This coronavirus recession isn’t anything like a “normal” one. The fall in output will be sudden and vast. The huge policy response means the recovery should be much quicker than normal too. But the scale of the economic dislocation and the risk that the virus lingers mean a swift recovery is not guaranteed.
- This coronavirus recession isn’t anything like a “normal” one. The fall in output will be sudden and vast. The huge policy response means the recovery should be much quicker than normal too. But the scale of the economic dislocation and the risk that the virus lingers mean a swift recovery is not guaranteed.
- Recessions are typically due to a fall in demand, perhaps caused by tight monetary policy or a crash in house prices. The coronavirus pandemic is instead causing a vast reduction in both supply and demand. Supply is reduced as large swathes of the economy shut down. Demand falls as businesses and households are either unable or disinclined to spend.
- The unprecedented nature of the economic shock means the size of the hit is very hard to estimate. We have pencilled in a 15% q/q fall in GDP in Q2. That would eclipse the peak-to-trough fall in GDP in both the Global Financial Crisis (6% over five quarters) and the Great Depression (7% over ten quarters). (See Chart 1.) And quite frankly, the coronavirus collapse could be a 20-40% fall in GDP.
- While the scale of the downturn will be unprecedented, for two reasons the recovery will probably be much faster than after previous recessions. (See Chart 1 again.) First, the virus will probably be a temporary shock. Data from China and Italy show that lockdowns work, with the number of new cases peaking and then starting to fall about a fortnight after one is implemented. Chinese industry is now reopening and should be back to normal by mid-April, three months after the lockdown started. (See here.) If that pattern were repeated in the UK, the bulk of the economic damage would be contained to Q2.
- Second, the policy response has been large and swift. Support for businesses in the form of loans and grants should help prevent viable businesses from going under, thereby limiting the permanent hit to supply. Wage subsidies of 80% for firms that hold onto their workers while they can’t trade will reduce the size of the increase in unemployment. Alongside income support for the self-employed, that will limit the fall in household income. (See here.) So there should be a sizeable rebound in demand once the lockdown ends.
- Admittedly, we don’t expect the output that doesn’t happen in Q2 to be fully made up. We won’t have twice as many haircuts, holidays, and commute twice as much as usual after the lockdown. But we don’t expect a big permanent reduction in GDP either due to viable businesses going under and workers losing their skills. Instead, we think the level of GDP will recover to more-or-less where it would have otherwise been by the end of 2022. (See Chart 2 and here.)
- There are three risks that could undermine this forecast. One, that new policies aren’t implemented fast enough, or turn out to have gaps, which leads to businesses going under and unemployment rising much further than we anticipate. Two, that the virus returns after the lockdown. And three, that households and businesses remain cautious for some time, causing spending to be permanently lower.
- Overall, we expect a fall in output of unprecedented size and pace. At face value, the policy response will mean the recovery is much quicker than normal too. But if its implementation is hindered or the virus lingers, the recovery will be more protracted than we currently forecast.
Chart 1: GDP (100 = Pre-Recession Peak)
Chart 2: Quarterly GDP (£bn)
Sources: Refinitiv, NIESR, Capital Economics
Sources: Refinitiv, Capital Economics
Andrew Wishart, UK Economist, +44 7427 682411, firstname.lastname@example.org