The economy has taken a hit this year, but the real effects will not be felt until 2021.
Government support has helped limit the economic damage caused by the pandemic, but many of the deadlines for the withdrawal of emergency funding have been pushed back into 2021.
The decision to prolong state support could safeguard more jobs, buying time for the economy to recover. But economists are tempering their previous optimism, shifting away from the prospect of a rapid V-shaped recovery to a more gradual one.
Economic shocks, such as those inflicted by Covid-19, can permanently damage an economy’s future growth rate – in a process known as ‘scarring’. The level of scarring will depend on how quickly the virus can be brought under control, the pace of economic recovery, and the effectiveness of policy measures in supporting jobs.
Our housing forecasts are based on the OBR’s central forecast of a 12.4% decline in economic output this year. But growth is expected to rebound to 8.7% in 2021, assuming a trading arrangement is agreed with the EU by the end of the transition period.
GDP is set to rise by 4.5% in 2022 and 2.1% in 2023 as the economy falls back in line with its longer-term growth trajectory. Nevertheless, the economy may remain 3% smaller after five years than would have been the case without Covid-19.
The direction of the housing market is largely determined by employment and the true extent of the pandemic’s effect on jobs may not be clear until next year. We expect job losses to peak in the first half of 2021, after the unwinding of the furlough scheme and the ending of the job retention bonus grant in January 2021. The OBR expects around 15% of the current 4.8 million furloughed workers to lose their jobs, which would take unemployment to a record high in 2021. The jobless count seems set to remain above 2019’s historic low of 3.8% until at least 2023.
There are many risks on the horizon, including the consequences of a no-trade deal Brexit, a second wave of Covid-19 or delay in the arrival of a vaccine. Yet if a vaccine, or an effective Covid-19 treatment become available more swiftly, a quicker economic recovery is still possible.
To date, the pattern of unemployment has not been uniform. A division is opening up between those whose earnings have been unaffected, and those who have had to take an income cut or lost their job.
The latest ONS data highlights that the young, who are likely to be renters or would-be first-time buyers have been hardest hit. This will have an influence on both the sale and the rental markets.
Higher-income workers, particularly those in London and the South, have been more able to work from home. As a result, they are less likely to have lost their jobs and, in some cases, have increased their savings. The Institute for Fiscal Studies (IFS) says that 58% of workers in London have jobs that can be done from home, compared to 38% in the North East.
But there is some good news. People’s incomes are expected to keep rising, albeit by just 0.2% in 2020. Thereafter, earnings will increase by 3.7% in 2021, 2.7% in 2022 and up to 3.0% in 2023. If inflation remains low, as forecast, this should boost living standards.
