BCC economic forecast: Coronavirus could further weaken UK economy

UK economic growth is expected to slow sharply in 2020 amid disruption caused by the impact of Coronavirus, according to the latest economic forecast by the British Chambers of Commerce (BCC).

The leading business group has downgraded its UK GDP growth expectations for 2020 to 0.8%, from our previous forecast of 1.0%. Outside of the 2008/09 financial crisis, this would be the weakest full-year growth outturn since 1992 and down sharply from UK GDP growth of 1.4% in 2019.

UK GDP growth is then expected to pick up in subsequent years: to 1.4% in 2021 and 1.6% in 2022. Our forecast indicates that by the end of 2022, the UK economy will have grown below its historic average growth rate of 2.6% for eight successive years, the longest period since records began.

The disruptive impact of Coronavirus is expected to weigh significantly on key drivers of UK GDP growth through the first half of 2020. A lack of clarity on the UK’s future trading relationship with the EU and other partners around the world and a struggling global economy is also predicted to limit UK’s near-term growth prospects:

  • UK export growth in 2020 is projected to be its weakest since 2009 as a subdued global economy, the impact of Coronavirus and uncertainty over future trading arrangements constrain export activity.
  • Business investment is expected to contract by 0.7% this year as the impact of Coronavirus, the cost of doing business in the UK and a lack of clarity on the future trading conditions limit investment intentions.
  • Growth in household spending in 2020 is predicted to be at its slowest since 2011, as the effect of Coronavirus temporarily weakens consumer demand, despite historically low unemployment.

On the upside, historically strong levels of government spending - both observed in Budget 2020 and anticipated in the upcoming Spending Review and Autumn Budget – are expected to support the UK economy through the forecast period. The measures announced by the Bank of England, including lowering interest rates and steps to support business access to finance, will also help mitigate some of the impact of the Coronavirus on the UK economy.

Commenting on today’s forecast Suren Thiru, head of economics at the British Chambers of Commerce, said:

“Our latest forecast indicates that the UK economy faces a challenging short-term outlook.

“It is increasingly likely that the boost from higher government spending and more political certainty will be surpassed over the near-term by the negative impact of Coronavirus on the UK economy.

“Although the scale and impact of Coronavirus remains highly uncertain, early evidence of disruption to supply chains and weakening in consumer demand and business activity could mean that even in the case of a temporary shock to the economy, there may be some long-term impact on economic output – particularly if significant action is needed to combat its spread.

“Failure to achieve a UK-EU arrangement conducive to trade is also a key risk to the outlook for the UK economy as disruption in early 2021 could adversely affect economic conditions.”

Adam Marshall, director general of the British Chambers of Commerce, added:

"Coronavirus could further weaken an already stagnant UK economy, as many businesses are starting to report an impact on their cashflow and growth prospects."

“The Chancellor and the Bank of England have responded to the immediate challenge with measures to help firms hit by Coronavirus, and they must now ensure this support gets to businesses as quickly as possible.

“More will need to be done later in the year to boost business confidence and tackle prolonged economic stagnation. Securing new trading arrangements, taking real action to reduce the high upfront costs of doing business and putting spades in the ground on long-overdue infrastructure projects must be prioritised in order to secure our long-term economic prospects.”

Key points in the forecast:

  • UK GDP growth forecast for 2020 is downgraded from 1.0 to 0.8%, but upgraded from 1.3% to 1.4% in 2021 and the first forecast of 2021 growth is 1.6%
  • Quarter-on-quarter GDP growth is forecast to 0.2% in Q1 2020, followed by a contraction of -0.1% in Q2
  • BCC expectations for export growth have been downgraded to 0.1% in 2020 (from 1.1%) and 0.9% in 2021 (from 1.4%), before growth of 1.4% in 2022
  • Forecast for business investment growth is unchanged at -0.7% for 2020, but downgraded to 0.6% for 2021 (from 0.8%), before growth of 1.0% in 2022
  • The forecast for household consumption growth been downgraded to 0.9% for 2020 (from 1.3%), 1.4% for 2021 (from 1.5%), before growth of 1.5% in 2022
  • Government spending growth been upgraded to 3.6% for 2020 (from 3.0%), to 3.0% for 2021 (unchanged), before growth slowing to 2.7% in 2022
  • UK official interest rates are expected to rise from 0.25% to 0.75% by the end of 2020. Interest rates are then expected to rise to 1.0% in 2021

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