How bad is the UK economy going to be?

Economies around the World and especially in the U.K. have been hammered by the coronavirus and the lockdowns.

The announcement by Boris Johnson last night – changes little and effectively means the lockdown continues until at least 1st June 2020.

1.8 million have claimed universal credit since the crisis began. 

Consumer spending has reduced by 30% in the last few weeks.

Analysts fear that things will be worse than originally predicted as social distancing and continued government enforced curbs look likely to be in place long after the lockdown eases.

The government will start to feel the pressure of the monetary support given to social, welfare, labor and companies, that have been put in place. The Office for National Statistics forecasts that the cost will be ￡104 billion this year alone.

This is also at a time when the government actions and impact on companies means tax receipts could be down ￡130 billion. 

The national debt is expected to surge to levels not seen in decades.

The Bank of England (BOE) last week stated that it expects that we are likely to see the biggest economic contraction since 1706.

Furloughs

6.3 million people have now been furloughed at a cost so far of ￡8 billion, claims have been made by 800,000 companies

Initially this scheme was until the end of May but has already been extended until the end of June and potentially may need to be extended further.

The Office for National Statistics forecasts that the cost of this scheme will be ￡49 billion.

Unemployment

The BOE is expecting unemployment to rise to 9 million from 4 million pre-covid.

Youth unemployment is expected to be especially high. The Resolution Foundation published a report on Wednesday that forecasts that youth unemployment could reach 1 million.

Kathryn Henehan of the Resolution Foundation warns that hundreds of thousands of young people leaving education this year face “huge immediate unemployment risks”.

Past downturns have shown that newly qualified people are at a disadvantage in a downturn as they have no skills. In 2011 after the last financial crisis – youth unemployment amongst GCSE leavers was 31% , more than three times the national average.

This downturn promises to be no different. Unemployment amongst people aged 18-24 already stood at 408,000 in February. 

Official data will only come out in the summer, but surveys do not look good. 10% of those under 30 had already lost their job by the end of March compared to 6% in the 40-54 age group.

Research by the Institute of Fiscal Studies shows those under 25 are twice as likely to be working in sectors that have shut down – hospitality, leisure, travel and retail are all struggling to keep people employed, let alone make new hires.

Moreover, unemployment affects future prospects negatively with a greater chance of being stuck in lower paid, lower skilled jobs. The Resolution Foundation predicts low-skilled teenagers leaving education during the crisis will be 37% less likely to be in work in three years’ time whilst amongst graduates’ chances will be 13% lower.  

House Prices

The BOE report on the 30th April suggested hat house prices would fall by 16% in the next year – similar to the decline in the last financial crisis just over a decade ago.

Data from the Halifax showed house prices fell 0.6 in March compared to February – still 2.7% higher than a year ago – at an average of ￡238,500.

Right the now the market is at a standstill because of the pandemic with no house viewing and everyone told to stay at home/stay alert. UK Mortgage approvals saw a 7-year low as the market is paralysed.

Homeowners will be concerned about the value of a key asset – whilst this might be better news for home buyers.

Many estate agents however are much more bullish. Lucy Pendleton from estate agents James Pendleton said:

“A Bullish picture going into this crisis actually means we are likely to see healthy prices when we return. There will be a period in which vendors test the water, but you can expect them to stand behind valuations they were confident of achieving before the lockdown began. That will be especially true of the capital.

There have been a small number of buyers seeking price reductions, but these have been minor skirmishes prompted by opportunists rather than any reaction to the economic realities being faced by the vendors.”

Where are we heading?

It is expected that the Government will have to make substantial tax increases to cover the hole in the public debt.  This is against a backdrop of a decade of austerity, so there is not going to be any public appetite for spending cuts.

The Office for Budgetary Responsibility (OBR) has said that a 3-month lockdown would see public borrowing at the highest level since the Second World War.

Capital Economics warned. “We think it will take the economy a few years to recover” and predicts despite the intervention that 110,000 companies will go into bankruptcy and tax receipts will take a long time to recover.

A survey by IHS Markit showed that the services sector had reduced by 79% last month and forecast a quarterly drop of 7% in quarterly GDP but warned it could be much higher and there have been many other reports suggesting much bigger falls. The BOE last week forecast a fall of 14% for the year.

Tim Moore, economics director at IHS Markit, said the data "highlights that the downturn in the UK economy during the second quarter of 2020 will be far deeper and more widespread than anything seen in living memory".

Samuel Tombs, economist at Pantheon Macroeconomics, said any pickup throughout the summer would be weak.

"With several sectors of the economy set to remain closed for business throughout the summer, and consumers' confidence torn to pieces by Covid-19, we expect only about half of the second quarter's huge drop in GDP to be reversed in the third quarter."

It looks like it will be a long recovery over many years, with increased taxes and burdens on corporates and high earners as the economy contracts throughout 2020 at least.

Author – Gary Corbett is an investor in fast growing international technology businesses.

11th May 2020