- KPMG estimates Brexit could cost the UK economy 2.9 percentage points in 2021, bringing GDP growth down to 7.2% next year
- Manufacturing and financial services sectors could still be 10% down by end of next year compared to pre-Covid levels, with the economy as a whole not returning to pre-Covid levels before the end of 2022
- Economic impact of the current lockdown will be relatively mild, with GDP falling by 2% in the final quarter of 2020
Despite new KPMG analysis finding that an early Covid-19 vaccine could see growth momentum accelerate from early next year, Brexit could hamper the UK’s recovery, bringing GDP growth down to 7.2% in 2021.
The manufacturing sectors hardest hit by Brexit, including textiles, chemicals and electrical manufacturing, could see output at the end of 2021 between 6% and 12% lower than in Q4 2019. This is down to bottlenecks in supply chains, border frictions and falling investment, as well as the ongoing fallout of the Covid-19 pandemic. Uncertainty and loss of access to the EU market for the UK’s financial services sector could lead to 10% lower output over the same period, while the UK economy as a whole is not expected to reach pre-Covid levels until the end of 2022.
The analysis assumes that a slimmed-down Brexit deal is agreed by year-end, which excludes services, and a vaccine is ready to be rolled out early next year, which brings about the end of social distancing restrictions by late Spring*.
Yael Selfin, Chief Economist at KPMG UK, commented on the report: “The impact of Brexit will single the UK out among advanced economies next year. While the Government will need to address the short-term needs of businesses as they cope with the transition to a new trading relationship, it is also important that it increases investment in the infrastructure and skills that will be needed in order to alleviate the longer-term impact Brexit will have on productivity and growth.”
Table 1. KPMG’s November forecasts for the UK economy (main scenario)
Base interest rate
Source: ONS, KPMG forecasts. Average % change on previous calendar year except for unemployment rate, which is average annual rate. Investment represents Gross Fixed Capital Formation, inflation measure used is the CPI and unemployment measure is LFS. Interest rate represents level at the end of calendar year.
Impact of the second wave on UK economy
The ongoing efforts to contain the second wave of the Covid-19 pandemic across the UK could cause a milder than expected 2% fall in GDP in the current quarter, leading to an 11.2% contraction in output for 2020. However, while the extension of the Job Retention Scheme has likely forestalled a sharp increase in unemployment this year, mounting losses and business closures could push the unemployment rate to peak at 7.8% in May next year before gradually subsiding as the economy continues to recover.
Yael Selfin, Chief Economist at KPMG UK, concludes: “While we can hopefully see the light at the end of the tunnel when it comes to the Covid-19 pandemic, there are further challenges ahead for the UK economy. Brexit and changes to working, communicating, and shopping habits reinforced by the pandemic will require all of us to adjust to new realities. “
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Notes to Editors
*The forecasts assume that it will take 4 months for a vaccine to be rolled out after approval.
About the research
The forecasts were produced by the KPMG macroeconomics team using a suite of external and in-house models capturing the main inter-relationships in the UK economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly. For more details, please see the full “Economic Outlook” at: www.kpmg.com/uk/economicoutlook
KPMG LLP, a UK limited liability partnership, operates from 21 offices across the UK with approximately 17,600 partners and staff. The UK firm recorded a revenue of £2.40 billion in the year ended 30 September 2019. KPMG is a global organisation of independent professional services firms providing Audit, Tax and Advisory services. It operates in 147 countries and territories and has more than 219,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.