Hit to economic health will linger for years - Capital Economics
UK Economics

Hit to economic health will linger for years

UK Economics Weekly
Written by Andrew Wishart

With the number of people fighting COVID-19 in hospital rising day by day, the recent talk of an “exit strategy” from the lockdown appears premature. Even when the restrictions are lifted, consumer and business caution, high unemployment and many corporate bankruptcies will mean it takes some time for the economy to reclaim a clean bill of health.

With the number of people fighting COVID-19 in hospital rising day by day, the recent talk of an “exit strategy” from the lockdown appears premature. Even when the restrictions are lifted, consumer and business caution, high unemployment and many corporate bankruptcies will mean it takes some time for the economy to reclaim a clean bill of health.

Pragmatism over optimism

The huge economic and fiscal cost of the coronavirus lockdown has led to calls for the government to end it as soon as possible.

But the outbreak in the UK is one of the most severe anywhere in the world. Sadly, the number of COVID-19 deaths each day is still rising. And importantly for the government’s strategy of preventing the NHS from becoming overwhelmed, the number of people in hospital with the disease is also increasing steadily. (See Chart 1.) The data, the Prime Minister’s personal battle with the disease, and the harrowing stories of NHS staff and relatives supporting those fighting for their lives make it clear that the lockdown won’t be lifted soon.

Chart 1: Number of People in Hospital with COVID-19

Source: gov.uk, Ministero della Salute

The good news is that lockdowns do work. Italy has just started to see the number of people in hospital due to COVID-19 fall for the first time. As a result, Italian Prime Minister Conte has suggested that he may be able to start to lift restrictions in three weeks’ time. If the UK were to follow a similar timeline, we might start to see restrictions ease in mid-May.

This time is only a bit different

At the start of the pandemic, the scale and speed of the response from the Treasury and the Bank of England was impressive, and suggested that we could have a short, sharp hit to GDP that is quickly reversed. But the sheer scale of the shock means that even if the policy response helps a lot, it will take time for the economy to recover. (See here.)

We now think that 25% of economic activity has been brought to a halt by the shutdown, up from 15% previously. The surge in Universal Credit applications (see here) points to a rise in the unemployment rate, which we now suspect will continue until it is over 8%. And we estimate that the number of businesses that will go bust due to the crisis will be similar to in the GFC. (See here.)

What’s more, it is increasingly clear that there will not be a clean and quick ending to the lockdown. While the UK has been keen to be less stringent than elsewhere, we suspect the removal of the current restrictions will be gradual. Even if it is not, with the disease still circulating businesses and consumers will be cautious, which will entail saving more of their income (if they have some) for some time. We will publish our new forecasts in full in our Economic Outlook in the coming weeks.

As a result, the Bank of England will probably have to keep policy extremely loose for the foreseeable future. And in this disinflationary environment, we don’t see much harm in the Bank breaking the taboo of monetary financing, the possibility of which it has been keen to play down. In the unlikely event that inflation did pick up it would be a positive sign that demand is recovering. And we know the institutional structure of policymaking in the UK and the Bank’s tools mean it wouldn’t go unchecked. (See here.)

The week ahead

The opening of the TFSME on Wednesday will provide cheap funding to banks which should help reduce financial market stress. And the Bank releases its Credit Conditions survey on Thursday.


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Consensus*

CE Forecasts*

UK Data Response

Mon 13th

Easter Monday Bank Holiday – Markets Closed

Tue 14th

No Significant Data Released

Wed 15th

UK

BoE’s Woods testifies to the Treasury Committee

Thu 16th

UK

BRC Retail Sales Monitor (Mar)

(00.01)

(-0.4%)

UK

BoE Credit Conditions Survey (Q1)

(09.30)

Fri 17th

No Significant Data Released

Selected future data releases and events

Tue 21st

UK

Labour Market (Feb)

(09.30)

3.9%

DR

Wed 22nd

UK

CPI (Mar)

(09.30)

+0.4%(+1.7%)

DR

UK

Core CPI (Mar)

(09.30)

+0.6%(+1.7%)

DR

Thu 23rd

UK

Public Finances (Mar, Ex. Banks)

(09.30)

£0.3bn

DR

UK

Retail Sales Inc. Fuel (Mar)

(09.30)

-0.3%(0.0%)

DR

UK

IHS Markit/CIPS Services PMI (Apr, Flash)

(09.30)

34.5

DR

UK

IHS Markit/CIPS Manufacturing PMI (Apr, Flash)

(09.30)

47.8

DR

UK

IHS Markit/CIPS Composite PMI (Apr, Flash)

(09.30)

36.0

DR

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts**

%q/q(%y/y) unless stated

Latest

Q1 2020

Q2 2020

Q3 2020

Q4 2020

2019

2020

2021

2022

GDP

0.0(+1.1) (Q4)

-1.5(-1.1)

-24.0(-24.7)

+16.0(-13.1)

+4.8(-8.9)

(+1.4)

(-12.0)

(+10.0)

(+3.7)

CPI inflation

(+1.7) (Feb)

+0.3(+1.7)

0.0(+0.8)

+0.2(+0.6)

+0.2(+0.7)

(+1.8)

(+1.0)

(+1.0)

(+1.6)

ILO unemployment rate (%)

3.9 (Jan)

4.6

8.5

8.0

6.5

3.8

6.9

5.7

5.3

Bank rate, end period (%)

0.10

0.10

0.10

0.10

0.10

0.75

0.10

0.10

0.10

10 yr gilt, end period (%)

0.36

0.25

0.25

0.25

0.25

0.82

0.25

0.25

0.50

$/£, end period

1.24

1.26

1.25

1.25

1.25

1.33

1.25

1.30

1.30

Euro/£, end period

1.14

1.13

1.14

1.14

1.14

1.18

1.14

1.24

1.24

Sources: Capital Economics, Refinitiv

** Assumes the UK Government agrees to extend the transition period beyond 31st December 2020. (See here.)


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com