UK growth expected to rebound in 2021

JaeVee Team

14 minutes

Recession, Economy, Property Market

Introduction

With the UK now projected to be in a technical recession as a result of Covid-19, organisations are now focusing on how long this recession will last and what the overall impact will be on the economy.

Although theories differ in the sense that different variables are used to determine when the UK economy will recover, many seem to agree that the UK economy will recover in early 2021.

This report will look at several theories put forward by organisations and will focus on when they predict the UK economy will recover and how that outcome was determined.

We will then look at how this recovery will affect the UK property market looking at a long term position.

When is the UK considered to be in a “recession”?

At the time of writing this, the UK is not currently considered to be in a recession. However with Covid-19 still causing the economy to be at a halt for the next few months, it is more than likely that the UK will fall into a recession (when Q2 results are announced at the end of June, 2020).

Therefore, when is a declining economy considered to be in a recession?

According to the Bank of England, the UK economy experienced a 3% decline in the first quarter of 2020. And this is expected to be followed by an unprecedented 25% decline in the three months to June.1

Assuming the UK economy contracts in the second quarter of 2020, the UK would then be in a technical recession as it has experienced two consecutive quarters of economic decline.

Comparing this to other countries, both France and Italy are already officially in recession after recording falls in GDP of around 5 per cent for the first quarter of 2020, on top of small decreases in the last quarter of 2019.

Spain's economy has also contracted by around 5% in the first quarter of 2020.2

Comparing the UK's GDP change to other countries, the UK’s economy has declined at a smaller rate of 3% last quarter compared to France, Italy and Spain, who all experienced a decline of 5%.

This could be considered a positive for the UK economy as it shows overseas investors that the UK economy is far more stable and less volatile compared to other countries which in turn could attract more foreign investment.

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Recovery of the economy

When does the Bank of England predict the UK economy will recover?

The Bank of England released their analysis regarding when the UK economy is likely to recover on 7th May, 2020. They based their analysis on the assumption that social distancing measures are gradually phased out between June and September, 2020.

Bank of England Governor, Andrew Bailey, has stated that they assume "not all of the economic activity comes back. There's quite a sharp recovery. But we've also factored that people will be cautious of their own choice. They don't re-engage fully, and so it's really only until next summer that activity comes fully back."3

The Bank of England has also stated that the housing market has come to a standstill, while consumer spending has dropped by 30% in recent weeks.

This in turn has resulted in the Bank of England predicting a contraction in the UK economy of 14% for 2020.

UK facing sharpest downturn since 1706

As you can see from the figure 1, whilst the UK economy is expected to contract by 14% in 2020, it is also expected to bounce back with a 15% growth rate in 2021.

If the UK economy was to contract by 14%, it would be the sharpest annual contraction since 1706 according to reconstructed Bank of England data which dates back to the 18th Century.

According to the Bank of England, the size of the UK economy is not expected to get back to its pre-virus peak until the middle of next year. This means that using the Bank of England's analysis, the UK economy should recover within the next 12-13 months.

It must also be noted that this analysis should be considered conservative due to the approach that has been taken.

Although there are accuracies in the Bank of England’s approach, such as assuming that social distancing measures are gradually phased out between June and September, they also assume that people don’t fully engage with the economy until the middle of next year.

This is somewhat of a conservative assumption as it seems plausible that people will want to fully engage in the economy both from a business and consumer perspective.

Therefore it may be possible that the UK economy actually recovers at a faster rate than what is predicted by the Bank of England.

When does the OBR predict the UK economy will recover?

The Office for Budget Responsibility (OBR) has also published an analysis of when they predict the UK economy will recover from the effect of Covid-19.

The Office for Budget Responsibility has assumed a six month lockdown effect and expects GDP to rebound by 27 per cent in the third quarter of 2020 and a further 21 per cent in the fourth quarter of 2020.

Under this scenario laid out by the OBR, GDP would recover back to its pre-virus level by the end of this year.

However, it must be noted that the OBR has this dependent on the persistence of the Covid-19 virus and the possibility of there being a second round of infections.4

The six month lockdown effect that OBR has modelled for the UK economy assumes that full lockdown lasts for three months (until 23rd June) and that economic activity gradually begins to return to normal over the following three months.

Although after Sunday’s speech in which the Prime Minister laid out a staged plan for the lockdown to end, it seems that this timeline might be accurate. However, this again is dependent on the persistence of Covid-19 and the possibility of a second round of infections.

Where this analysis is not accurate is assuming the entire economy will be able to recover by the end of the year.

There are still many restrictions that are likely to remain in place for the rest of the year that will affect businesses. For example, the possibility of going to pubs, restaurants and attending football games look increasingly unlikely this year.

Although the government has laid out plans for the hospitality industry to return in July 2020 (via what is known as phase 3), many businesses are going to need to adapt and trade at much lower capacity in order to abide by social distancing measures.

By businesses being limited to the amount of people they can serve, they are making less money than they were before the virus which in turn will limit the aid that these industries can provide to the economic recovery.

On the other hand, one of the major attributes that will help the UK economy recover will be businesses ability to quickly and easily start back up.

In a recent survey conducted by the British Chambers of Commerce, most firms believe that they could be ready to restart business with just three weeks notice. This is a major attribute for the UK economy as it means businesses can quickly react to the ever changing news concerning the coronavirus and be able to open and continue trading in a short amount of time.

Dr Marshall from the British Chamber of Commerce has said “it will be crucial for the government to maintain and evolve support for businesses, to give as many firms as possible the chance to navigate a phased return to work."5

Looking at the schemes available for businesses of all sizes in our last market insight, it is clear that the government are continuing to maintain and evolve the support that is available for businesses, this means that the majority of firms have the ability to quickly and efficiently return to work.

How will the UK property market react during this recovery period?

As it stated in our previous market insight reports, the UK property market is different from normal financial markets in that it is less volatile and has only experienced contractions under extremely severe circumstances such as high interests during a recession.

Right now there is huge uncertainty not only for the property market, but for the entire UK economy.

This means there are a lot of questions regarding what will happen to property prices during this pandemic with many speculating wildly.

However, if we look at historic trends, the UK housing market has only ever contracted during times of high interest rates and high unemployment.

Currently both of those measures are at all time lows and although unemployment is expected to increase, it is unlikely that it will increase to the same levels of those times where the UK housing market contracted, during the financial crisis for example.

The government’s bounceback loan scheme, which has seen funds released within 24 hours of making an online application, has gone a long way to safeguarding jobs in the UK SMEs, which make up 99.9% of all businesses.

Instead, it is more realistic to assume that there will be a decrease in the growth rate of house prices as there has been a standstill in the property market due to house movers not being able to move, valuers not being able to attend properties and estate agent branches being closed.

Those restrictions were lifted on Wednesday, 13th May 2020. This means we’re expecting to see the property market starting to move again.

In our view, the market should then continue to grow, just at a smaller rate than what it would have if the coronavirus had never happened.

In simple terms, instead of driving at 50mph we’re now driving at 10mph - however, we’re still driving forward.

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Please note this report is not to be considered as investment advice. We recommend you seek independent financial advice and conduct your own due diligence before making any investment.

About JaeVee

JaeVee joint ventures with experienced property developers to bring residential schemes to life in the UK whilst helping to tackle the housing shortage problem. The structure of our model creates equity investment opportunities for investors into these projects, where investors enjoy the profits of a successful development without sacrificing their demands on control, protection and accessibility.

Sources

[1] https://www.bbc.co.uk/news/business-52566030
[2] https://www.independent.co.uk/news/business/coronavirus-recession-economy-what-is-when-uk-us-a9498306.html
[3] https://www.bbc.co.uk/news/business-52566030
[4] https://www.independent.co.uk/news/business/coronavirus-recession-economy-what-is-when-uk-us-a9498306.html
[5] https://www.bbc.co.uk/news/business-52552580

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