The coronavirus crisis: the economic costs mount up

The coronavirus crisis: the economic costs mount up

Date: 14^th April 2020

The coronavirus crisis: the economic costs mount up
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the mounting economic costs of the coronavirus pandemic in the UK:

• Survey evidence continues to show deteriorating activity. The Markit surveys for March showed a major hit on manufacturing, with even more severe hits on services and construction.
• The ONS's new Business Impact of Coronavirus (COVID-19) Survey (BICS) suggested that the worst hit sections within services were 'accommodation and food services', 'arts, entertainment and recreation' and 'administrative and support service activities'.
• The evidence available to date suggests the impact of the coronavirus outbreak will be very unevenly felt throughout the economy.
• Forecasting bodies continue to assess the possible impact of the lockdown measures. NIESR suggested GDP may fall by 5% (QOQ) in 2020Q1 and 15-25% (QOQ) in 202020Q2. Similarly, the CEBR suggested quarterly contractions of 5% and 15% for 2020Q1 and 2020Q2 respectively.
• The Chancellor's support measures are likely to be very expensive. The IFS suggested as early as 26 March they may add £50bn to borrowing in FY2020; this excluded the package for the self-employed which may add £10bn. Assuming a 5% (YOY) contraction in GDP in 2020, the IFS estimated this may add a further £72bn to borrowing in FY2020. Total borrowing could, therefore, be around £185bn in FY2020, compared with the OBR's March forecast of £54.8bn for FY2020.
• The Debt Management Office stepped up its planned gilts sales in April, whilst the Treasury and the Bank of England agreed to extend temporarily the use of the government's long-established Ways and Means (W&M) facility.

Internationally:

• Markit indicators for the Eurozone and the US deteriorated markedly in March. Within the Eurozone, of the four major economies, Italy was the worst affected followed by Spain, France and Germany.
• The EU finance ministers agreed to a €500bn rescue package for European countries hard hit by the coronavirus pandemic in April.
• The Markit indicator for China showed a marked improvement in March, albeit still suggesting contraction.

Other news:

• The ONS's recent releases have related to 2019Q4 and February and are, therefore, not good indicators of where the economy can be expected to go over the next few weeks and months.
• GDP in 2019Q4 was confirmed as flat, whilst growth in 2019 was confirmed as 1.4%.
• The current account balance was little changed in 2019, recording a deficit of £83.8bn (3.8% of GDP) in 2019, compared with a deficit of £82.9bn (3.9% of GDP) in 2018.
• GDP in February slipped by 0.1% (MOM). Services were flat, production rose a tad, but construction fell, reflecting the adverse weather conditions.

Ruth Lea said, 'We remain in unknown territory. A review of the Government's 'Stay At Home measures', as announced on 23 March, is due on 16 April. There are, however, currently few expectations of any relaxation to the current restrictions at this review. But, as the evidence mounts concerning the economic and social costs of the measures, debate is inevitably switching to the timing and shape of the Government's exit strategy, with a structured progressive relaxation of the restrictions. In the meantime economic activity can only be severely curtailed, damaging businesses and employment prospects and putting pressure on the public finances.'

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
[e-mail]
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the coronavirus pandemic and its economic implications:

• The Government's response to the increasingly severe coronavirus pandemic has been to introduce increasingly strict curbs on activity in order to contain the spread of the disease. These restrictions have already had, and will continue to have, profound implications for business and the economy.
• It is currently impossible to say how long the current intensity of the restrictions will continue or, indeed, when the worst of the pandemic in the UK will be past. However, Sir Patrick Vallance (Government Chief Scientific Adviser (GCSA)) commented on 12 March that the peak could be '10-14 weeks ahead', accompanied by a graph suggesting the worst of the outbreak would be over by Autumn 2020.
• It will be some weeks before the ONS releases any indicators relating to March. But, in the meantime, Markit recently released its flash UK composite output index for March which showed a very sharp decline in activity - to a record low (the series began in 1998). The index implied contraction in 2020Q1. Moreover, Markit expect the decline to accelerate in 2020Q2.
• Markit's findings were broadly supported by the latest Bank of England Agents' summary (for example), which concluded '…the Covid-19 (Coronavirus) pandemic has caused a sudden, rapid decline in economic activity in recent weeks'.
• Given this information it now seems all but inevitable that the UK will experience a recession in the first half of 2020.
• Given the enormous unknowns, a scenario-building approach to projecting GDP is probably the most constructive way forward. Assuming that the worst of the outbreak is over by the Autumn and that measures of the Government and the Bank of England are effective in mitigating the worst of the down-turn, it is reasonable to expect the beginnings of recovery in the second half of 2020 after a very sharp contraction in the first half of 2020. We also assume that there will be some significant relaxation of the severe restrictions introduced on 23 March 2020 in April-May. Overall GDP could fall 2½-3% in 2020.
• This scenario is broadly in line with the MPC's assessment that there will be a large and sharp reduction in activity, but it should prove temporary.

Support measures by the Treasury and the Bank of England:

• The Chancellor has announced four significant packages of measures: in the Budget (11 March, including the Coronavirus Business Interruption Loan Scheme), 17 March (including the Covid Corporate Financing Facility), 20 March (including the Coronavirus Job Retention Scheme) and 26 March (for the self-employed).
• The Bank of England's measures include: cuts in the Bank Rate (to 0.25% on 11 March and to 0.1% on 19 March), the introduction of the Term Funding scheme for SMEs and an increase in Bank's holdings of UK government and corporate bonds by £200bn (to £645bn).

Internationally:

• In the US, the Fed cut the target range for Fed Funds again on 15 March (to 0-0.25%) and the Senate and the White House agreed a $2 trillion stimulus package on 25 March.
• The ECB announced a new Pandemic Emergency Purchase Programme (PEPP), with overall envelope of €750bn, on 18 March.

The pandemic has had major impact on the markets, including:

• The equity markets, with the FTSE100 dropping from around 7,500 in the first half of February to a recent low of under 5,000 on 23 March, ending last week at around 5,500.
• Sterling has weakened since the beginning of the year, reflecting the flight to relative safe havens (including the dollar) as well as the perceived, specific vulnerability of sterling, reflecting the UK's need to finance its current account deficit.
• Oil prices have collapsed from $65pb (Brent crude) at the start of the year to $25pb by 27 March, on falling demand, exacerbated by disagreements between Saudi Arabia and Russia.

Other news:

• The ONS's recent releases have related to January and February and are, therefore, not good indicators of where the economy can be expected to go over the next few weeks and months. The labour market data were robust, whilst inflation looks well-contained.
• The UK-EU Brexit talks are expected to continue in the forthcoming week, by video link.

Ruth Lea said, 'We are in unknown territory. The indicators we have, however, point to a fall in GDP in 2020Q1 and a very sharp contraction in 2020Q2. Recession, therefore, looks all but inevitable. If, however, the worst of the outbreak is indeed over by Autumn and the measures announced by the Treasury and the Bank of England mitigate the worst of the down-turn, the economy should start to recover in the second half of 2020. Under these circumstances, there would be a sharp V-shaped recession. Comparisons are being made with the Great Recession of 2008-2009 and it could well be, indeed it is likely, that the initial contraction in the economy is sharper that in 2008. But the Great Recession was characterised by a highly damaging, protracted U-shaped recession, which we do not expect this time'.

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
[e-mail]
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:

• There were two parts to the Budget. Firstly, a package of measures, costed at £12bn, to support public services (including the NHS), individuals and businesses affected by the coronavirus outbreak. Secondly, the new Government's overall fiscal strategy, including the spending envelope for the forthcoming Comprehensive Spending Review 2020 (CSR).
• The OBR's revised economic forecasts were little changed. GDP growth was revised to 1.1% for 2020 (from 1.4% in March 2019, last year's Spring Statement), 1.8% for 2021 (1.6%), 1.5% for 2022 (1.6%), 1.3% for 2023 (1.7%) and 1.4% for 2024 (new forecast). Significantly, these forecasts did not allow for the economic impact of the coronavirus outbreak.
• The OBR revised their public finances forecasts. Public sector net borrowing (PSNB) and public sector net debt (PSND) were revised significantly higher, reflecting the substantial increase in public spending. Cumulative extra borrowing for the years FY2020-FY2023 (inclusive) was £95-100bn, whilst debt was projected to be £99bn higher in FY2023, and some 2.9% higher as a % of GDP, than in March 2019. These forecasts did not allow for the Treasury's package of coronavirus-related measures.
• The Budget was very expansionary. The estimated net effect of the spending and tax decisions totalled £17.9bn (FY2020), £36.4bn (FY2021), £38.5bn (FY2022), £41.15bn (FY2023) and £41.9bn (FY2024), entirely driven by higher spending (with current spending increases greater than capital spending increases). The net tax measures were contractionary.
• Spending announcements included extra cash spending for the NHS, security and schools; around £640bn of gross capital investment for roads, railways, communications, schools, hospitals and power networks across the UK by FY2024; and plans to increase public R&D investment to £22bn a year by FY2024.
• Tax announcements included confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%; freezing fuel and alcohol duties for FY2020; and increasing the NICs threshold to £9,500 in April 2020.

Other UK news:

• The Bank of England announced an emergency cut in Bank Rate to 0.25% on 11 March, alongside a new Term Funding scheme for SMEs and a relaxation of capital buffers.
• GDP was flat (MOM) in January and flat (QOQ) in the three months to January.
• The underlying total trade (goods and services, excluding precious metals) balance showed a deficit of just £0.5bn in the three months to January.

The US Fed cut the target range for the Fed Funds rate to 0%-0.25% on 15 March, along with a major stimulus programme.

EU update:

• The ECB agreed a package of monetary policy measures to alleviate the impact of the coronavirus outbreak on 12 March, but no cuts in interest rates.
• The Commission sent a draft legal text, titled the 'New Partnership between the European Union and the United Kingdom', to the 27 EU states on 12 March.

Ruth Lea said, 'The coronavirus measures are to be welcomed. Concerning the rest of the Budget, it was more expansionary than expected, with large projected increases in current as well as capital spending. The OBR forecast significant rises in public sector borrowing and debt compared with March 2019. But, given the huge uncertainties ahead, there are serious risks that these forecasts could be significantly overshot. There is already speculation that the Autumn Statement may need to contain tax rises, though, at this point, it is too early to comment on this issue with any confidence.'

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
[e-mail]
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:

• There were two parts to the Budget. Firstly, a package of measures, costed at £12bn, to support public services (including the NHS), individuals and businesses affected by the coronavirus outbreak. Secondly, the new Government's overall fiscal strategy, including the spending envelope for the forthcoming Comprehensive Spending Review 2020 (CSR).
• The OBR's revised economic forecasts were little changed. GDP growth was revised to 1.1% for 2020 (from 1.4% in March 2019, last year's Spring Statement), 1.8% for 2021 (1.6%), 1.5% for 2022 (1.6%), 1.3% for 2023 (1.7%) and 1.4% for 2024 (new forecast). Significantly, these forecasts did not allow for the economic impact of the coronavirus outbreak.
• The OBR revised their public finances forecasts. Public sector net borrowing (PSNB) and public sector net debt (PSND) were revised significantly higher, reflecting the substantial increase in public spending. Cumulative extra borrowing for the years FY2020-FY2023 (inclusive) was £95-100bn, whilst debt was projected to be £99bn higher in FY2023, and some 2.9% higher as a % of GDP, than in March 2019. These forecasts did not allow for the Treasury's package of coronavirus-related measures.
• The Budget was very expansionary. The estimated net effect of the spending and tax decisions totalled £17.9bn (FY2020), £36.4bn (FY2021), £38.5bn (FY2022), £41.15bn (FY2023) and £41.9bn (FY2024), entirely driven by higher spending (with current spending increases greater than capital spending increases). The net tax measures were contractionary.
• Spending announcements included extra cash spending for the NHS, security and schools; around £640bn of gross capital investment for roads, railways, communications, schools, hospitals and power networks across the UK by FY2024; and plans to increase public R&D investment to £22bn a year by FY2024.
• Tax announcements included confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%; freezing fuel and alcohol duties for FY2020; and increasing the NICs threshold to £9,500 in April 2020.

Other UK news:

• The Bank of England announced an emergency cut in Bank Rate to 0.25% on 11 March, alongside a new Term Funding scheme for SMEs and a relaxation of capital buffers.
• GDP was flat (MOM) in January and flat (QOQ) in the three months to January.
• The underlying total trade (goods and services, excluding precious metals) balance showed a deficit of just £0.5bn in the three months to January.

The US Fed cut the target range for the Fed Funds rate to 0%-0.25% on 15 March, along with a major stimulus programme.

EU update:

• The ECB agreed a package of monetary policy measures to alleviate the impact of the coronavirus outbreak on 12 March, but no cuts in interest rates.
• The Commission sent a draft legal text, titled the 'New Partnership between the European Union and the United Kingdom', to the 27 EU states on 12 March.

Ruth Lea said, 'The coronavirus measures are to be welcomed. Concerning the rest of the Budget, it was more expansionary than expected, with large projected increases in current as well as capital spending. The OBR forecast significant rises in public sector borrowing and debt compared with March 2019. But, given the huge uncertainties ahead, there are serious risks that these forecasts could be significantly overshot. There is already speculation that the Autumn Statement may need to contain tax rises, though, at this point, it is too early to comment on this issue with any confidence.'

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
[e-mail]

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