UK Braces For Recession As Coronavirus Corrupts Economy
By Naimish Keswani
One month into lockdown, the UK economy saw its fastest contraction in 20 years as the Coronavirus pandemic brought businesses to a grinding halt. Several economic indicators suggest that the country could be heading towards a recession.
The IHS Markit’s Purchasing Managers Index, which tracks activity in the manufacturing and the service sectors, fell to record lows of 12.9 in April, compared to 36 in March. This is well below the 38.1 figure recorded during the troughs of the 2008 financial crisis.
Any figure below 50 denotes a contraction in business activity.
“It seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries,” said Gertjan Vlieghe, an External Member of the Bank of England’s Monetary Policy Committee, in a speech streamed online.
As per the latest count, more than 20,000 people have died of Coronavirus in the UK with nearly 150,000 people infected. Home Secretary Priti Patel warned in a briefing that “we are not out of the woods yet,” and people must continue to follow social distancing rules to mitigate the spread of the virus.
The IMF slashed global growth forecasts in response to the pandemic, saying that the ‘Great Lockdown,’ would be far more painful than the recession in 2008. The sudden shock to economies globally led them to replace their previous estimate of 3.3% growth with a contraction of 3%; assuming that the pandemic peaks in the second quarter and recedes in the second half of this year.
“There is still considerable uncertainty around what the economic landscape will look like when the world emerges from the lockdown,” warned Gita Gopinath, Chief Economist at IMF. “Much worse growth outcomes are possible and maybe even likely.”
While the IMF forecasted a 6.5% plunge in GDP for the UK, the Office for Budget Responsibility believes it could dip as much as 13% in 2020. Their analysis also expects about 2 million jobs to be cut, bringing the unemployment figure to 10% by the end of June.
According to an analysis by Enterprise Research Centre, the UK saw a 70% year-on-year increase in the number of company dissolutions. The data — which is maintained by Bureau Van Dijk, a Moody’s subsidiary — suggests that there were 51,498 dissolutions in March; over 21,000 more than the same period in 2019. Businesses in the West Midlands and Wales saw over a 100% increase in dissolutions compared to last year.
“These are facts. Something is going very badly wrong in the economy,” said Mark Hart, deputy director of ERC in an interview with the FT.
A survey conducted by the Confederation of British Industry indicated that UK manufacturers saw the most rapid fall in output volumes and total orders since 2009 in the past quarter.
Volumes in the month of April fell by 21% compared to a contraction of 8% in March. Manufacturers are expecting further pain and believe output will fall by 67% next quarter, making it the weakest expectation for future output on record. Total new orders are also expected to fall by 78%.
There’s also an 87% plunge in sentiment, compared to a post-election bounce of 23% in January.
“The fall in activity and sentiment is not surprising given the unprecedented circumstances that manufacturers and other businesses face,” said Tom Crotty, Chair of the CBI Manufacturing Council in their report. “It is crucial that the government continues to work with and support manufacturers during these difficult times.”
The UK Chancellor, Rishi Sunak, announced loans worth £330 Billion to support businesses and people affected by the virus in March, and promised to do “whatever it takes” to keep households and companies afloat.
The government’s Coronavirus Business Interruption Loan Scheme (CBILS) currently underwrites 80% of the value of a loan for businesses with annual turnover below £45 million. The Coronavirus Job Retention Scheme is also supporting companies that have furloughed their employees by paying 80% of their wage up to £2,500 per month.
Due to the sudden rise in public spending, the government is planning to raise funds by selling government bonds worth £180 Billion to investors over the next three months.
The Bank of England has also cut their interest rates to 0.1% and are injecting £200 Billion in the economy to cut long term borrowing costs. Their Covid Corporate Financing Facility lets larger companies sell commercial paper on terms comparable to market conditions before the ascent of the pandemic.
“The Bank’s job now, as always, is to provide monetary and financial stability,” wrote Andrew Bailey, Governor of the Bank of England in an article for The Sun. “These measures will help as much as possible to keep companies running and hard-working people in their jobs.”
So far, no exit strategy has been put forth by the government. Chris Whitty, the Chief Medical Advisor, has indicated that social distancing measures would have to stay in place until the end of the year to prevent fresh outbreaks.
“Government policies have made a good start when it comes to curbing the insolvency of businesses, but the longer it persists, the more agile policies would have to be,” said Alpesh Paleja, Lead Economist at the Confederation of British Industry, in an interview with this reporter.
“As is always the case with economics, our understanding will grow as we get more data, but certainly, I think we can be clear that there’s quite a sharp downturn ahead, at least in the first half of this year.”
Gertjan Vlieghe, Bank of England’s Monetary Policy Committee Member, believes that a U-shaped recovery is likely once things settle down.
“The economy’s potential is severely disrupted at the moment, but once the pandemic is over, and other things equal, in principle it should return approximately to the pre-virus trajectory,” he said.
