an increase in cash balances, compared to 15% of those earning lower incomes.
Source: PwC Research
15%
25%
22%
47%
44%
47%
38%
31%
31%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Less than £20,000
Between £20,000 and £50,000
>£50,000
Increased Stayed the same Decreased
16
4 June 2020
PwC
Household savings from reduced social activities and commuting
How have you managed to save additional cash?
For those that have experienced an increase in bank balances, the higher balances have been driven by the lack of usual spending outlets, for example socialising less, not having to commute to work, and savings from having meals at home. This could represent a significant amount of cash unspent as the average UK household in 2019 spent 14% of their weekly expenditure on transport, and a further 13% on recreation and culture. A smaller share of households also saw increased cash balances from a mortgage holiday and/or council tax holiday. These housing costs (mortgage and council tax payments) contributed to around 8% of average weekly expenditure in 2019.
Source: PwC Research, ONS, PwC analysis
8.4%
10.5%
11.6%
16.5%
37.8%
42.8%
50.1%
0% 10% 20% 30% 40% 50% 60%
I have had a council tax or rates holiday
I have had a pay rise
I have had a rent or mortgage rebate or holiday
I have had a refund from a holiday I booked
I have lunch at home
I have no commuting costs
I’m eating out and socialising with my friends less
17
4 June 2020
PwC
Reduced consumption driven by inability to spend as well as income impacts
Consumer spending in April 2020 by category, % change year-on-year
Higher frequency payments data based on card transactions from Barclaycard suggests consumer spending has fallen by around a third in April, largely driven by the inability to spend at restaurants, hospitality, other non-essential spend categories, and reduced travel (including public transport). This data does not capture other forms of non-card spend that are more resilient, such as spending on energy and utilities. Consumers have increased spend on groceries in supermarkets, and home-based activities such as digital subscriptions to entertainment services and video-conferencing.
Source: Barclaycard – Consumer Spending May 2020
-100% -80% -60% -40% -20% 0% 20% 40% 60%
Digital subscriptions
Food & Drink specialist
Grocery and supermarkets
Electronics
Online
Sports & Outdoor
Overall
Household
Takeaway & fast food
Furniture
Pharmacy, health and beauty
Clothing
Fuel & motoring
Travel and hospitality
Restaurants
18
4 June 2020
PwC
Available cash balances could boost consumer spending
What do you intend to do with your additional cash?
Our research suggests with the increase in cash balances, there may be some ‘pent up’ consumer spending that could be released, especially post-lockdown. This could take time to filter through: nearly half of all consumers with additional cash balances are likely to engage in precautionary savings. However, up to 36% of consumers are planning to spend some or all of the cash. The most popular categories of spend are for home improvements and household furnishings which could be a result of the increased amount of time spent at home due to the lockdown. Spending on holidays, cars and eating out are lower on the list of priorities, perhaps reflecting uncertainty as to when broader lockdown and travel restrictions are lifted.
Source: PwC Research
12.8%
15.2%
16.3%
21.4%
25.4%
26.5%
35.4%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Eating out and socialising
A new car
A holiday
Consumer electronics (e.g. electronicdevices, TVs, home entertainment)
Clothing
Household furnishings and appliances
Home improvements and renovations
7.0%
29.0%
15.7%
48.3%
Spend all of itSave some of it andspend some of it
I haven't decided yetSave all of it
What do you think you will spend this additional cash on?
Source of pent up demand
as lock-down eases
19
4 June 2020
PwC
These savings represent potential additional spending capacity for some consumers
Average household spend in FY19 versus during COVID-19
We estimate households that have increased cash balances could therefore have a sizeable amount of disposable incomes that are not currently being spent. We estimate this to be about 12% of pre-COVID-19 average weekly household spend, or around £70 per household per week.
Source: PwC Research, ONS – April 2020 retail sales data, Barclaycard – consumer spending data in April 2020, PwC analysis
14%8%
14%
16%
13%
7%
11%
11%
9%
1%
8%
6%
2%
3%
30%
24%
12%
12%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FYE 2019 COVID-19 Spending
Housing, fuel and power
Other including clothing,
household goods and
services, communications,
miscellaneous items
Alcohol and tobacco
Housing, mortgage payments,
council tax
Restaurants and hotels
Food and non-alcoholic drinks
Recreation and culture
Additional precautionary
savings
Transport
Potential spend capacity• Using results from our consumer
survey, retail sales data from the ONS, and Barclaycard payments data, we estimate that households that have increased cash balances have reduced average weekly household spending by around 25%.
• Assuming that around half of this saving is allocated towards precautionary savings, this leaves around 12% of spare cash that could be available for consumer expenditure, which could be partially spent while under lockdown (such as on household goods), or to be spent later after lockdown, such as on holidays or going out.
• Spending on transport is likely to have fallen as people save on commuting costs, while consumption of energy and water
20
4 June 2020
PwC
Spending behaviour varies across age groups
What do you intend to do with your additional cash?
For those with additional cash balances, younger age groups have indicated they are more likely to either spend some or all of their additional cash. This is highest for the 18-24 age group (57%) and the 25-34 age group (44%). This compares with only 24% for the 65+ age group. Younger age groups are more likely to enjoy parental support for household and living costs while older workers may choose to save more for retirement or may be supporting other family members.
Note the sum of percentages may not add up to 100% due to rounding.
Source: PwC Research
43% 44%50%
63%
46% 46% 48%
53%
34% 22%
33%
32%
17%
29%
5%
10%15% 3%
7%
7%
12% 13%4%
19%
30%
16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
18-24 25-34 35-44 45-54 55-64 65+ Average
Save all of it Save some of it and spend some of it Spend all of it I haven't decided yet
21
4 June 2020
PwC
Local and ethical shopping becoming more important
As a result of the Coronavirus restrictions, and after they are lifted, have you bought or will you buy more from
any of the following?
In PwC’s Consumer Sentiment Survey we identified a trend towards local and ethical shopping as a result of prolonged lockdown. With many larger stores and chains closed, and continued social distancing for the foreseeable future, more consumers are looking to support local independent retailers who have helped them through these times. This is especially visible in the results of consumers who indicate they will support stores and brands that look after their staff, or have supported the NHS and the vulnerable.
Source: PwC Research
24%
18%
15%
11% 11%
5%
29%
24%
20%
31%
34%
18%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Small shops instead ofchains
Local high street shops Groceries / food boxes fromlocal shops and restaurants
Brands / stores that supportthe NHS and vulnerable
Brands / stores that lookafter their staff
Ethical brands / stores
Since lockdown After lockdown
22
4 June 2020
UK GDP scenarios
PwC
Assumptions*:
• Following an initial peak in April 2020, successful implementation of NPIs including testing,
contact tracing, quarantine and physical distancing results in the effective reproduction rate
remaining at or below one, and therefore the number of cases reducing to a lower level.
• NPIs are lifted in a gradual, phased way from late May 2020 onwards.
• Significant testing and contact tracing will be necessary to track and control outbreaks as pre-
symptomatic and mild cases prevent complete containment of the virus until a vaccine
becomes available.
Timeframe:
• Peak: April 2020
• Total duration: 12 to 18 months (until a vaccine is available).
Assumptions*:
• Following an initial peak in April 2020, successful implementation of NPIs including testing,
contact tracing, quarantine and physical distancing results in the effective reproduction rate
remaining at or below one, and therefore the number of cases reducing to a lower level.
• NPIs are lifted in a gradual, phased way from late May 2020 onwards. However, this has the
effect of increasing the reproduction number to above one, causing a subsequent rise in cases.
NPIs may be introduced and reversed in a cyclical way to control subsequent outbreaks.
• Significant testing and contact tracing will be necessary to track and control outbreaks as pre-
symptomatic and mild cases prevent complete containment of the virus until a vaccine
becomes available.
Timeframe:
• Peak: April 2020, but with prolonged lockdown or re-imposed if there is a later rise in cases
• Total duration: 12 to 18 months (until a vaccine is available).
Potential COVID-19 scenarios to inform crisis planning
24
Our illustrative COVID-19 scenarios reflect a range of likely outcomes following the UK government’s proposed phased approach to lifting lockdown restrictions. Both scenarios assume a continuation of some elements of lockdown over the coming months, but for varied periods and at varying levels of intensity. The subsequent trajectory of the disease is dependent on the success of these non-pharmaceutical interventions (NPIs), whether they need to be re-imposed, and the introduction of other NPIs or pharmaceutical interventions at a later date (i.e. treatment or vaccines).
2
New
ca
se
s p
er
we
ek
BUMPY EXIT
Lifting of NPIs results in a subsequent rise in cases, requiring NPIs
to be reintroduced to bring cases back to a lower level.
2021 2022
Assume vaccine
available – June
2021
2020
1
New
ca
se
s p
er
we
ek
SMOOTH EXIT
Gradual lifting of NPIs does not result in a significant further rise of
cases. Cases continue to occur at a lower level.
2021 20222020
Assume vaccine
available – June
2021
Note: *Our scenarios assume the UK moves to a comprehensive free trade agreement with the EU on 1 January 2021, but there are still uncertainties surrounding this assumption.
4 June 2020
PwC
COVID-19 economic impact transmission channels
25
For our alternative scenarios, we modelled five main transmission channels through which COVID-19 could impact the UK economy (the first four negative, with an offsetting positive effect from monetary and fiscal policy reactions). Other reinforcing and mitigating impacts are possible, so this is not an exhaustive list.
• Major disruption
reduces demand
throughout the supply
chain, affecting
suppliers. Businesses
scale back production or
adapt supply chains to
alternative sources.
• Significant proportion of
the workforce becomes
unavailable for work and
production facilities can’t
maintain output of basic
materials and unfinished
goods.
• Social distancing
measures see non-
essential workers
working from home for
an extended period, or
workers staying at home
to care for children or
other dependents.
• Focus on maintaining
workforce in essential
roles only.
• Consumers defer major
purchase decisions and
defer discretionary
spend.
• Significantly reduced
levels of business and
consumer confidence
results in a sharp and
sustained downturn in
business investment.
• Investment focuses on
infrastructure and
facilities to counter the
pandemic and
investment in digital
ways of working (or new
delivery models).
• Significant periods of
travel disruption,
closures of most retail
outlets (except grocery
and pharmacy), leisure;
hospitality; sports and
entertainment venues.
• Other non-essential
sectors may see full or
partial lockdowns due to
practical difficulties in
operating with adequate
social distancing.
• Extensive working
capital / cashflow
support to businesses
through tax / payment
holidays, grants and
loan guarantees.
• Fiscal support for
healthcare service.
• Looser monetary policy
stance through interest
rate cuts combined with
additional quantitative
easing (QE) and other
measures to boost
credit flows to business.
1. Supply
chain
disruption
2. Labour
supply
reduction
4. Sector
partial or full
lockdowns
3. Uncertainty
impacts
5. Policy
reactions
4 June 2020
PwC
-25
-20
-15
-10
-5
0
Smooth exit Bumpy exitSupply chain
Labour supply
Uncertainty- consumerexpenditure
Uncertainty- investment
Sector lockdowns
Illustrative scenarios for short-term impact on UK GDP
Year one impact (%) on UK GDP
relative to baseline without COVID-19
Scenarios
Smooth exit Bumpy exit
1. Supply chain -0.7 -1.2
2. Labour supply -2.1 -2.4
3a. Uncertainty – consumer
expenditure -3.2 -5.4
3b. Uncertainty – business
investment -1.9 -2.6
4. Policy responseFiscal: 3.0
Monetary: 1.0
Fiscal: 3.7
Monetary: 1.3
5. Sector partial lockdowns -4.7 -7.9
Overall UK economic impact -8.6 -14.5
Government
support schemes
prevent far worse
outcomes
First year UK GDP impact across COVID-19 scenarios
Net position after monetary
and fiscal response
% impact on 2020 GDP relative to
baseline without COVID-19
Our projections reflect recent economic data on the severity of the economic disruption in the short-term. Our estimates for GDP growth in 2020 range from -7% to -13%. The projections for the ‘Bumpy exit’ scenario not only reflects the potential disruption from the re-imposition of lockdown measures, but also acknowledges the potential “scarring” effects from a deeper contraction in Q2, which could hold back the speed of the recovery in the UK after the initial bounce from leaving lockdown.
Our analysis suggests that UK GDP growth could range between around -7%
and -13% in 2020, given we expected growth of around 1% before COVID-19
and the estimated impacts of the outbreak in the table below, which are from
around -9% to -14.5% in the first year. Figures below are only illustrative of broad
orders of magnitude and should not be taken as forecasts or predictions. See the
technical annex for more detail on assumptions.
26
4 June 2020
PwC
UK GDP will drop sharply in Q2 2020, but should recover later
UK GDP index (Q4 2019 = 100), quarterly levels in each scenario
Source: ONS, PwC analysis
Commentary
80
70
100
90
105
75
85
95
2019
Q3
2021
Q3
2020
Q2
2020
Q1
UK
Real G
DP
In
dex (
Q4 2
019:1
00)
2019
Q1
2019
Q2
2019
Q4
2020
Q3
2020
Q4
2021
Q1
2021
Q2
2021
Q4
Bumpy exit
Baseline
Smooth exit
● In the ‘Smooth exit’ and ‘Bumpy exit’
scenarios, GDP could contract by around 20-
30% quarter-on-quarter in Q2 2020.
● This compares to a contraction of around 2.1%
in Q4 2008 at the height of the global financial
crisis, or a 2.7% quarter-on-quarter decline at
the peak of the 1974 recession.
● We assume output would then recover
relatively quickly at first as lockdowns are
eased, followed by a more gradual pace of
recovery as economic life slowly returns to
normal. The recovery is longer under the
‘Bumpy exit’ scenario due to larger scarring
effects and the temporary re-imposition of
social distancing measures in this case.
● The pace of the recovery remains highly
uncertain, but we assume this involves the
level of GDP returning to only around 1.5% to
7% below pre-crisis trend levels by the end of
2021. But other outcomes are clearly possible
if the crisis lasts for longer.
Our expectations for Q2 2020 growth shows a significant weakening in business investment and consumer expenditure, leading to a deep contraction in Q2, perhaps by around 20-30% - much larger than any quarter during the 2008-09 financial crisis. This is driven by the unprecedented nature of the lockdown, as well as lower consumer spending and business investment due to more standard confidence and income effects. There should then be a recovery as and when the lockdown eases, although the pace of this remains highly uncertain. We estimate that output could be back to around 1.5% to 7% below its pre-crisis trend by the end of 2021.
27
4 June 2020
PwC
PwC’s economic growth scenarios compared to other analyses
28
Our ‘Bumpy exit’ scenario growth projections are broadly in line with illustrative projections by the OBR predicting a 13% fall in 2020. The OBR assumes a very sharp 35% drop in Q2 2020. Similarly, the Bank of England’s most recent forecasts for the UK assume a quarterly decline of over 20%, with growth in 2020 averaging at -14%. The latest IMF and consensus forecasts as surveyed by the Treasury in May more optimistic and broadly in line with PwC’s ‘Smooth exit’ scenario.
Comparison of 2020 GDP projections and scenarios
● The Office for Budget Responsibility (OBR)
published illustrative projections on the impacts
of COVID-19 on UK economic output on 14
April. They estimate that 2020 Q2 GDP could
fall by as much as 35% compared to the
previous quarter and by around 13% in 2020
as a whole despite a strong recovery later in
the year.
● Similarly, the Bank of England anticipates a
significant decline in Q2, followed by a material
pick up in activity later in 2020 that continues
into 2021, when the economy recovers to its
pre-COVID level in the second half of 2021.
● IMF and consensus forecasts project more
moderate falls in GDP in 2020, but also some
longer term scarring effects as we do. But all
such projections are subject to large
uncertainties and can only be illustrative at
present.
Commentary
Source: PwC, OBR, IMF, HMT, BoE
*HMT comparison of independent forecasts (May 2020) – average of new forecasts made in last month
-6.5%
-7.5%
-8.6%
-12.8%
-13.5%
-14.0%
IMF
PwC - 'Smooth exit' scenario
Consensus forecasts* (20 May)
OBR (14 Apr)
PwC - 'Bumpy exit' scenario
Bank of England (7 May)
4 June 2020
UK sector impacts
PwC
We use an input-output approach to assess sector impacts
30
We use UK input-output (I-O) tables to model the sectoral economic impact of COVID-19 through three main channels: the direct impact on gross value added (GVA)* due to sector lockdowns and labour supply disruption; the supply chain spend impact (indirect impacts through the supply chain); and the employee spend impact (induced impacts as a result of lower household incomes and so lower consumer spending).
The relationship between the three levels of economic
contribution
1
Indirect
Supply chain spend
2
Direct
Employment
Gross Value added
Wages Profit
Employment
Gross Value added
Wages Profit
Induced
Employee spend
3
Employment
Gross Value added
Wages Profit
Supplier
expenditure
Employee
spending of
wages
A simplified representation of the relation between Covid19’s
direct impact and its impacts through the supply chainA simplified representation of the relation between COVID-19’s
direct impact and its impacts through the supply chain
£xm
(construction
contractor)
£xm
(financial
services provider)
£xm
(distribution
network provider)
£xm
Suppliers to the financial
services provider
£xm
Suppliers to the distribution
network provider
£xm
Suppliers to
construction contractor
£xm
Initial demand shock
Extended supply chain
*Note: GVA is broadly the sectoral version of GDP
4 June 2020
PwC
Our sector impacts demonstrate more declines across sectors
31
Our sectoral analysis finds the worst-hit sectors in terms of short term economic damages continues to be the food service (e.g. restaurants and pubs), hotels, retail and transport sectors. In our ‘Smooth exit’ scenario, these sectors shrink by 15% to25% in 2020, relative to a baseline without COVID-19. In our ‘Bumpy exit’ scenario, these sectors could suffer a negative GVA impact of around 25% to 40% in 2020.
Source: PwC Economics analysis, ONS
Range of estimated GVA impact by sector – ‘Smooth exit’ vs ‘Bumpy exit’, % impact on
2020 GVA relative to baseline without COVID-19
● Our sector scenario impacts are in line with our GDP scenarios as described in Section 3 above.
● We now anticipate a decline in health and social care output as recent Q1 data suggests reduced activity in some areas (such as elective surgeries), which is partially offset by an increase in activity related to COVID-19 treatment and helpline services (i.e. NHS 111).
● These impacts stem largely from demand-side effects, and we assume that the economy re-allocates labour to where it is needed (e.g.to food retail away from non-food retail).
● Our analysis also implicitly assumes that policy action is sufficient to prevent a very large wave of corporate insolvencies (though there are bound to be some in practice).
Commentary -25%
-23%
-17%
-15%
-15%
-14%
-13%
-10%
-9%
-8%
-8%
-7%
-6%
-5%
-5%
-5%
-4%
2%
-44%
-41%
-29%
-26%
-25%
-25%
-23%
-17%
-15%
-14%
-14%
-11%
-10%
-8%
-8%
-8%
-7%
3%
0%-20%-50% -40% -10%-30% 10%
Hotels
Admin and support services
Retail and wholesale
Food service
Manufacturing
Transport
Leisure and arts
Construction
Education
UK Average
Logistics
Professional and technical services
Real estate
Finance and insurance
Health and social care
Information and Telecoms
Utilities
Public Admin, DefenceSmooth exit Bumpy exit
4 June 2020
PwC
COVID-19 sector impacts vs global financial crisis
32
The potential scale of the annual GDP impact under even our ‘smooth exit’ scenario could be larger than the experience of 2009 due to the global financial crisis, with the impact of COVID-19 being significantly larger for locked-down sectors such as the food industry and hotel industries. In addition, the current COVID-19 crisis is expected to have a broad-based impact across most sectors. An outcome that is closer to our Bumpy exit scenario would accentuate those differences even further. However, the scale of government support has also been much greater this time around, which mitigates some of the difference.
Source: PwC Economics analysis, ONS
Sectoral GDP impacts in the smooth exit scenario in 2020 vs actual 2009 annual impacts
-20%-30% 10%-10% 0%
Leisure and arts
Food service
Real estate
Hotels
Transport
UK Average
Retail and wholesale
Construction
Education
Manufacturing
Logistics
Professional and technical services
Finance and insurance
Health and social care
Information and Telecoms
Utilities
Public Admin, Defence 2009 comparisonSmooth exit
4 June 2020
Annex – methodological details
PwC
• An online survey of 1,000 individuals (representative of the UK
population aged 18 and over) was conducted by the PwC
Research team from 22-24 May 2020 to understand some of the
impacts of COVID-19.
• One of the questions on the survey was about how the cash
balance in their current account has changed since before the
COVID-19 lockdown.
• A second question on how much their cash balance has changed
was asked to those who had seen a decrease (334 respondents)
and to those who had seen an increase (208 respondents).
• 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. Participants were taken from a
panel PwC Research uses for regular weekly omnibus surveys on
a wide range of topics as an input to market research projects.
• To support our analysis, we asked further questions on those who
had seen an increase in their cash balances:
- “How have you managed to save this additional cash?”
- “What do you intend to do with your additional cash?”
• For those who responded to the above question with ‘Spend all of
it’ or ‘Save some of it and spend some of it’ (75 respondents), we
asked a further question on what they think they will spend their
additional cash on.
34
PwC Research survey of household income and spend, May 2020
Below we set out further details of the methodology for our household income and spend survey, issued as part of our weekly Quantibus survey.
4 June 2020
PwC
• Annual vs quarterly: this report focuses on estimated impacts on annual
GDP/GVA in 2020, but these are based on a quarterly model where output falls
sharply in Q2 2020 and then recovers at varying rates in different scenarios later
in the year and in 2021 (see chart on p.14). We assume that the UK moves to a
comprehensive free trade agreement with the EU on 1 January 2021.
• Supply chain assumptions are taken from an academic paper by Luo and Tsang
(2020) who estimate the indirect economic impact to the: a) domestic and b)
global economy due to the Chinese supply chain disruption as a reference point.
We adjust this to reflect the different composition of the UK economy (either due to
the manufacturing/services mix or openness to trade compared to the global
average). Finally, we also incorporate any potential adaptation effects for longer
lasting scenarios from businesses which switch to alternative suppliers,
dampening this effect.
• Labour supply impacts are assessed in five categories covering workers that
are: a) self isolating; b) infected and not ill; c) infected and ill; d) caring for
dependants; e) not affected by the disease. We assume the first four segments of
the workforce lose between 75-100% of their working hours during absence and
calculate the total number of hours worked lost. We combine this analysis with our
calculation of the additional GDP produced per hour of work estimated by UK
GDP and the average number of hours worked by an employee in the UK in a
week. In this analysis, we don't take into account the productivity improvements
that could potentially result from adjusting to lower staff levels, or the potential for
continued home working by those with only mild symptoms.
• Uncertainty - consumer expenditure: We benchmark the shock to household
expenditure with reference to historical crises and period of economic stress. To
derive the economic impact we adjust the expenditure shock based on its duration
and the relative importance of household expenditure to total GDP.
• Uncertainty - business investment: We use our previous modelling work to
determine the relationship between UK GDP and business investment. The
modelling quantified the economic impact of a risk premium shock to total
investment and UK GDP using a Computable General Equilibrium modelling
approach. We apply this relationship to a drop in the business investment portion
of total investment to estimate the impact on GDP. The shock to business
investment was informed by benchmarking to other periods of historic stress and
adjusted for its duration.
• Policy response - fiscal: We divide the additional amount the UK government
plans to spend to combat COVID-19 into: a) day-to-day spending; b) additional
spending brought forward; and c) negative tax receipts (i.e. cut in taxes). Each of
these spending categories is associated with a fiscal multiplier between 0.6 and 1
which we obtain from the Office for Budget Responsibility (OBR). We do not
explicitly model the impact of government loan guarantees, though these will help
to limit downside risks to the economy relative to our two scenarios.
• Policy response - monetary: We estimate the sensitivity of UK real GDP growth
to changes in monetary policy using Andy Haldane's speech on the impact of
monetary policy during the global financial crisis. We assume the monetary policy
space available to the Bank of England is consistent with the Governor's
statement that "We have effectively 200 to 250 basis points of space".
• Sector lockdown: We use ONS data for the UK's sector and sub-sector outputs.
We assume that output in certain “locked-down” sectors will be depressed for
varying periods of time in the two scenarios. This may include periods of partial
lockdown. We do not attempt to model any possible regional or demographic
variations in lockdowns.
35
UK GDP/GVA scenarios – technical notes and key assumptions
4 June 2020
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors
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separate legal entity. Please see www.pwc.com/structure for further details.
Nick Forrest
Economics leader
T: +44 (0) 7803 617744
Barret Kupelian
Senior economist
T: +44 (0) 771 156 2331
Edmond Lee
Senior economist
T: +44 (0) 7802 660 423
Alex Tuckett
Senior economist
T: +44 (0) 7483 373 911
For more information on our Economics services and reports, please contact one of our team above or visit our website at:
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For more information on the wider business impact of COVID-19, please see our website at:
pwc.co.uk/covid19
Jing Teow
Senior economist
T: +44 (0) 7525 281 974