What Next For The Ailing UK Economy?

Summary

• The country’s services hit the hardest
• UK might not be able to fully recover to pre-corona levels until 2023: Berenberg bank
• More government investment could speed up recovery
• Government must try for a favourable Brexit deal

The UK’s economy contracted by more than 20 per cent during the second quarter of 2020, much more than US or most parts of the Europe. While the Boris Johnson government is being blamed for imposing a late and long-stretched lockdown that caused the economic recession, however, there are some typical characteristic of the British economy which also need to be considered for the much talked about slowdown.

Britain is a nation which is heavily driven by the services sector, unlike many others. The services sector contributes to almost 80 per cent of the country’s economic output. This sector was the hardest hit due to the impact of the coronavirus pandemic because it requires a lot of human interface, which was restricted as a result of the social distancing measures in place.

The national economic output from the services sector crashed by 21.2 per cent during Q2 2020, as compared to the same period a year back in 2019. This was a record fall and now even when the services output has started to rise gradually since July 2020, one has to note that it has started to grow back from a very low base and will take time to fully recover to pre-pandemic levels.

Moreover, the falling employment numbers in the country’s services sector continues to remain a concern and one can not clearly predict when exactly will the trend begin to reverse.

UK might not be able to fully recover to pre-corona levels until 2023

Holger Schmieding, chief London economist, Berenberg bank has opined that Britain may not be able to fully come out of the economic crisis and come to 2019 output levels, till around the year 2023. The country will be slow by at least one year as compared to the US and Europe, in completely recovering from the impact of the coronavirus pandemic, he stressed.

Schmieding further added that Brexit will be another reason for the expected delay in the recovery. According to expert estimates, a no-deal Brexit is expected to cost £2,000 per annum to every British household.

Cost of a no-deal Brexit to the UK economy

The negotiations on the EU-UK future partnerships are going on after Brexit and the transition period expires on 31 December 2020. Britain had left the European Union on 31 January 2020 and is under a 11-month transition period at present, to negotiate a mutually beneficial free trade agreement with EU, its largest trading partner. The EU laws and regulations are continuing to apply in Britain, like before, during the entire transition period.

Till now the negotiations have not led to any fruitful outcome with respect to crucial aspects such as a level playing field, fishing access, and the government aid.

In fact, Sir Paul Nurse, Nobel prize laureate said that Brexit has pushed Britain many decades into the past. He said that the country needs strong global ties and can not be living in its imperial past, where it ruled the world. Today it needs strong and well thought of global ties for sustained economic growth, he added.

The estimates of the food industry alone suggest that British families would be paying an additional £250 every year just to buy the daily groceries in a no-deal Brexit scenario.

Not just this, the overall cost would undoubtedly be rising for many other businesses across the UK, in case the nation fails to strike any deal with the EU. Media reports suggest that most companies do not have a solid no-Brexit plan for themselves, especially because their attention was scattered due to the uncertain coronavirus crisis period.

Many companies will be majorly affected in a no-deal Brexit scenario. For instance, Ashwani Gupta, Global Chief Operating Officer, Nissan Group has warned that the car making company could be forced to shut its Sunderland base plant, in case of a no-deal Brexit which would mean an end to the tariff-free EU access for the company. This could result in hundreds of job losses, as a most conservative projection.

Government investment support required

The private investment decreased drastically by more than 30 per cent in Q2 2020, as compared to the same period a year ago in 2019. The next quarter is also unlikely to see any major announcements by the British businesses for capacity enhancements with never seen before low consumer demand levels across goods and services.

In such a scenario of dried up private sector investment, strong support is required with public investment to push up the economy on a steady growth trajectory.

In case the government slows down its income support in the form of furlough scheme post October 2020, it might just be a great idea to push up public investment in sectors such as infrastructure. In fact, the government should consider this suggestion even without withdrawing its job retention schemes, as they too might actually be required to be extended, given the dire state of the job market across the United Kingdom.

Keeping the UK workers furloughed for another six months (starting November 2020) could cost the exchequer a hefty sum of £80 billion in total.

Frances Lorraine O'Grady, General Secretary, British Trades Union Congress has asked for a raise in the Universal Credit (UC) payments by the government. She has also requested to treble the sick pay rate to £320 a week.

Nonetheless, even without any forthcoming hike in the UC rates, the Office of Budget Responsibility had predicted the total UC bill to touch £20 billion for the year 2021, as the number of jobless people would be touching four million.

To sum up, the UK economy has been particularly hit by the coronavirus pandemic and shrunk significantly by one-fifth of its pre-corona level during Q2 2020. It is probably one of the worst affected nations by the deadly flu in the world. While it remains debatable if Johnson’s extended lockdown was a major reason for the slowdown, however, the main focus should be to revive the economy fast. Two plausible options for this could be: one, pushing up public investment in the country, given that private investment has totally dried up; and two, the UK government should try for a favourable Brexit deal with the EU, so that the economy can revive at a faster pace.