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Summary
- HSBC believes that the British economy could shrink by as much as 10.3 per cent for the year, before it grows by about 6 per cent the year after
- The GDP shrinkage prediction of the bank is 0.8 per cent lower than the prediction of the BoE published earlier this month
- The bank’s estimates are better than the BoE's estimates on the employment front as it expects the unemployment in the country to hit 7.2 per cent by the end of this year against the BoE's estimate of 7.5 per cent.
The largest bank of UK, HSBC in a report published this week on the state of the British economy has predicted a pessimistic picture about the state of recovery. In contrast to a comparatively optimistic picture presented by the Bank of England in its monetary report published earlier this month. HSBC believes that the British economy could shrink by as much as 10.3 per cent for the year before it grows by about 6 per cent the year after. The private lender's reports also call to question several of the central bank's assumptions like the payments data which it had based its predictions on. The chief economist of the bank Elizabeth Martins while speaking on the publication stated that the recent economic data about the economy is far from overwhelming to support BoE's optimism. Regarding the current bleak state of affairs, she pointed out that only about 5.5 per cent of the people who had been furloughed had returned to work by the end of July.
HSBC’s prediction Vs the BOE’s prediction
The data published by the current HSBC report is in sharp contrast not only to the BoE report that was published earlier this month but also to its own numbers published in the previous editions. In its previous report, the bank had painted a much rosier picture of the economy, predicting the economy to shrink at a moderate pace of 7.8 per cent in 2020 followed by a growth of 6.2 per cent in 2021. In contrast, the BoE predicted a slightly gloomier picture in its latest report when it predicted the GDP shrinking by 9.5 per cent for the year followed by a growth of a whopping 9 per cent in 2021 and a recovery to pre-pandemic levels by the end of 2021. On the parameters of recovery by the end of 2021, is where the latest HSBC report differs the most from the BoE’s stand, as it predicts that by the end of 2021 the British economy would have actually shrunk by nearly 4.5 per cent. The New HSBC report thus firmly indicates that it does not believe that the current momentum of recovery is sustainable, and the economy would see a worse performance during the next two quarters of the year.
The state of unemployment and the impact of the withdrawal of stimulus packages
Much of the current state of recovery of the British economy is the result of the pent-up demand forces from the lockdown period and the massive stimulus spending undertaken by the government since the lockdown. However, now that the pent-up demand forces have started to recede and the government is actively trying to curtail its stimulus programmes, the economy will be left to its momentum generated since the lockdown reopening to carry itself forward.
The withdrawal of the furloughing scheme would be one of the most challenging factors that the economy will have to face for the rest of this year. There were nearly 9 million people who were placed under the benefit of this scheme by their employers since the beginning of the lockdown. Now that the scheme is about to be snapped by the end of August, many of the people who are under it will find themselves unemployed at the start of the next month. The real state of unemployment in the country will be visible then, as it had remained hidden all this while because of the scheme.
There are several industries which are witnessing a very slow recovery since the lockdown reopening, and they have a long way to go before reaching a level of sustainability without government support. There is a high probability that the economy might see a lot many business failures in the months to come when the stimulus is withdrawn than was seen during the lockdown.
Factors that could see the economy move as per BoE's predictions.
The biggest factor that would provide support to the BoE's predictions is the demand forces becoming more stronger for the rest of the year that has driven the current state of recovery in the past couple of months. Businesses actively bringing their employees back from furlough will also provide a major boost to the economy as it will support the momentum of the demand forces in the country. The third factor would be the improvement in the threat levels from the pandemic. The much-hyped Jenner institute vaccine for the pandemic is set to be unveiled by September, after which it should take some time before a sizable amount of the country's population is inoculated with it. Once the threat levels of the pandemic reduce, it will induce more people to come out of their home to join work. More companies will bring back their employees from furlough as workplace safety restrictions will be reduced. More customers will visit supermarkets, shops, and recreation establishments while most importantly, the transportation sector, will make a steady recovery. Public transportation systems are an important factor that motivates people joining back to their workplaces. The last quarter of the year is usually the busiest part of the year for most business in the country. It would be interesting to see how most of the above factors play out until that time.
