Optimism Around COVID-19 Vaccine; ASX 200 Moves Up 1.81%

Summary

• British economy to shrink steeply by 21 per cent during Q2 2020
• The country’s economic output had declined by 2.2 per cent during Q1 2020
• This brings the UK in the list of countries undergoing economic recession, Eurozone and the US are already part of the club

The UK government estimates from the Office for National Statistics (ONS) are expected to be released on Wednesday 12 August 2020. Media reports suggest that the British economy could shrink yet again after a 2.2 per cent decline seen in the country’s output for Q1 2020. This time around, in Q2, the decline is being projected at a much steeper level of 21 per cent, which is a serious concern.

If these reports are true, the nation will officially enter economic recession, a phase defined as a withering economy that continues to contract for two consecutive quarters in a year.

The concern is also grave since, this is the steepest contraction being witnessed amongst the G7 nations during the second quarter of the year 2020 (April to June). The G 7 or the Group of Seven is a world organisation comprising of seven prominent developed countries including Japan, US, Germany, Canada, Italy, France, and the UK.

(Source: Organisation for Economic Co-operation and Development)

The depth of the impact of the coronavirus pandemic can be gauged from the fact that it has affected economies across the globe, even when they are spread miles and miles apart from each other. The economies of all the seven members of the Group of Seven Nations are forecasted to shrink for the second quarter of 2020. While Japan is least affected amongst them (to contract by 7.6 per cent), the UK is expected to be the worst affected (with a 21 per cent fall in output).

The eurozone and US are also undergoing economic recession, according to official estimates.

(Source: Office for National Statistics - GDP monthly estimate)

According to the latest available government statistics, the monthly rate of change in the gross domestic product (GDP) of the UK since the beginning of the year 2020 has not been very encouraging.

Even before the pandemic struck the nation, it was not growing, during the months of January and February 2020. During March 2020, Britain’s economic output shrank by 6.9 per cent. The economy further contracted very deeply by almost one-fifth of its size during the month of April 2020. It mildly grew by 1.8 per cent during May 2020. June’s figures are yet to be released.

A second wave of infections feared

The UK government had to impose a lockdown beginning 23 March 2020, to contain the spread of the deadly coronavirus infections across the nation. As a result, the consumer demand fell across the board and supply chains were disrupted, putting tremendous pressure on the bottom-line of businesses across various sectors. Employment levels also started to go down as a consequence of all this.

Though the lockdown was gradually lifted beginning 1 June 2020, and most of the sectors are now open for operations, however, the social distancing norms and health safety measures still need to be taken. People continue to remain fearful in these uncertain times and many sectors like hospitality, travel, restaurants, construction etc. are still not doing well.

Further, the country is grappling with the anxiety of another nationwide rise in infections, as is being predicted by medical experts, starting with the onset of the winter season.

If this turns out to be true, the impact on the economic growth will be devastating.

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Bank of England’s support

Bank of England (BoE), the country’s central bank has been supporting the sluggish economy in an extraordinary manner throughout the ongoing crisis. The BoE had slashed the interest rate to a record low level of 0.1 per cent during March 2020. It is also contemplating on the pros and cons of pulling it further to the negative territory, if required.

Till now, the bank has offered government bond purchases worth £745 billion. It also plans to increase the support by another £100 billion by November 2020.

The bank expects the nation’s economy to contract by 9.5 per cent during the whole of 2020.

Even though the bank’s governor Andrew Bailey expects the nation to rebound fast and the economy to have a V-shaped recovery during 2021, but many experts say that one needs to be watchful of the turn of events, and unfortunately this may not turn out to be true.

Also Read:

Bank Of England Sees The British Economy Making A Sharp Turnaround

The UK Healthcare Sector and Some Companies with Sound Performance

Top companies that laid off workers

While the pandemic has hit almost all the businesses very hard, and many of them have run out of their cash reserves, some sectors are particularly negatively affected. Not coincidentally, these are also the sectors where job losses have been the maximum like aviation, retail, hospitality, energy, and manufacturing, to mention a few.

Talking about the top few big names that have laid off staff, British Airways would probably lead this chart. In a single day on 28 April 2020, the company announced that it is laying off 12,000 workers.

The company (British Airways owner IAG) had released its half yearly results a week back. IAG recorded a pre-tax loss of £3.8 billion for H1 2020. The management said that the company is undergoing very tough times and is forced to lay off staff. It needs continued government support to survive and continue with its operations.

Rolls Royce has laid off 6000 of its total staff till now, while Centrica and SSP Group have cut their staff strength by 5,000 jobs each.

According to media reports, Value Act Capital Management, the biggest shareholder in Rolls Royce has sold off its complete stake few days back. It had a 10 per cent stake in the aircraft engine manufacturer.

As part of its re-structuring plan, Centrica would be selling off its US subsidiary Direct Energy for £2.8 billion.

To sum up, the investors await the news of the economic output numbers for the UK eagerly. It is expected that the country would be officially entering into economic recession, with a second quarter of contracting GDP, which is quite worrisome. The size of the GDP contraction for Britain is largest amongst the G7 nations for Q2, 2020.