UK Economic Outlook Q1 2020

Residential Outlook Q1 2020

Initial data measuring the economy post-shutdown suggested a large impact. But as the Coronavirus pandemic continues, the Government’s unprecedented response gives hope that that the outcome will be better than initially expected.

Economic indicators can also offer a guide to the scale of falls in activity we might expect, with the key metrics including unemployment, GDP, and inflation.

The Office for Budget Responsibility set out a scenario (dated 14th April) for the potential economic impact of the crisis, summarised in the table below. It is worth noting that this is not a forecast but a scenario to assess the possible impact of a massive temporary economic shock.

Table 1 Key economic variables: reference scenario versus Budget forecast

  Percentage change on a year earlier, unless otherwise stated
  Scenario horizon
  2019 2020 2021 2022 2023 2024
Gross domestic product (GDP) 1.4 -12.8 17.9 1.5 1.3 1.4
GDP levels (2019 = 100) 100.0 87.2 102.8 104.3 105.7 107.1
CPI inflation 1.8 1.2 2.3 2.4 2.3 2.2
RPI inflation 2.6 1.8 2.9 3.4 3.2 3.0
Employment (millions) 32.8 31.8 32.3 33.0 33.3 33.4
Average earnings 2.8 -7.3 18.3 1.6 2.5 3.1
Unemployment (millions) 1.3 2.5 2.1 1.6 1.4 1.4
Unemployment rate (per cent) 3.8 7.3 6.0 4.5 4.0 4.1
  Differences from Budget 2020 forecast
Gross domestic product (GDP)   -13.8 16.1 0.0 0.0 0.0
GDP levels (2019 = 100)   -13.8 0.0 0.0 0.0 0.0
CPI inflation   -0.2 0.5 0.4 0.2 0.1
RPI inflation   -0.4 0.1 0.3 0.2 0.1
Employment (millions)   -1.2 -0.8 -0.2 0.0 0.0
Average earnings   -10.6 14.7 -1.8 -0.7 0.0
Unemployment (millions)   1.2 0.8 0.2 0.0 0.0
Unemployment rate (per cent)   3.5 2.2 0.6 0.0 0.0


Source Reproduced from OBR Coronavirus Reference Scenario (14th April)

The scenario uses falls in GDP during 2020 that are unprecedented. By way of comparison, UK GDP during WWII and the 2008 Global Financial Crisis never fell by more than 5% annually. Only the combination of WWI and the Spanish Flu pandemic saw comparable reductions to those set out here: -9.7% in 1921. The OBR scenario for 2020 also has the unemployment rate almost doubling and average earnings falling by over 7%.

But the Government’s economic response has been unprecedented too – with furloughs, grants, loans and other measures all aimed at keeping viable businesses afloat during the pandemic, as well as support for individual employed and self-employed workers. Therefore, the hope is that the actual outcome will be better than this worst-case scenario.

‘Mortgage holidays’ are a further measure aimed at helping home-owners affected by the crisis. UK Finance reported on 28th April that 1 in 7 of the UK’s mortgage-holders have been granted a repayment break by their lender, totalling 1.6m loans so far. This level of take up highlights the precarious nature of many households’ finances, even with the Government support mentioned above.

A major concern at this stage of the pandemic is that the economic forecasts appear to be getting worse with every new piece of information. The chart in Figure 1 below shows that the more recently a forecast was made, the more negative it is, suggesting we don’t yet know the full extent of the economic impact.

Figure 1

Many economic forecasters expect a rapid recovery in 2021 – a ‘V-shaped’ trend. but this may not be plausible given the announcement on April 22nd by the Chief Medical Officer that social distancing of some form would likely have to remain in place until at least the end of 2020. While some sectors may start to recover, the chance of a swift return to normal for the economy appears unlikely.

A more drawn out recovery period is likely to have negative implications for the housing market. Even if the guidance to avoid house moves is lifted relatively soon and personal finances survive mostly intact, buyers, sellers, landlords, tenants and developers may all have reasons to be cautious, contributing to a prolonged slowdown.

Apart from buyer and seller appetite, mortgage availability and affordability will be another key factor in how the sales market behaves once it reopens. The Bank of England Q1 2020 Credit Conditions Survey reported that lenders expected access to mortgages to drop in Q2, particularly for borrowers with deposits of less than 25%.

The BoE cut its base rate from 0.75% to 0.1% in March as part of a range of emergency measures. While this helps mortgage-holders with trackers, most outstanding loans are at fixed rates. For new loans, it is unlikely that this cut will be passed on as lenders try to protect margins in a riskier economic environment. 

  Percentage change on a year earlier, unless otherwise stated
  Scenario horizon
  2019 2020 2021 2022 2023 2024
Gross domestic product (GDP) 1.4 -12.8 17.9 1.5 1.3 1.4
GDP levels (2019 = 100) 100.0 87.2 102.8 104.3 105.7 107.1
CPI inflation 1.8 1.2 2.3 2.4 2.3 2.2
RPI inflation 2.6 1.8 2.9 3.4 3.2 3.0
Employment (millions) 32.8 31.8 32.3 33.0 33.3 33.4
Average earnings 2.8 -7.3 18.3 1.6 2.5 3.1
Unemployment (millions) 1.3 2.5 2.1 1.6 1.4 1.4
Unemployment rate (per cent) 3.8 7.3 6.0 4.5 4.0 4.1
Differences from Budget 2020 forecast
Gross domestic product (GDP)   -13.8 16.1 0.0 0.0 0.0
GDP levels (2019 = 100)   -13.8 0.0 0.0 0.0 0.0
CPI inflation   -0.2 0.5 0.4 0.2 0.1
RPI inflation   -0.4 0.1 0.3 0.2 0.1
Employment (millions)   -1.2 -0.8 -0.2 0.0 0.0
Average earnings   -10.6 14.7 -1.8 -0.7 0.0
Unemployment (millions)   1.2 0.8 0.2 0.0 0.0
Unemployment rate (per cent)   3.5 2.2 0.6 0.0 0.0