Spike in Covid cases to keep the UK economy under recession

Summary

• It seemed that the British economy would be coming out of recession during Q3 2020, with reasonably good performance during May to July 2020, but fresh coronavirus restrictions likely to dampen growth.
• Bank of England said that its latest policy statement should not be seen an indication that negative interest rates are on the cards any soon.

The UK economy had officially entered a recessionary phase by shrinking for two consecutively quarters of January to March 2020 (2.2 per cent) and April to June 2020 (20.4 per cent). Later, a healthy GDP growth rate of 6.6 per cent for the month of July 2020 brought cheer to the nation along with the hope that the Q3 economic output would expand, even if at a slower rate than earlier anticipated, bringing the British economy out of a recession.

However, these hopes were lost when fresh coronavirus restrictions were imposed across England on 22 September 2020, which are expected to postpone the much-awaited recovery. Leading economists warn that the economic growth is expected to drain out again, which had started to gain momentum beginning May 2020.

Bank of England plays down using negative rates

The interest rates had been held at an all-time low level of 0.1 per cent during the September 2020 monetary policy committee (MPC) meeting.

Andrew Bailey, governor, Bank of England said that using a negative interest rate still continued to remain an option, and is not being rules out. However, the recent MPC’s policy statement is in no way a hint that negative interest rates are coming any soon. Earlier, media reports had stated that the MPC was chalking out a plan to remove the technical barriers for lowering the bank rates below the level zero.

Right now, the study regarding a possibility of using sub-zero bank rates is merely exploratory in nature, he clarified. He mentioned this while interacting with the British Chambers of Commerce recently.

Bailey admitted that the British economy is undergoing a tough period, having contracted by roughly 10 per cent of its pre-corona size.

UK economy undergoing a tough period

The monthly GDP growth rates for UK have been dismal even before the coronavirus pandemic struck the world. For instance, the British economy was facing difficulties after Brexit, EU being one of its most important trading partners. From July 2019 to January 2020, the monthly GDP growth rates were hovering very close to zero, which effectively meant almost nil growth in the economic output of the nation.

The impact of the coronavirus pandemic started to show up particularly from March 2020, when the economy contracted by 6.9 per cent.

(Source: Office for National Statistics, UK)

With fresh coronavirus restrictions in place across England, economic experts expect the GDP growth to stall in Q4 2020 and Q1 2021. Other factors that are likely to pull down the national economic activity are Brexit risks and dwindling government stimulus.

The recovery had gained momentum beginning May 2020, aided with government support policies such as VAT cut, stamp duty holiday, and restaurant discount schemes. However, the climbing Covid-19 cases and stricter rules of social distancing and health safety could put the fast-track growth to a sudden halt.

In fact, government’s support policies have also attracted criticism from various quarters. They are being blamed for having raised the post-April 2020 economic growth to a faster level than was compatible with keeping the coronavirus infections under check. Some experts blame the eat out to help out scheme for partially raising the Covid-19 cases in England.

Coronavirus cases

The total number of coronavirus cases have crossed 403551 in the UK on 23 September 2020. England has the highest daily infection rate, which is rising at a rapid rate since August 2020.

Earlier, the daily infections were going down gradually since the month of May 2020 from a daily number of 4095 on 1 May to 514 cases registered on 26 July in England. After that, they have been rapidly rising.

Daily Coronavirus Cases: 22 September 2020

(Source: Government of UK)

A more or less similar trend of increase in coronavirus cases was evident across the regions of Scotland, Wales, and Northern Ireland as well, even though the total number of cases in these regions were much lesser as compared to those of England. For instance, Scotland saw only 2 new cases for 5 July 2020, but on 20 September the number of daily infections rose to 308.

The stricter restrictions are expected to put a cap on the soaring number of cases across England. Other regions are also expected to soon come out with similar tighter rules to contain the spread of Covid-19 cases.

To sum up, the British government has been trying its level best to aid the economic recovery with various policies to assist struggling businesses and protect employees from losing their jobs. At the same time, a fine balance might be required to move in a sustainable manner so that coronavirus infections are kept under check, even if it comes at a cost of a relatively slower GDP growth.