A Note on the UK Economy’s Contraction

Today’s economic release – with the UK economy shrinking 20.4% in April – confirms that the economy is in a deep recession. This should focus attention on the policy steps needed to help the economy emerge, both to restore jobs and output in the near term and help reposition the economy in the longer term. We expect the economy to recover during the second half of this year, but it will not be until the end of next year that output will return to its pre-crisis level.

The scale of the contraction highlights the need to continue to unlock the country in order to bring the economy out of recession. For instance, the scale of the contraction in construction was huge and will be reversed as that sector returns to work.

The Government clearly needs to get the balance right by unlocking in a way that revitalises the economy while keeping the virus in check.

It appears clear that the guidelines on social distancing should be relaxed to help a number of the hard-hit sectors such as hospitality. That easing in guidelines – for instance, from two to one metre – should happen immediately.

Even as unlocking happens, the business models of some sectors will continue to be impacted by the lack of a vaccine. During this vaccine gap phase the government will need to provide assistance to these areas, to help them through this prolonged but temporary phase. Help will be needed during this difficult adjustment.

In my view there is a need for a pro-growth economic policy, focused on the three arrows of:

- credible fiscal activism
- monetary and financial stability, including a new money GDP target for the Bank of England
- and a supply-side agenda.

There will be a need for consistency between monetary and fiscal policy. In an environment of low inflation, low rates and low yields there is no need for austerity or tax increases, with borrowing thus remaining high before reducing the ratio of debt to GDP. Expect monetary policy to remain accommodative.

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