What lies ahead for the UK economy in the wake of the latest national lockdown?
The UK, like the rest of the world, continues to face a global health crisis that has triggered a global economic crisis. It is only once the health crisis is over that we can address fully the economic crisis. Currently we are in a vaccine gap phase. This is contributing to a diverging performance globally, both in health and in economic terms.
Health fallout affects some countries more than others
Some countries – particularly but not exclusively in East Asia – appear better able to cope with the health fallout. That might be because of their previous experience with SARS. In turn, this has helped their economic performance, notably in China where the economy grew by a solid pace of 4.9% in the third quarter, up from 3.2% in the second. The US economy, too, rebounded strongly – up by 7.4 % in the third quarter, equivalent to an annualised rate of 33.1% – despite its Covid death figures being poor.
Western Europe has also been hit hard by an escalation of the virus that has triggered lockdowns of significant degrees across a number of economies, including the six largest: Germany (the fourth biggest economy in the world), the UK (5th), France (7th), Italy (8th), Spain (14th) and the Netherlands (17th).
In contrast to the US, this points to a likely downturn in all these economies in coming months, necessitating further policy easing. Indeed, the markets expect the Bank of England to further boost quantitative easing soon and the European Central Bank to ease policy at its December meeting.
Across the globe, the policy environment is likely to remain constructive for markets. Not only may central banks ease further, but fiscal policy remains accommodative. As the IMF stated recently, despite high global public debt levels, this is not the time to tighten fiscal policy.
A significant hit to the UK economy is likely
In the UK the economy began the year in a weak position before contracting sharply in March and April as the virus hit. GDP fell 2.5% in the first quarter and 19.8% in the second.
The turning point for the UK economy was in May. In each of the four months from May to August (the month for which the latest GDP data is available) the economy has grown, but in August it was still 9.2% below the level of February.
The projections of the National Institute Of Economic and Social Research, an economic think tank, which are currently a good guide to consensus thinking, suggested (before the latest national lockdown) that the economy‘s growth would be flat in September and up only 1.3% in the fourth quarter.
In all likelihood the economy was probably up slightly in September, but will now contract in Q4 because of the renewed lockdown. While this hit will not be as much as in the initial lockdown, it will still be significant, possibly reducing GDP by as much as 7.5% to 10%.
The UK’s two-speed economy
Despite the recovery in the UK since May, there has effectively been a two-speed economy. For five successive months from May to September, retail sales volumes continued to rise. In fact, non-food sales had recovered to 1.7% above February’s pre-pandemic level.
This solid trend in retail sales was consistent with a large number of people seeing their financial situation remaining sound despite the pandemic, including a rise in savings. Some sectors, like online sales, housing sales and construction have exhibited a strong rebound. Internet sales now account for 27.5% of all retail sales.
In contrast, some significant parts of the economy, notably hospitality, the creative sector and tourism have remained weak. Indeed, the vaccine gap continues to have a negative economic impact globally, as well as a sectoral impact within economies too, with some sectors severely impaired compared with others because of social distancing.
A large section of the economy will be in a moribund state
The latest lockdown in the UK will have a negative impact on the economy. It is hard to quantify fully – as it will depend upon how long the lockdown lasts and also on how it impacts overall confidence, both of firms and people, as well as the adverse effect it will have directly on some sectors. As before, some parts of the economy, such as the service sector and construction, will continue to grow, but likely at a slower pace than before.
This lockdown will ensure that a large section of the economy will be in a moribund state and will require huge new fiscal stimulus and help. Since the pandemic began, a large number of people have suffered. At one stage the furlough scheme was paying 80% of the wages of 9.6 million people.
The furlough scheme was due to finish at the end of October but has now been extended, consistent with the lockdown. Currently 2.1 million people are on it. This lockdown reinforces our previous expectation for unemployment to rise from 1.52 million to 3 million and large swathes of firms to be left nursing debt that will inhibit their ability to recover.
Like the rest of Western Europe, the UK economy will occupy the slow lane and the hard shoulder, while China, the US and the rest of the world will occupy the outside faster lanes.
Please note, the value of your investments can go down as well as up.