British economy to rebound by the third quarter of 2020

The British economy could be confronting a massive decline of 15 per cent of its GDP in the second quarter of 2020 and an unemployment rate that would be more than double of what it is now, till at least the end of the second quarter of 2020. In the first quarter of 2020, there was a marginal contraction in GDP by 0.5% sequentially. While making these observations, economists from the Centre for Economics and Business Research (CEBR) stated that this is the severest slowdown that the country is facing since the 2008 financial crisis. The experts at the centre further noted that this contraction in the economy could be one of the worst ever seen in the last 20 years till things start to improve by the third quarter of 2020, provided the threat of the pandemic subsides by then. Should everything go as envisaged, the British economy would recover earlier, and the overall GDP is expected to be lower by 4% in 2020 compared to that in 2019.

The massive loss of business activity and the financial standing of many of the country’s businesses is such that it will be challenging for them to withstand this onslaught. The country is expected to witness two consecutive quarters of contraction. Already 477,000 people have submitted applications for universal credit in the past nine days as per data provided by the Department for Work and Pensions, and it is likely that the numbers will go up as the months pass by. While the government is doing all it can to protect the interest of the ordinary citizens, it is not an easy job the save all businesses from succumbing to the ill-effects of this deadly pandemic. In such an event, it will be difficult not only to find alternative employment for those people but also to keep them off the streets and maintain peace in the country.

With increasing unemployment and an increase in the number of beneficiaries of the government-sponsored social security, household consumption will take a beating in the second quarter of 2020, declining by 15% sequentially. Consumer spending is expected to be lower by 5% in 2020, although recovery is expected by the second half of the year.

The biggest casualty is expected to come from reduced business investment. It is estimated to be down by 13% in 2020. Despite a recovery, it is projected to take until 2032 to catch up with peak business investment in 2017. Housing prices are forecasted to fall 13% in the year to 1Q 2021. By 2022, house prices are expected to be down 15% from their zenith.

Although inflation is projected to remain low in the upcoming months, it is expected to climb up in 2021 and 2022. CPI is estimated to hit a peak of 3.2% in 1Q 2021. Interest rates are projected to rise in unison in 2021 along with inflation. Base rates are expected to touch 3% in 2022. Government borrowing is forecasted to touch 7% of GDP in 2020/21 before declining to 5% of GDP in 2021/22. Debt to GDP ratio is likely to be at 100% of GDP in 2021. This will exclude loans to companies, which are expected to be written off subsequently.

There is an expectation that restrictions on the movement of people and the operation of business establishments will be relaxed by the third quarter of the current year with the proliferation of testing facilities. The government is also expected to encourage consumer spending in the second half of the year. Also, it is expected that there will be an added stimulus for the resumption of business investment which is crucial for employment generation in the country.

The severity of the pandemic has grown substantially in the past two months. In the beginning, when the news broke of the virus breakout, British importers and aviation firms were the first to report major disruptions in their business activities. Importers of both merchandise and intermediate goods started to feel the heat of the halt in the movement of goods. Amongst them were British engineering and other manufacturing companies which were heavily dependent on imports from China and were forced to opt for a temporary shutdown of production due to unavailability of components. The spread of the pandemic in the country from the beginning of March 2020 gradually pushed the country into a virtual shutdown mode. Among the major companies to be hit by this shortage were several large automaking companies which were some of the largest export revenue earners for the country. The lockdown conditions also affected several other sectors of the economy, like retail, financial services, etc.  The audit and financial services sector especially was severely strained. Most of the small and large audit firms who are entrusted do the hard number crunching of the country’s thousands of big and small enterprises are now short of staff, who have been locked up at their residences after government directives.

Business disruptions caused by events like coronavirus epidemic result in elongated periods of slowdown, which can turn a healthy company into a sick one. Such a situation will cause additional burden on the country’s banking system which performs the role of the central nervous system of an economy. While this situation could result in the piling up of massive non-performing assets, it would also create the risk of further elongation of the period of the slowdown as the banks would not be unable to support the recovery phase fully when their role becomes most sought after. Keeping these things in mind, some British banks have on their own come out and declared that they would allow their customers mortgage payment holidays until the economic situation improves.

The British government and the central bank have also taken several measures to see that the pandemic causes little disruption to the economy and that the recovery is fast-tracked. The government in the week before the budget announced a £30 billion stimulus package to help small and medium businesses of the country which is to be implemented in the form of cash injection directly in the form of salaries of employees. Then in the budget, the government announced a massive £640 billion infrastructure spend programme to rebuild the countries frail infrastructure. After than on the 18^th of March 2020, it announced a massive loan guarantee scheme when the Bank of England would be providing guarantees to loans to large and medium-sized corporates would have to pay for their bills and salaries of their staff while depressed demand condition continues.

It is very important that the country quickly comes out of this pandemic. All the above efforts will have an impact if the healthcare authorities can come up with an antidote for the infection. The lockdown conditions must be lifted as soon as possible so that ordinary citizens can resume their day to day activities, which add up to result in the economic growth of the country. The international scenario will continue to be volatile for a while now and will not improve till at least all countries declare that they can take control over the epidemic.