Britain Short Read

Covid-19 and the Economy

Recently, Covid-19 has been at the forefront of global news. Having originated in the latter months of 2019 in China, it has now been declared a global pandemic. The virus is carried best by young people but is most lethal for the elderly. The United Kingdom has now moved to the ‘delay’ phase with the objective now being to slowdown the virus. With total cases having risen to over 3,000,000 and 200,000 deaths, the threat is extremely serious.

There has been rapid growth of the virus in the UK. We have now reached 150,000 cases and are continuing to grow. In terms of total cases, experts predict that we are only around 2 weeks behind Italy (they currently have 195,000 cases). With the UK under lockdown to contain the outbreak, the impact on the economy will be vast. The important question is how deep, and how long-lasting, will our recession be?

At the start of this year, the Office for Budget Responsibility (OBR) predicted that GDP will grow 1.4%. They have now changed this and predict a growth of only 1.1%. This marks the slowest economic growth since the financial crisis over 10 years ago. According to Chief UK economist at Nomura, Covid-19 will further slow growth. We are also predicted to have a 30% Quarter on Quarter decline in GDP. The OBR expects government borrowing for the year 2020-2021 to rise from £218bn to £273bn. This marks 14% of GDP and is the largest single year deficit since the Second World War.

In March, we saw Rishi Sunak, Chancellor of the Exchequer, announce the budget for the year of 2020. The effects of the Covid-19 on this budget are clear. The chancellor has effectively written a blank check to support the economy during this period. He has directed £30 billion of extra spending (equating to 1.3% of our GDP) in hopes to combat it and boost the economy. £12 billion will go directly towards the virus – this includes £5 billion for additional NHS funding and £7 billion for workers and businesses across the United Kingdom. In addition to this, Mr Sunak pledged that the NHS will be equipped with whatever resources it requires to cope with the increased demand and stress on its services. This undoubtedly comes at a cost to the deficit: the government will have to borrow more – we are expected to soon top the £2 trillion mark, and we are already in over 80% debt compared to the country’s GDP.

Boris Johnson has emphasised how we need to contain and prevent further spread of the virus. One of the ways in which this is being done is through self-isolation and lockdown measures. Although effective in its role, the impact on the economy is vast. The government has launched a job retention scheme. It funds 80% of a worker’s wage, until a maximum of £2500 per month, if the worker is put on leave. Rishi Sunak has said that the scheme would help lay the wages of more than one million people. 140,000 firms have already applied for the aid package. The OBR estimated that the programme could cost £42 billion. However, this estimate was made before the scheme was extended by another month, until the end of June. Schools have been shut indefinitely. This means that a large proportion of the workforce is forced to look after their children, resulting in reduced work output. These measures, although effective in their nature of protecting people, have serious consequences for the economy.

The Bank of England has reduced the Base Rate (the rate that the central bank charges on its loans to commercial banks) by 65 base points to 0.1%, the lowest level in history. Cheaper lending helps to boost liquidity and provide cash to struggling businesses. The Bank hopes the new measures will encourage spending and massively deter people from saving to allow the economy to bounce back. In his speech, Mark Carney stressed that although the measures are designed to have ‘maximum impact’, the impact on the economy ‘should be temporary’.

The financial markets have also taken a big hit. We are now in a bear market. This is where there is a general decline in the stock market over a period of time. We usually accept that a bear market is at least a 20% fall over a minimum of a 2-month period. The FTSE100 saw 34.7% of its value wiped off since January at one point. This marked one of the largest plummets since the financial crisis of 2008.  Furthermore, 10-year UK Treasury bonds, considered a safe bet, have had yields sink to 0.5%. These came despite repeated efforts by central banks to ease the economic impact. These financial market drops affect all even if you are not directly invested in them. Millions of people will have pensions invested in these markets. However, it does mean that young people will now be able to invest at very low prices, which is beneficial to them.

Businesses are among those majorly affected too. For example, the UK’s largest cinema chain, Cineworld (second largest chain globally), is due to suffer. It has warned shareholders that due to heavily reduced traffic; it will not be able to maintain its debt repayments. The company has around $3.6 billion of debt. If Cineworld have a credit utilisation of more 35%, its covenants (legally binding clauses that, if breached, trigger compensatory or other legal action) will be set off. Although representatives of the chain have said that they do not expect to breach these thresholds, the fact that it has a fair chance of occurring its worrying. Small businesses, in particular, are struggling due to the drying up of supply chains which leaves them without vital materials or products. With similar traits shown in various other companies, we can expect other businesses to suffer, however we must also bear in mind that there are many companies who will benefit from the virus.

Due to the nature of the virus, the end impact of the virus still remains unclear. What we know for sure is that that peak of the virus is yet to come. With many measures being put in place, best efforts are being made to prevent the virus’s spread. Unfortunately, the fact that Covid-19 will continue to cause more disruption is inevitable. Furthermore, we do not know exactly how much longer the virus will take before declining. Therefore, we can only wait, observe and hope that the UK economy doesn’t entirely succumb to Covid-19.

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