The seeds of the 2020 UK recession were sown on March 23 when the UK prime minister, Boris Johnson, put England into its first coronavirus lockdown. Over the following month, UK GDP fell by 19.5%. In comparison, during the last financial crisis GDP shrank by just over 6% between January 2008 and July 2009.
In his spending review in November, chancellor Rishi Sunak admitted that the UK economy was set to shrink in 2021 more than it had in 300 years.
There has been much discussion over whether the economic recovery from the coronavirus shock could take a V or a W shape, the latter indicating a short rise before another incoming dip. But I think the most likely option is a prolonged dip before a future recovery, meaning a flat U.
At the end of June, shortly before England came out of its first lockdown on July 4, the Bank of England’s chief economist, Andy Haldane, announced that the UK economy was on track for a quick, V-shaped recovery. Early indicators bore out this prediction. During May and June, GDP rose by a monthly average of 5.9%.
That the economy rebounded strongly is, of course, due mainly to the ongoing high levels of state support the chancellor outlined in his spending review. As of November 15, 9.6 million workers from 1.2 million different employers were using the UK furlough scheme. In addition, the Bank of England injected £100 billion into the economy in a single month in June 2020 through quantitative easing.
Even though a number of local lockdowns were imposed in England, the outlook for the UK economy remained broadly positive. GDP in October 2020 was 23.4% higher than it had been in April, although it was still 7.9% below the February 2020 figure.
England then entered a second period of lockdown on November 4 – although the restrictions were less severe than they had been earlier in the year. One indication of the impact of this second lockdown can be gleaned from a recent Office for National Statistics Business Insights Survey which reported findings covering the first two weeks of November. While 77% of businesses were trading during that period, that figure fell to less than 50% for firms in sectors such as accommodation and hospitality. Equally worrying, only 9% of the businesses surveyed said they were fully prepared for Brexit, just a few weeks before the end of the UK’s transition period on December 31.
With the recent announcement of Tier 4 restrictions across London and the South-East and the effective “cancellation” of Christmas, what then are the prospects for the UK economy? Will ongoing restrictions serve simply to temporarily halt the country’s economic recovery, or will they stifle it completely and possibly cause a second slump – a so called W-shaped recession?
According to a recent report by the Office for Budget Responsibility (OBR), government borrowing for this fiscal year is projected to be only slightly below £400 billion, a figure equivalent to 19% of national income. For the UK, this exceeds any level of borrowing aside from that during the two world wars – and is almost double what it was at the peak of the financial crisis.
Ahead also lies the threat of unemployment when the furlough scheme is scheduled to end at the end of April 2021. The Bank of England predicts the unemployment rate could possibly exceed 7%.
For many businesses, the run-up to Christmas is usually the busiest trading period of the year. Yet, many hospitality operations remain closed and, although retail sales rose sharply between February to October, this was attributable solely to online trade. Store sales actually fell by 3.3%.
Record household savings
Trade patterns with the EU will change, with, or without a deal. However, for many businesses the conclusion to Brexit could mean the end of the uncertainty they have faced. For many, this uncertainty was more problematic than the actual terms of trade with the EU that they may face going forward.
That said, households have record savings and, with sufficient confidence, consumer spending could drive the recovery.
One prediction in the OBR’s report is that GDP will return to its late 2019 level as early as the end of 2022. This would make the recession much shorter than the one the country experienced in the aftermath of the financial crash.
The Office for Economic Co-operation and Development’s (OECD) forecast is less optimistic. It expects the UK economy to shrink by 11.2% in 2020 meaning that the country will face the deepest recession of all of the G7 economies. By the end of 2022, the OECD predicts that the UK economy will be 2% smaller than it was in the last quarter of 2019. Three factors underpin the OECD’s beliefs: weak consumer confidence, a dearth of business investment and the ongoing uncertainty surrounding Brexit.
A U-shaped recovery
Early hopes of a quick bounce back in line with a V-shape have been dashed. GDP growth remains positive but small, making the upwards portion of the V less steep than the downwards one.
One possible cause of a W-shaped recession would be the labour market. The furlough scheme will end and redundancies are likely to follow. To protect the recovery, measures must be put in place to help those losing jobs to move to sectors where openings are available. If, in the medium term, the net result of this is merely a re-distribution of employment as those who lose their jobs move into sectors where there is unsatisfied labour demand, the double dip could be avoided. And, of course, such shifts have occurred before. In the decade following the 2008 crash, professional, scientific and technical services flourished while financial and insurance activities contracted.
Arguably, the key factor influencing the shape of the recovery is business confidence. We need firms to make investments which could lead to new jobs. Since the 2016 vote, Brexit has hampered this. But the uncertainty is coming to an end. Whatever the UK’s future trading relationship with Europe, British firms will adapt.
The evidence suggests that the UK will avoid a double dip or W shaped recession, but that the path to recovery will be much slower than the initial downturn indicating a long, flat U.