United Kingdom – 2021-2022 Scenario: we are not out of the woods yet
- The economic outlook: no time for relief
- The monetary policy outlook: it gets (even more) complicated
After a brief and incomplete rebound in Q3, GDP is expected to fall again in Q4 as the second wave of the Covid-19 pandemic and the November lockdown in England and across the Eurozone interrupted the recovery in the consumer-oriented service sectors. We expect GDP to fall by 2% QoQ in Q4 on a quarterly basis, which would bring the annual contraction this year to a historic -11.1%. We expect positive, albeit subdued recovery at the beginning of 2021. Two well-known key headwinds will weigh on growth: the persistent risk of a resurgence of the Covid-19 pandemic; and the end of the transition period and the adjustment to the new EU-UK relationship that will come into force on 1 January 2021.
We expect exports and activity to be significantly damaged in Q1 due to the entry into force of new barriers to trade between the UK and the EU at the end of the transition period, leading to controls and delays at the border as well as a disruption to supply-chains. That will likely further weigh on business and consumer confidence. We expect the recovery to gain steam in H221 only, thanks to progress on the vaccination front and the dissipation of the initial shock of Brexit. However, while one might hope to foresee the end of the pandemic within a year or so, this does not mean a return to the pre-crisis normal. The supply capacity, the labour market, the corporate balance sheets and the public finances will be in a severely damaged situation.Slavena NAZAROVA, Economist