Coronavirus – UK to be hit by deep recession
The Bank of England has warned that the UK will be struck by the deepest recession on record, confirming that the economy is on course to contract by 14% as a whole in 2020, and that unemployment levels could double.
It’s predicted to be the worst economic downturn since 1946, and historically, the most severe economic drop since 1706.
The latest analysis detailed in the Bank of England’s May Monthly Policy Report reflects the devastating blow that the Covid-19 epidemic has dealt to the UK’s jobs and businesses in recent months. The Bank of England has based its projections on social distancing gradually being phased out from June to September this year.
This week all policymakers unanimously decided to maintain the base rate at a historic low of 0.1%.
Unemployment levels are also predicted to double to 9%, but this does not yet account for the 6.3 million workers who have so far been shielded from losing their jobs due to the government’s coronavirus job retention scheme. Chancellor Rishi Sunak has made it clear this week that the salary subsidy scheme will be winding down as of July.
According to a recent survey by the Office for National Statistics, 23% of businesses in the UK “temporarily closed or paused trading last month” and some two-thirds of UK businesses have applied for the Coronavirus Job Retention Scheme.
James Smith, Research Director at think tank the Resolution Foundation, said the hit to the economy this year was equivalent to £9,000 for every family in Britain, or £300 billion.
He noted the government had taken the right steps in introducing the scheme, saying: “Faced with this huge economic hit, both the Bank and the Government have made the right call in taking bold action to protect firms and families as much as possible.”Get free advice
Is the UK in a recession?
If the Bank of England’s predictions are accurate, the UK economy will face its first recession this summer since the global financial crisis in 2008, with the economy shrinking by as much as 25% from April to June.
To be classified technically as ‘in recession’, a country must see a decline in economic activity (essentially a drop in Gross Domestic Product) for longer than two business quarters – or six months.
With businesses across the country shutting up shop, millions of workers on furlough and unemployment already on the rise, this will undoubtedly be the case.
But while the UK may already be in recession, it may not be technically confirmed until August 2020.
How has the Bank of England predicted what will happen?
The Bank of England has outlined what it refers to as a “plausible scenario”, based on the information that’s currently available, and some assumptions about how people are likely to behave in the coming months.
In introducing the report, they do point out that, “The outlook for the economy is highly dependent on a number of assumptions about which there is great uncertainty, given the nature of the shock posed by Covid‑19.”
Some of the assumptions that the Bank of England has based its predictions on are that:
- Consumers will be cautious, and voluntarily maintain some degree of social distancing until around summer 2021.
- The Coronavirus Job Retention scheme (furlough) will be phased out at the same time as lockdown.
- Businesses will be slowing or stopping operations for a while.
How long will the economic damage last?
The Bank of England report suggests that the outlook will come down to how people behave in the months after lockdown, stating, “The economy will also be affected by how households and businesses respond, including by their confidence and uncertainty about the outlooks for both health and the economy.”
And although the effects of the coronavirus are without question acutely damaging to the economy in the short term, the Bank of England’s report does offer a glimmer of hope, suggesting that households may be in a stronger position to weather the disruption than they were during the global downturn in 2008.
“UK households entered this period of economic disruption in a stronger position than they were before the 2008 financial crisis. While the policy response will provide substantial support to households, the sharp fall in economic activity will put pressure on some households’ finance. We are vigilant to risks that could emerge once payment holiday measures end, including borrowers seeking to refinance in the coming months.”
The Office for Budget Responsibility (OBR) suggested a similarly optimistic outcome in April – that the UK’s GDP could bounce back by 27% in the third quarter of this year – for the months from July to September – and then 21% from October to December.
However, it’s been pointed out that the current Bank of England scenario doesn’t factor in if a second wave of infections was to hit the UK after the winding down of lockdown and furlough over the summer.
James Smith, research director at the Resolution Foundation, said: “The Bank’s scenario points to a fairly rapid recovery. But even if this were to materialise – and it is certainly not guaranteed – Britain is likely to be living with a legacy of high unemployment for some years to come.”
Everyone’s feeling the financial strain of the Covid-19 outbreak, but if you’re in debt and struggling to pay off your bills every month, it could be time to get financial advice. Our team of professional debt specialists can offer free, confidential advice and support. Speak to one of our team, on 0808 253 3282.Get free advice