Coronavirus hit to the economy is coming

The economy started the year on a strong note, but it is only a matter of time before it succumbs to the effects of the coronavirus. To reflect the weaker global backdrop and the likelihood that measures implemented to limit the spread of the virus will dampen business activity and spending by households, we have revised down our GDP growth forecast for this year from 1.0% to 0.7%. We also now expect the Bank of England to cut interest rates from 0.75% to 0.50% soon and the Chancellor to announce in the Budget on 11th March an extra package of measures to help support businesses and households. At the moment, we envisage that a 0.2% q/q rise in GDP in Q1 will give way to a stagnation in Q2 before the economy gets back on track in the second half of the year. But the clear risk is that the hit to GDP will be bigger or last longer, thereby requiring a larger policy response.