This week, in between the usual whirlwind of activity going on in the business, I’ve been digesting the latest UK Economic Update released by PWC.
An economic report written by accountants may not sound like a riveting read, but there is some fascinating stuff in here, whether you’re a finance geek like me, or just have a more general interest in what may lie ahead for the country as we continue to deal with the pandemic.
There is clearly a lot of uncertainty ahead for both the UK economy and the housing market and we have now reached a cross roads of sorts. In this piece I cover some of the highlights from the report and look at two possible scenarios for the UK as we head towards 2021 and beyond.
Something I’ve blogged about before is the potential shape and pace of our economic recovery following the downturn caused by the Coronavirus crisis. As we were leaving the initial lockdown, there was much talk of the likelihood of a ‘V’ shaped recovery. The concept was that pent up demand for goods and services would be unleashed once lockdown restrictions were lifted and that the economy would bounce back sharply to where it was before Covid hit.
Many global stock markets have indeed seen something of this ‘V’ shaped recovery, largely due to the huge government stimulus packages that have been rolled out in response to the Covid crisis. Unlike the slowly shifting fortunes of the economy and housing markets, stock markets can be quick to move and often behave based on future assumptions, not current facts. That is exactly what we are seeing at present.
However, underlying economies behave much more slowly. Businesses and their workers naturally prioritise dealing with the current circumstances they find themselves in, before pondering what might happen in the future. Certain sectors have actually benefitted from doing business in the Covid environment, but many others have suffered, resulting in at best furloughing, or at worst job losses. For a company forced to let staff go or an employee made redundant, a future recovery isn’t really much good to them in the here-and-now.
My expectation has always been that the ‘V’ shaped recovery is a tad optimistic and that our return to better times economically will be more of a ‘U’ shape. That is to say a period of difficulty, followed by a gradual improvement, then a sharp uptick once momentum builds as the true recovery takes hold. The recession still has some way to play out before a more sustained recovery can take root and how we finish 2020 will largely determine our path in 2021.
The PWC report predicts two potential scenarios for the recession and subsequent recovery. Each scenario assumes that a vaccine is released successfully in mid-2021 and that Brexit negotiations end with an agreement and not a ‘no-deal’ situation.
The first is a ‘contained spread’ scenario. This would be where the ‘R’ rate stays slightly above one for the rest of autumn, with a gradual but marked rise in cases as we move into winter. This scenario would see the continuation of limited restrictions and local lockdowns, but assumes that they are largely successful in preventing further major outbreaks of the virus. It surmises that warmer weather will reduce the number of cases by spring, with cases gradually melting away during the remainder of the year. In the case of the economy it forecasts real GDP growth and consumer spending surging in 2021, fuelling a strong recovery. For the UK housing market meanwhile, it predicts that we could see average house price growth fall slightly from 2.5% in 2020, to 1% in 2021, but with stronger increases in the years to follow.
The second is a ‘further outbreaks’ scenario, where a significant rise in infections leads to simultaneous and significant outbreaks across the country, resulting in a return to strict national lockdown measures. In this event, for the economy, real GDP growth next year is modest, leaving us still below 2019 levels overall. Consumer spending growth is predicted to rise, but to a lesser degree. For the UK housing market meanwhile it is estimated that prices come off around -7% in 2021, but with a sustained recovery beginning in 2022.
Another interesting aspect is the impact the virus is having on people’s choice of where they wish to live, with more people now wanting to live in less densely populated areas. A study suggests that around 30% of those who previously thought they would move to a city centre, now want to live in the suburbs or towns and villages. Likewise, 19% of those who previously thought they’d move to the suburbs, now think they’ll move to a town or village. A symptom no doubt of inner city residents tiring of looking at the four walls of their apartments during lockdown and feeling vulnerable with so many other people in close proximity. For people already living outside of the main towns and cities meanwhile, with more opportunities to work from home, there is less need to live in – or close to – major urban environments. Overall this could see reduced demand for city centre properties, whilst boosting demand in suburbia and rural townships, with a potential rebalancing of property prices to reflect this.
So what can we deduce from all this?
It appears that the success of government efforts to stem the tide of the virus in the remainder of 2020 will largely determine how the economy and housing market are likely to behave in 2021. Whilst the furlough scheme is ending, further government support measures over the winter have been announced to support jobs and shelter workers and business from the worst of the recession. The UK housing market has been remarkably buoyant in 2020, but is - at best - likely to be flat in 2021, with potential for downside. The stockmarket meanwhile is likely to remain more volatile for some time yet, with Brexit still casting a shadow over equity prices in the UK.
Whatever the future holds and however the situation may change, we will continue to advise our clients of the best way to proceed with all aspects of their finances. Those of you who are invested with us can rest assured that pension and investment portfolios are being actively managed and will be adjusted automatically to take into account the shifting economic backdrop. For those not taking advice but thinking of doing so, there has arguably never been a better time to do so, to ensure you are on track to achieve your goals in these uncertain times.
If you’d like to take a deeper look at the report, you can read a copy of the report here.
