The UK economy is plunging into a deeper recession than the 2008-09 financial crisis, according to the most reliable data published so far, with unemployment surging and the public finances sliding sharply into the red because of the coronavirus pandemic.
Economists said there was huge uncertainty over the depth of the coming recession and the speed of the subsequent recovery. Some predict the downturn will be short and sharp, but fear that like a decade ago, there will also be a painful transition to a persistently weaker path for economic growth.
With most UK households under lockdown, high streets shuttered except for essential stores, and many companies struggling to keep going, large parts of the economy are grinding to a halt.
Diane Coyle, professor of public policy economics at Cambridge university’s Bennett Institute, said the interconnected nature of the modern economy meant everyone was affected by the coronavirus crisis.
“The long list of categories regarded by the UK government as ‘key workers’ is testament to how reliant we are on each other, even within one country,” she added, referring to the government’s list of people such as health and transport workers who are involved in the response to Covid-19 and whose children are still able to attend school.
The downgrades to forecasts as the UK economy has progressively shut up shop are dramatic.
Capital Economics thought on March 10 that a pessimistic scenario would be for gross domestic product — the size of the UK economy — to fall from peak to trough by 5 per cent.
Exactly one week later, it thought a realistic scenario was a 15 per cent decline. “It’s clear we are in the early days of a big recession,” said Paul Dales, economist at Capital Economics.
Similar dire forecasts are being released by many consultancies and banks, reflecting the fast spread of coronavirus through the population, the lockdown and recent poor economic data.
On Tuesday, a closely watched business survey for March showed the worst monthly decline in economic activity on record, although a silver lining was a slightly less dire reading for employment.
This element of good news in the IHS Markit flash purchasing managers’ index was shattered on Wednesday when the Department for Work and Pensions revealed that 477,000 people had registered for the universal credit welfare benefit in the previous nine days, most likely because they had been laid off. In a normal week, the figure is 55,000.
YouGov, the polling company, revealed in a snap survey that 5 per cent of people in Britain reported having lost their job as a result of the coronavirus outbreak.
This rise in joblessness has no historical precedent, according to Professor Jonathan Portes of King’s College London. “Most worrying is that despite rapid policy action designed to stop firms laying people off — the government has done its best to throw the kitchen sink at the problem — so far at least that’s exactly what they’re doing,” he added.
As far as the coming drop in GDP is concerned, economists can estimate this in three ways: by looking at what is produced by the public and private sectors, what is spent by households, the government and foreigners on UK exports, or what is earned by people and companies.
On the output side, with much of the economy closed, the PMI figures suggested at least a 2 per cent drop in the first quarter, followed by close to 8 per cent in the second, according to Allan Monks, economist at JPMorgan. “The worst is yet to come,” he said.
Expenditure is falling rapidly, with restaurant sales down to zero, for example. Samuel Tombs, economist at Pantheon Macroeconomics, estimated that non-food retail sales would be down 80 per cent following the lockdown.
Retail sales are only a third of household consumption, but Adam Slater, economist at Oxford Economics, was only a little more optimistic for total spending.
He estimated that a 12-week lockdown would slash consumption by 18 to 32 per cent. “The GDP impacts would be very large,” he added, saying they would amount to “very roughly” a reduction of 13 to 22 per cent.
With the government replacing up to 80 per cent of lost earnings in its job retention scheme for many private sector workers, the income side of the national accounts might not look that awful, according to Prof Coyle. But for the Office for National Statistics, she said working out the impact on GDP would be “bloody complicated”.
Any drops in GDP in the sorts of ranges now predicted by economists would devastate the public finances in the short term.
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Public borrowing is especially sensitive to the economy performing much worse than expected, with the Office for Budget Responsibility’s ready reckoner showing that for every 1 per cent of lost GDP compared with the fiscal watchdog’s forecasts, borrowing tends to rise by 0.7 per cent of output.
If the economy lost 5 per cent of its GDP in the whole of 2020, compared with the OBR’s latest forecast for growth of 1.1 per cent, it would suggest borrowing rises by 4.2 per cent of output. This would be on top of borrowing put at 2.4 per cent of GDP by the OBR at the Budget, and before the Treasury counts the discretionary coronavirus-related measures it has announced so far, worth at least another 2 to 3 per cent of output.
In total, this would raise borrowing close to £200bn or 9 per cent of GDP, eliminating almost all of the reductions from a decade of austerity.
Richard Hughes, research associate at the Resolution Foundation, the think-tank, said such figures were plausible and seen in African countries when they had to deal with the Ebola crisis.
Robert Chote, chair of the OBR, said last week that only after the epidemic had passed would events reveal whether the recession left lasting scars that required higher taxes or renewed austerity to repair the public finances.
There is no doubt Britain is entering a deep recession: the answer to the question about scarring remains the big unknown economic element of the coronavirus crisis.
Source: Economy - ft.com
