Economic Trends :The shifts in the U.K. Economy

The terrible and unprecedented hit of the novel Coronavirus halted the ongoing practices and processes of governments and businesses all over the world. The deadly, invisible virus resulted in a global pandemic, which affected the decisions of authorities in power all around.

The United Kingdom -just like many other countries- launched a full lockdown on 23rd March, 2020 and shut down all functioning businesses, companies, educational institutions etc.

World rankings of UK in terms of GDP

?Basing WEO (World Economic Outlook) as the prime source, global growth trajectory has shown a significant downturn, which is projected at -4.9 percent in 2020, 1.9 percentage points lower than the forecast anticipated. Categorising this bane more like a health shock rather than irregularities in the economic cycle, the pandemic has exposed disparities amongst countries when it comes to dealing with speed breakers.

Even when most of the economies are witnessing negative growth in 2020, there are considerable variations among individual economies - reflected by the rate of testing, the design of the curve and most importantly, the policy action in hand to feed the macro-economic variables (reliance on external financial flows, including remittances; and pre-crisis growth trends).

If we assess the trends based on the nature of the economy , growth in the advanced economy cartel is projected at –8.0 percent in 2020, reflecting a deeper hit in the first half of 2020, with signs of voluntary social distancing even before the lockdown was imposed.

Source: IMF, WEO June 2020

As we can see from the chart above, synchronised deep downturns are foreseen in the United States (–8.0 percent); Japan (–5.8 percent); Germany (–7.8 percent); France (–12.5 percent); Italy and Spain (–12.8 percent). In 2021, the advanced economy growth rate is projected to strengthen to 4.8 percent, leaving 2021 GDP for the group about 4 percent below its 2019 level.

When it comes to assessing UK’s trajectory , humongous loop hole in policy action can be seen as UK is ranked third in the list of advanced economies worst hit by the pandemic ( -10.9 % GDP forecast).

The cost of supporting the UK’s economy through the pandemic has reached record levels, and while borrowing has so far been aided by the Bank of England’s enlarged QE program, the boiling trends of public debt doesn’t appear to be transitory.

Monthly forecasts

 In April 2020 the gross domestic product of the UK fell by 20.4 percent, the biggest monthly fall in GDP growth on record. The public health measures enforced to contain the spread of the virus resulted in not only the temporary closing of several businesses but also complete collapse of many due to the economic damage.

These measures also led to an increase in job loss and affected the labor market. However, in an effort to limit the damage to the labor market, the UK government introduced a ‘Job Retention Scheme’ whereby they temporarily paid 80 percent of an employees’ wages up to 2.5 thousand pounds a month, provided they were kept on the payroll of their respective employers. Around 9 million workers so far have been put on furlough through this scheme.

Source: ONS, Analysis using Excel

As the data suggests, the extent of restrictions on activities slowed down various sectors resulting in a mass weakening in Gross Value Added (GVA). As in the beginning, the government was resilient towards these draconian measures, signs significant change in value added is not witnessed until Feb 2020. It was only until March when the government imposed a harsh lockdown, shifting the paradigm from voluntary to its topmost priority.

Exposing regional vulnerabilities - Triggering disparities

As far as the damage within UK is concerned, regional economies with less diverse concentration of discrete industries comes in the most risky lot amidst the pandemic.

As per KPMG UK Economic Outlook June 2020, economies leaning mostly on transport, manufacturing, travel and international tourism are likely to see the most gargantuan economic affliction this year. Parts of the Midlands having a high concentration of automotive and other transport manufacturing industries are likely to be highly exposed to the economic aftermath of the pandemic. Towns such as Crawley in the South East, and those dependent on international tourism such as some areas of London, are also expected to suffer.

The report further predicts that areas with a high concentration of public sector employment or pharmaceuticals and food manufacturing could better tolerate the pandemic. Rural areas with a high proportion of agricultural output might also function better due to the indispensable nature of the industry but only if they can overcome the challenge of attracting seasonal workers. The rationale behind this regional tampering is the location of transport and food manufacturing, hence shaping the bumpy impact of COVID-19. Owing to the even spread of the hospitality sector, not much can be deciphered in terms of the pandemic’s impact on that particular region.

 On the other hand, transport manufacturing tends to be highly concentrated: it makes up 5.4% of the economy of the West Midlands and only 0.4% of the economy of Scotland. Likewise, the relatively less impacted food-manufacturing sector is heavily concentrated in Northern Ireland, where it makes up 5.2% of the regional economy.

The table above gives an overview of the region wise growth in lieu of proportion of sectors least and heavily impacted. Since West Midlands has the highest proportion of heavily impacted sectors (10.3%), it has consequently registered a deepest trough (-9.1%) in its growth in 2020.

What do the macro-economic indicators say?

The rising spread of pandemic has put forth negative consequence for housing, job security and consumption spending, leaving a daunting impact for the coming financial years. Accordingly, already mounting public debt will witness greater burden to achieve the policy action the government intends to execute.

As per OECD Economic Outlook June 2020 UK, the government debt is predicted to rise considerably in 2020, reaching its peak and hence falling in 2021.

On the contrary, the left side of the chart displays a deflationary pressure on the economy until the invention requisite vaccine. Majorly, these predictions are based on the assumption of a universal vaccine by June 2021. When we talk about the job sector, the worst hit sectors ultimately offset the least impacted slots, hence pulling the curve upwards.

With so many unknowns regarding the COVID-19 pandemic, it is difficult to predict when the economy will recover and how strong that recovery will be. An EY report warned that consumer spending could slump by 8.7 percent over the whole year, before rebounding in 2021. Although the government introduced numerous supportive measures to help people retain their jobs and basic income, a paramount fraction of the population is still suffering from unemployment. Howard Archer, EY group’s chief economic advisor, mentioned that all this would inevitably have some limiting effect on the economy’s recovery.

According to forecasts from the European Commission, all of Europe’s economies will suffer a deep recession in 2020, followed by a return to growth in 2021. For the UK specifically, GDP will fall by 8.3 percent over the whole of 2020. Mark Gregory, EY UK’s chief economist, said: “This is an undoubtedly challenging environment for businesses and forecasting is extremely difficult. We’ve made some significant adjustments to our GDP expectations compared to what the data told us just six weeks ago.”

The Organisation for Economic Cooperation and Development predicted the UK economy would shrink by more than any other developed country as businesses struggle to recover from the pandemic. The UK economy is still not expected to return to the size it was at the end of 2019 until early 2023.

Filled with uncertainty, the future of macro-economic indicators rely on the efficiency of R&D and a rapid recovery rate to achieve a new steady state. Feasible policy frameworks can help reverse this intimidating impact on different sectors, hence triggering efficient recovery with an intention to facilitate equitable benefits across the income spectrum and skill distribution. To conclude, a practical and well-thought package of policy framework with an aim to regain UK’s position in the world economy is feasible for the coming years.

We at LS&CG believe what the world needs right now is solidarity. With solidarity, we can defeat the virus and build a better world.

Contributors : JG, Priyal Goel, Alankrita Arora