Economic update: coronavirus

The Office for National Statistics’ (ONS) April monthly GDP release revealed the severe economic impact of a full month’s worth of lockdown measures. Specifically, GDP in April fell by 20% on a month-on-month basis. The drop in output in April represented by far the largest monthly fall since comparable records began in 1997 and brought the level of real GDP down to where it was in 2002. Record month-on-month falls were seen across all sectors: services (-19%), industrial production (-20%), and construction (-40%).

The labour market began to weaken in Q2 2020 due to the impact of the COVID-19 crisis. The number of employees on payrolls fell by over 600,000 from March to May, while job vacancies in the three months to May saw their largest quarterly decline (-342,000) since the series began in 2001. The deterioration in the labour market came despite 9.1 million jobs being furloughed under the government’s Coronavirus Job Retention Scheme (JRS) as of 14 June.

Survey indicators suggest that economic activity remained depressed going into May. The CBI Growth Indicator reported that private sector activity in the three months to May fell at the fastest pace since it began in October 2003. ONS survey data reported that 18% of firms remained temporarily closed in mid-May, while, of those firms that remained open at that time, 62% stated that turnover was lower than normal. Consumer confidence also remained remarkably gloomy in May, with GfK’s headline index hitting its lowest since January 2009 in the second half of the month.

However, there were some early, tentative signs of output bottoming out in May as the government encouraged certain sectors to go back to work (such as construction and manufacturing). The May IHS Markit/CIPS PMIs reported activity falling at a slower (but still fast) pace. High frequency data, such as Apple/Google mobility and Barclays spending data, have gradually begun to improve in recent weeks. Furthermore, ONS data suggested that a quarter of firms that had paused trading in mid-May expected to reopen in the next four weeks.

Looking at expectations for GDP across Q2 2020 as a whole, the recent average of economic forecasts (as of 27 May) anticipates output to fall by -15% quarter-on-quarter, compared to a decline of -2% in Q1. However, the range of forecasts is quite large – between -9% to -24% – as the unprecedented nature of the crisis means that any estimates of future output are highly uncertain.

At this stage, most economic forecasts assume that the sharp fall in activity over H1 2020 will be followed by a rebound as social distancing measures are eased over Q3 2020. This is what is sometimes referred to as a ‘V-shaped’ recovery. Such a scenario was reflected in the Bank of England’s latest outlook (published in May), which assumed a decline in GDP of -14% year-on-year in 2020 followed by a recovery of 15% in 2021.

However, some economists have begun to posit that the recovery may end up being more drawn-out, especially if a second wave of the virus requires restrictions on activity to be tightened again. For example, the OECD published a ‘double hit’ scenario for the UK showing a fall in GDP of -14% year-on-year in 2020, followed by a shallow recovery of 5% in 2021 (compared with -11.5% and 9% in its ‘single hit’ scenario).

There remains significant uncertainty around the UK economic outlook, as the recovery depends on continued progress in the fight against COVID-19. The reopening of all non-essential retailers on 15 June was an important first step in restarting activity; however, sectors such as accommodation, food services, and recreation – which have been some of the hardest hit by social distancing measures – will not be able to open until 4 July at the earliest.

Notwithstanding any delays, this reopening timeline suggests that any broader pick-up in activity will not likely be seen until Q3 2020. It is also worth noting that a no deal Brexit would pose a downside risk to the UK’s recovery from the COVID-19 crisis going into 2021.

The COVID-19 crisis also presents the potential for economic ‘scarring’, whereby job losses, business closures, and reduced investment levels would damage the UK economy in the longer-term. For example, recent CBI surveys reported that plans for investment in the year ahead have deteriorated to historic lows. The potential for large declines in capital spending risks the reduction in production capacity and adoption of new technologies in the future, which would damage the UK’s longer-term economic prospects.

Although there are early signs that the economic downturn may have begun to bottom out in Q2 2020, the pace of any future recovery will depend on the extent to which social distancing measures and government support schemes are unwound.

The impact of the COVID-19 crisis varies by sector and across companies. Therefore, firms should be aware that some parts of their supply chain may be relatively more impacted than others.

Firms should continually review their business planning to consider their ability to operate effectively under social distancing rules, while also considering the potential impact of businesses and households’ changing behaviour.