Gov’t package cuts chances of financial crisis - Capital Economics
UK Economics

Gov’t package cuts chances of financial crisis

UK Economics Update
Written by Ruth Gregory

While the large package of measures aimed to counter the economic effects of the coronavirus unveiled by the government today probably won’t prevent a precipitous decline in GDP in Q2, it should help to prevent a longer-lasting fallout by reducing the chances that the economic crisis morphs into a financial one.

  • This Update was originally sent to clients as a Rapid Response immediately after Rishi Sunak’s speech on 17th March.
  • While the large package of measures aimed to counter the economic effects of the coronavirus unveiled by the government today probably won’t prevent a precipitous decline in GDP in Q2, it should help to prevent a longer-lasting fallout by reducing the chances that the economic crisis morphs into a financial one.
  • There are three stands to the new measures. First, by pledging up to £330bn (15% of GDP) of state guarantees for bank loans to firms, the government went further than the French government whose guarantees are worth 12% of GDP. What’s more, by saying that if demand is greater, the government will “provide as much capacity as required” the Chancellor, Rishi Sunak, essentially provided an unlimited guarantee to all new bank loans that means no one should worry about the health of the banks. That, and the extra liquidity for banks provided in a new commercial paper lending scheme, should minimise the chances that the sharp fall in GDP in Q2 triggers a financial crisis.
  • Second, the Chancellor announced a package of direct support for businesses worth more than £20bn (or 0.9% of GDP), which comes on top of the £12bn (0.6% of GDP) announced in last week’s Budget. That included extending the business rates holiday announced in the Budget for the retail, hospitality and leisure sectors, as well as cash grants of £10,000-£25,000 for businesses. This means the total direct coronavirus-countering measures is now worth more than £32bn (1.6% of GDP), which is bigger than the measures in the euro-zone, the US and many other countries so far.
  • Third, the Chancellor pledged more help for households. There was not much detail on the specific measures or the size, aside from a three-month mortgage holiday. But Sunak said they would announce more in the coming days with the aim of limiting the blow to employment and incomes.
  • Overall, this is a pretty big package alongside a credible commitment to do whatever is necessary to support the economy no matter the cost. With policymakers acting quickly and working closely together, this raises the chances that, beyond the huge hit to GDP that is likely in Q2, a prolonged economic slump will be avoided.

Ruth Gregory, Senior UK Economist, +44 7747 466 451, ruth.gregory@capitaleconomics.com