IFT National Conference - Economic Outlook by Tom Simmons - The IFT

IFT National Conference – Economic Outlook by Tom Simmons

At this years National Conference, Tom Simmons of Deloitte gave his expert insight on the challenges facing the UK economy as a result of the COVID-19 pandemic and what the road to recovery may look like. Here, Tom shares his thoughts from the conference.

The UK economy grew by 1.8% in May from the previous month, a slower recovery than was anticipated after recording an historic 25% contraction between February and April. The easing of the lockdown in June and July should deliver a strong increase in activity, and we are forecasting growth in the third quarter to claw back close to half the loss of GDP sustained in the second quarter.

However, the pace of the recovery to pre-crisis levels of activity is likely to be slow; we do not expect the economy to recover to its pre-pandemic size until the summer of 2022. Concerns about COVID-19 and a highly uncertain economic backdrop mean that many consumers are likely to remain cautious. Production may struggle with supply chain disruption, changes to processes required by social distancing and shifts in demand. Businesses seem likely to remain in defensive mode with a focus on cutting costs. A perception of increased risk is likely to weigh on travel and some leisure activities.

For corporates, the pandemic overshadows all other causes of concern. The 2020 Q2 Deloitte CFO Survey shows CFOs rate it as the greatest risk facing their businesses – and by a wide margin. Against a backdrop of elevated uncertainty and very weak demand, CFOs are firmly focused on protecting their balance sheets by bearing down on costs and building cash. Official data confirm that corporates’ are building cash reserves, and at the fastest pace on record. Views on corporate leverage have changed too. In the last ten years, CFOs have been relaxed about levels of corporate debt. But, following a recent surge in borrowing, the balance of opinion among CFOs is that corporate balance sheets have become overleveraged.

Increased levels of corporate debt and a rise in unemployment will hamper the growth potential of the economy. Much will depend on the behaviour of the virus, with the biggest risk to the outlook being a second wave of infections and further lockdowns. But the vast and unprecedented policy interventions could generate a faster snapback, with pent-up demand surging as restrictions are loosened. The recovery will need more help. Yet, reduced and shaky though it is, the UK economy is starting to recover.

 

 

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