United Kingdom, OECD Economic Outlook, December 2020

 257

United Kingdom GDP is set to contract again in the fourth quarter of 2020 as virus containment measures are implemented, and to fall by 11.2% in 2020 as a whole. Growth of 4.2% in 2021 and 4.1% in 2022 is projected to be driven by a rebound of consumption, while business investment will remain weak due to spare capacity and continued uncertainty. Until an effective vaccine is broadly deployed, risks of further outbreaks will dent confidence. Increased border costs will weigh on imports and exports from 2021 as the United Kingdom leaves the EU Single Market and is assumed to enter a new, less comprehensive free trade agreement with the European Union. Labour market withdrawals and unemployment will increase even though the Coronavirus Job Retention Scheme continues to support employment. Bankruptcies are set to rise, although extensions to crisis loan schemes are set to soften the increase.

Fiscal and monetary policies should stay supportive until the recovery firmly takes hold. Closely monitoring the situation, adapting and targeting support to hard-hit areas and sectors, while allowing structural change to take place are key challenges going forward. Extending increased levels of cash support and training to the unemployed can help this restructuring. Reaching a free trade agreement with the EU is essential to limit disturbances to exporting and importing industries.

United Kingdom 1 Feeble investment weighs on the partial recovery

Retail and recreation mobility is weakening Deviation from baseline²

Index 2019Q4 = 100 115

% change, 7-day m.a.

25

Real GDP Private consumption Private investment¹

105

0

95

-25

85

-50

75

-75

65

2019

2020

2021

2022

0

0 Feb-20

Apr-20

Jun-20

Aug-20

Oct-20

-100

1. Residential investment is excluded.

2. The baseline is the median value, for the corresponding day of the week, during the five-week period between 3 January and 6 February 2020.

Source: OECD Economic Outlook 108 database and Google LLC, Google COVID-19 Community Mobility Reports, https://www.google.com/covid19/mobility/.

StatLink 2 https://doi.org/10.1787/888934219660

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

258 

United Kingdom: Demand, output and prices 2017

2018

Current prices GBP billion

United Kingdom GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2

_ _ _ _ _ _ _ _

Unemployment rate (% of labour force) Household saving ratio, gross (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) Current account balance (% of GDP)

2020

2021

2022

Percentage changes, volume (2018 prices)

2 068.8 1 334.4 387.3 372.3 2 094.0 4.6 2 098.6 622.9 652.8 - 29.9

Total domestic demand Exports of goods and services Imports of goods and services

2019

1.3 1.4 0.6 0.4 1.1 0.1 1.2 3.0 2.7 0.1

1.3 0.9 4.1 1.5 1.6 -0.1 1.5 2.8 3.3 -0.2

-11.2 -14.6 -9.4 -12.2 -13.2 -0.5 -13.9 -13.1 -21.0 2.7

4.2 4.3 6.4 1.9 4.3 0.3 4.5 -1.1 -0.2 -0.3

4.1 5.0 0.7 5.2 4.1 0.0 4.1 0.1 0.2 0.0

2.2 2.5

2.1 1.8

5.9 0.8

-2.9 0.7

1.0 1.5

2.1 1.7 1.2 0.8 1.5 4.1 3.8 4.6 7.4 6.2 6.1 6.5 19.4 17.7 15.2 -2.2 -2.4 -16.7 -13.3 -8.8 113.9 117.3 145.3 157.4 160.5 -3.7 -4.3 -2.6 -3.6 -3.4

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 108 database.

StatLink 2 https://doi.org/10.1787/888934219679

United Kingdom 2 Unemployment is set to increase

Fiscal measures increase public debt

% of labour force 9.0

% of GDP 10

% of GDP 180 Gross government debt¹ →

150

7.5

5

6.0

0

120

4.5

-5

90

3.0

-10

60

1.5

-15

30

0.0

2019

2020

2021

2022

0

-20

← Fiscal balance

2008

2010

2012

2014

2016

2018

2020

2022

0

1. General government gross financial liabilities.

Source: OECD Economic Outlook 108 database.

StatLink 2 https://doi.org/10.1787/888934219698

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

ď ź 259

Confirmed COVID-19 cases have risen recently Daily confirmed cases of COVID-19 reached new records after the summer, as propagation increased and more people were tested compared with the first wave. Hospital admissions and COVID-19-related deaths are still considerably lower than their April peaks, but pressure on the healthcare system has been rising.

New national measures, including advice to stay at home and restrictions on hospitality and non-essential retail activities and socialising across households, have temporarily replaced a three-tier system of local alert levels in England. Distancing and hygiene measures continue to apply, such as rules on the use of masks and telework when possible. Devolved administrations in Northern Ireland, Scotland and Wales have all tightened containment measures, with a two-week nationwide lockdown in Wales at the end of October.

An initially strong rebound has come to a halt A strong consumption-driven GDP rebound in the third quarter of 2020 after COVID-19 case numbers had been brought down and the lockdown lifted is set to go into reverse. As the number of cases has surged again, forward-looking indicators such as the Purchasing Managers' Index pointed to growth levelling off already before national restrictions were implemented in November. Footfall in areas of retail and recreation has declined again, and, according to the Business Impact of Coronavirus (COVID-19) Survey, the share of companies reporting falling turnover increased in October. The number of claimants to Universal Credit remained broadly constant from September to October, while the number of job vacancies increased considerably, but from a low level. Unemployment has so far only risen slowly relative to the output loss thanks to the Coronavirus Job Retention Scheme. Over 7% of the labour force was still fully furloughed on 31 August, and more than 15% of eligible employees were fully furloughed in some sectors.

Fiscal and monetary policies are supportive The government has extended and adjusted the economic support measures put in place early on in the crisis and introduced new measures. The Office for Budget Responsibility estimates that discretionary spending to support businesses and households and strengthen healthcare and testing capacity will amount to 16% of GDP in fiscal year 2020-21. The Coronavirus Job Retention Scheme covers up to 80% of wages and has been extended until 31 March 2021. Government guaranteed loan facilities have played an important role in allowing banks to lend to firms without tying up regulatory capital. The Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme have been extended to end-January, while the Covid Corporate Financing Facility, run jointly with the Bank of England, remains open until March 2021. GBP 40 billion of tax deferrals have further eased liquidity constraints.

Monetary policy has remained accommodative, easing financial stress and supporting demand. The Bank of England cut interest rates to 0.1% and increased its bond purchasing programme by GBP 200 billion at the start of the crisis, GBP 100 billion in early summer, and an additional GBP 150 billion in November, to a total of GBP 895 billion (more than 40% of 2019 GDP).

The United Kingdom is at a critical juncture The resurgence of COVID-19 cases comes at a historic and critical moment, as the United Kingdom is preparing to leave the EU Single Market. Output is set to contract by 11.2% in 2020 before growing by 4.2% in 2021 and 4.1% in 2022. Growth will be driven by private consumption and public spending, while private investment will recover only slowly due to elevated uncertainty. The unemployment rate is projected to average at 7.4% in 2021, as the Coronavirus Job Retention Scheme continues to shield many jobs.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020

260 ď ź Government net lending will peak at 16.7% of GDP in 2020, and gross public debt is set to rise to 160% of GDP in 2022.

The projection is contingent on the health situation going forward. A deterioration could prompt additional restrictions on economic activity and lead to a slower recovery. Effective treatment or effective vaccines are assumed to be widely available at the turn of 2021 and 2022. New treatment methods or earlier than assumed distribution of a vaccine are a clear upside risk. Risks around the future relationship with the European Union compound COVID-19-related uncertainty. The failure to conclude a trade deal with the European Union by the end of 2020 would entail serious additional economic disturbances in the short term and have a strongly negative effect on trade, productivity and jobs in the longer term. By contrast, a closer trade relationship with the European Union than expected, notably encompassing services, would improve the economic outlook in the medium term.

A balance needs to be struck between protecting people and protecting jobs Monetary policy should not tighten until there are clear signs of price pressures, and the Bank of England should stand ready to provide further support and, if necessary, expand the monetary policy toolbox to reach the inflation target. Fiscal policy should also remain supportive until the recovery is firmly underway.

Policies supporting companies and jobs, such as the Coronavirus Job Retention Scheme, need to be available and adapted as needed based on epidemiological and economic developments, while not hindering the reallocation of resources towards firms and sectors with better growth prospects. Adequate cash support to displaced and low-skilled workers along with efforts to help them gain new skills and find a job would reduce their hardship and speed up structural change. Reducing the out-of-pocket cost of childcare would help parents, notably mothers, engage in paid employment and training. Public investment should address long-term challenges, notably reducing greenhouse gas emissions and boosting digital infrastructure. Plans outlined in the 2020 Spending Review to create a public-private infrastructure bank can help.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020