19 December, 2020 - 23:00

EY ITEM Club reviews jobs and finance forecasts

The new OBR forecasts that the economy will not return to its pre-COVID-19 size until Q4 2022 and sees the economy three per cent smaller in 2025 than it did at the time of the March Budget, writes Howard Archer, chief economic adviser to the EY ITEM Club.

The OBR forecasts highlight the pandemic’s significant impact on the public finances, with the budget deficit seen at £393.5 billion (19 per cent of GDP) in 2020/21 and still as high as £101.8 billion (3.9 per cent of GDP) in 2025/26.

The Chancellor in his Spending Review did not indicate what corrective action will be needed to rein in the public finances once the economy is on a surer footing.

Limiting measures on the public finances were restricted to reducing the overseas aid budget as a proportion of national income and measures on public sector pay.

The scale of the challenge facing the Chancellor to restore the public finances to a sustainable position over the medium term was highlighted by the OBR forecasts.

These look broadly defensible: the EY ITEM Club suspects that the OBR’s growth forecast for 2022 is on the high side, but the EY ITEM Club believes that the expansion in 2021 could be a bit more than the OBR expects, on the assumption that there is a widespread rolling out of the COVID-19 vaccine in the first half of the year. 

Similar to the OBR, we assume that the UK and EU will conclude a Free Trade Agreement by December 31.  

The unemployment rate – 4.8 per cent in the three months to September – is seen reaching 7.5 per cent, or 2.6 million people, in the second quarter of 2021 and then falling back to 4.4 per cent by the end of 2024.

The EY ITEM Club has recently updated its forecast and sees GDP contracting 11.6 per cent in 2020 then growing 6.2 per cent in 2021, 4.3 per cent in 2022 and 1.9 per cent in 2024. We expect GDP will contract around 4 per cent in the fourth quarter due to the lockdown in England being followed by the introduction of restrictive conditions from early December. 

Consequently, GDP is seen contracting 11.5 per cent over 2020. We see the economy returning to growth in the first quarter of 2021 and then the recovery becoming more firmly established, helped by restrictions being eased and a vaccine becoming widely available during the first half of the year.

We believe that the budget deficit could be modestly less than the OBR forecasts in the near term, although the shortfalls still look high. 

We anticipate a budget deficit around £375 billion in 2020/21, equivalent to 18 per cent of GDP, but also suspects it will still be around £100bn in 2024/25.

LIBOR transition compliance

With the death of LIBOR (the London Bank Interbank Offered Rate) looming, Luminance, the Cambridge-born AI platform for the legal profession, reveals that world-leading professional services firm, Ernst & Young (EY) Law Belgium, are using its machine learning solution to assist with LIBOR compliance reviews.

The Financial Conduct Authority’s decision to transition from LIBOR to alternative overnight risk-free rates (RFRs) by 1 January 2022 has left many financial institutions with the complex task of reviewing enormous volumes of contracts to identify the extent of their exposure to LIBOR. 

Indeed, LIBOR underpins contracts affecting banks, asset managers, insurers and corporates estimated at $350 trillion globally on a gross notional basis. To help firms avoid reputational, legal and commercial risk, ‘Big Four’ professional services firm, EY Law, is using Luminance’s AI to quickly identify LIBOR-related documents maturing after 2021 and repaper them accordingly.

Most recently, a Global Top 100 law firm used Luminance for a LIBOR compliance review and achieved a 70 per cent time saving.

Within Luminance, lawyers can select the LIBOR module and in one click analyse their documents for LIBOR exposure. This will help lawyers to perform compliance reviews with more speed and insight than ever before.

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