Elizabeth Martins, Senior Economist, HSBC
Five key questions for the UK economy
The UK government faces tough decisions as it tries to control coronavirus at the same time as reopening society and reigniting economic growth. We look at five key questions that could help determine their tactics – and the country’s economic outlook.
How prevalent is the virus?
Infection rates have fallen dramatically since the early weeks of the UK’s outbreak. On 30 July, the number of confirmed new cases was 763, compared with a peak of 5,487 on 24 April. Daily COVID-19 deaths have also plummeted.
As a result, the UK ‘R-rate’ – the average number of people that each infected person passes the virus to – was believed to be 0.7 to 0.9. At that level, case numbers will continue to fall. However, there are concerns over local and regional outbreaks, and experience in Europe suggests infection rates could rise again.
What is the economic hit so far?
The economic hit from COVID-19 can be divided into two phases: lost output as a consequence of enforced closures between March and May; and then – more importantly – lost output as a result of the financial consequences of those closures for businesses and households from June onwards.
The UK economy contracted by 2.2 per cent in the first quarter of 2020, and then a record-breaking 20 per cent in April. A disappointingly small recovery in May and June means there are downside risks to our second-quarter GDP growth forecast of minus 16 per cent.
In the second phase of the crisis, we have already started to see a bounce in activity, reflecting the reopening of businesses across the country from mid-June onwards. But again, the headline numbers belie underlying consumer caution. As long as consumers fear returning to ‘normal’, the economy will continue to suffer.
“57 per cent of firms surveyed by the Office for National Statistics reported lower turnover”
How have consumers and businesses coped?
Despite the drop in COVID-19 case numbers since the April peak, surveys show that people remain cautious. A majority remain uncomfortable with the idea of using public transport, and only half of respondents felt comfortable to return to their normal place of work. Indeed, the percentage of people who are working from home exclusively has fallen only slightly, from 33 per cent in mid-May to 27 per cent in mid-July – well up from about 5 per cent in 2019.
In the corporate sector, 57 per cent of firms surveyed by the Office for National Statistics reported lower turnover, though a perhaps surprisingly high 26 per cent reported turnover was unaffected by the crisis. Of all surveyed businesses – those trading and those still on pause – 79 per cent were using the Job Retention Scheme, with 39 per cent answering that they were providing top-ups to the wages covered by the scheme.
Have the rescue measures worked?
The Bank of England’s 65 basis points of rate cuts and GBP300 billion of quantitative easing since the pandemic began appear to have had the desired effect: bond and money market rates have been remarkably stable and according to the latest money and credit data, effective rates on new lending and deposit rates have fallen too. Corporate borrowing has ramped up, though many small firms have been reluctant to increase their indebtedness.
The Jobs Retention Scheme has been extremely popular, but Chancellor Rishi Sunak reiterated on 8 July that it could not continue ad infinitum. Indeed, it is both an expensive policy and one which prevents people from returning to work and restarting the economy. Still, its expiry represents a huge source of uncertainty for the UK economy: how many of the 9.5 million people registered on the scheme will still have their jobs when employers have to start paying their wages in part and then in full? How many will have them three months down the line, or six months?
What will be the impact of Brexit?
The UK has formally rejected the option to extend the post-Brexit transition period, and the deadline under which it would have been able to do so has now passed. While it is still possible, in our view, that the EU would agree to an extension later in the year, that is not the UK’s policy and as such, the UK will in all likelihood move to a new trading relationship with the EU from 1 January 2021.
If a deal is struck, it may include tariff-free and quota-free goods trade, but no regulatory alignment and few provisions for services. Because of the non-tariff barriers, this would still be a disruptive event. Indeed, the difference between such a deal and no deal at all is not particularly large.
Modelling the impact of this ‘bare bones’ deal is not easy. We expect UK GDP to rise by 6.2 per cent in 2021, and indeed, it would be very hard for it not to record positive growth, given the 7.8 per cent fall we envisage in 2020.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Elizabeth Martins
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