UK GDP growth to drop as low as -10%, warns PwC

UK GDP growth to drop as low as -10%, warns PwC

John Hawksworth, chief economist at PwC

UK GDP growth is expected to range from around -5% to -10% for 2020, according to new analysis from PwC.

This estimate reflects the growing body of evidence that the short term decline in activity due to the lockdown will be greater than originally anticipated.

This is a downward shift from the previous estimate of -3% to -7% made a month ago, but a gradual recovery is still expected by the end of 2021.

John Hawksworth, chief economist at PwC, said: “It is clear the COVID-19 crisis will lead to a sharp fall in GDP in Q2 2020, perhaps by around 12% to 16%. This is due to the unprecedented nature of the lockdown, as well as lower consumer spending and business investment due to confidence and income effects. 

“However, we assume output will recover gradually as lockdowns are eased and economic life slowly returns to normal. We estimate that output could therefore be back to only around 1.5% to 4% below its pre-crisis trend levels by the end of 2021 in alternative scenarios, although considerable uncertainty remains around any such estimates.”

Given the sharper drop in economic activity this year and announcements of further government economic support over the past couple of weeks, PwC’s public finance scenarios have also been revised.

The estimated scenario range for the budget deficit in 2020/21 is now around £210-315bn, or around 10-15% of GDP, as compared to around 10% of GDP in 2009/10 after the financial crisis and around 8-12% of GDP in previous PwC estimates.

However, this budget deficit is then expected to fall relatively rapidly to only around 4.5-7% of GDP in 2021/22 as temporary measures come to an end and the economy recovers after the crisis.

This would still be above the 3% of GDP ceiling implied by current fiscal rules, so some longer-term fiscal tightening may be needed after full recovery has been achieved.

John Hawksworth added: “In our ‘Smooth exit’ scenario, public debt excluding the impact of Bank of England schemes might stabilise at around 80% of GDP in 2021/22, so in this case, there should be no major threat to long term fiscal sustainability. But the debt profile looks less sustainable in a ‘Bumpy exit’ scenario as that may be associated with a larger permanent loss of GDP and, hence, of tax revenues.

“In that less favourable case, there may be a need for future tax rises in the longer term, but this should only be considered once we are well past the end of the current crisis. Bank of England gilt purchases mean there is no problem with the government borrowing more for now.”

  • Read all of our articles relating to COVID-19 here.
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