This report was produced on 22 May 2020 with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide an unparalleled ability to forecast economic trends.
- This year’s overall slump in activity is spread very unevenly between sectors.
- As well as manufacturing, other sectors that are seeing particularly large falls in output this year are ones that are focused on hospitality, leisure and culture; plus education.
- Manufacturers are also likely to be hit, probably in 2023, by the ending of the UK’s transition period with the EU. Over the medium term, financial services are likely to grow slowly or even decline slightly.
Different effects depending on sector
Clearly, this year’s overall slump in activity is spread very unevenly between sectors. Especially large output losses (as measured by Gross Value Added or GVA) are apparent in the hospitality sector, as measured by the ONS category of Accommodation and food services, and also in the cultural and sporting sector, as measured by Arts, entertainment and recreation. Activity in each case is currently running at a tiny fraction of its normal level. Even with strong rebounds in the second half of this year, the overall declines in GVA in 2020 are likely to be around 25% in each case.
Figure 1: GVA growth in 2020 and 2021, % y/y
The position of the Education sector is nearly as serious, and is having important knock-on effects. The closure of schools affects the availability for work of many parents, not to mention their productivity if they are trying to work from home. And university closures mean a large loss to the economy from student spending − not least, the spending of foreign students. Plus, there is a potentially damaging impact on research and innovation.
Also in the strongly negative category is the Manufacturing sector. Many businesses are closed and others are suffering, either from weak demand, shortages of components and raw materials, or both. Particularly badly hit are the production of motor vehicles and parts, plus engineering more generally, as well as basic metals, building materials and chemicals.
In contrast, food and drink manufacturing will probably see only a small decline in the year as a whole. The sector is being hurt by the closure of cafés, pubs and restaurants, but the manufacture of food and drinks for consumption at home is much more resilient. That is consistent with the experience of the retail sector, with some shops such as supermarkets relatively insulated, and online sales doing very well, but most non-food retailers experiencing huge challenges. Business failures in the sector were high in 2019 and will be again in 2020, before the expected 2021 rebound provides relief for the survivors, and perhaps an opportunity for some new starts.
This picture of mixed fortunes also applies in the media and tech sector, with Information and communications output likely to end the year only slightly down on 2019. Within that total, the production of new media content is severely limited at the moment, but both business and consumer demand for existing content and for digital media and communications services is clearly very strong.
One sector that is experiencing a rise in activity this year is, of course, Health and social work, although even in this case the full-year increase is pretty small. Many medical procedures and admissions have been cancelled, and some people are choosing to delay or forego treatment or care.
Sustained sectoral changes over the medium-term
Looking beyond this year and next, there is the possibility that many aspects of life will have permanently changed, as part of the ‘new normal’. It is possible, for example, that growth in the demand for air travel will have been permanently weakened by the widespread adoption of online business meetings, and also that the growth in demand for office space will be reduced by a widespread adoption of homeworking. Both of those would tend to boost demand for Information and communications services and hardware, but might impact negatively on sectors as diverse as aero-engine manufacturing and Real estate.
At this stage it is too early to make strong predictions along those lines. The evidence base does not yet exist. However, one prediction that does feel robust is that the Health and social work sector will see sustained growth, not just now but over the medium term. The aging of the population was a reason for expecting that to be the case long before the current crisis hit; the present emergency must surely strengthen that argument.
Indeed, the sector looks set to experience growth in both output and employment that is similar to the likely growth rates for the three sectors that are normally thought of as the drivers of expansion of the national economy: Information and communications; Professional, scientific and technical services; and Administration and support services sectors (the last of which is gradually reinventing itself as part of the online economy). These sectors are also normally largely office-based, and that means that (along with Public administration) they have been better able than most to adopt homeworking. That is also likely to have given them some helpful resilience in 2020.
Figure 2: GVA and employment changes % y/y 2020-25
Challenges for manufacturing and financial services
Unfortunately, the same remarks do not apply to Manufacturing, a sector which may well see both lower output and lower employment in 2025 than in 2019. That is despite an expected strong recovery in activity in 2021, as companies respond to a probable surge in demand and the relaxation of supply constraints. The main concern here is the UK’s impending exit from the Single Market. The Oxford Economics forecasts assume that there will be a two-year extension to the current transition arrangement (which is due to end on 31 December). But even so, the task of negotiating favourable trade deals with the US and China as well as with the EU is a daunting one. Meanwhile, there is no reason to expect a spontaneous improvement in the underlying competitiveness of UK manufacturers, which is heavily governed by the scale and effectiveness of investment in capital equipment, in people and in research and innovation. The net result is that Oxford Economics forecasts a decline in manufacturing output in 2023, and slow growth in other years, after the 2021 bounce back.
It is no comfort that another sector which faces medium-term challenges is Financial services, which will probably continue to be squeezed by a variety of factors, including: digital transactions technology that bypasses banks; tight regulations to prevent over-selling (a problem in the past); requirements that businesses maintain large capital bases, which can also inhibit rapid growth; and the UK’s uncertain relations with the EU. Oxford Economics forecasts that over the period to 2025 the sector will lag, not lead, the economy as a whole: indeed, its output actually declines over the full period, marginally. Combined with a manufacturing sector that is also under pressure, and the inevitable impact of coronavirus on company finances and confidence across the board, this is a challenge for the UK economy, which for many years was partly driven by the expansion of the finance sector.