While many have warned that the UK should brace itself for potentially one of the most severe recessions in over 300 years, others predict that we could see a sharp upturn in recovery as lockdown eases. We take a look at how COVID-19 has impacted the UK economy and what is predicted for the future of post-lockdown UK.
Shifting shape of the economy
In the first quarter of 2020, the UK had already seen a mild contraction in GDP of around 2%[i], with the manufacturing industry already severely impacted by the uncertainty surrounding Brexit. In February, the construction industry also suffered as a result of unprecedented rainfall, seeing a decline of 1.7%[ii]. Before lockdown even began, the UK’s economy had ground down to a near halt, growing 0.1%[iii] overall in the three months leading up to February.
As the growing threat of COVID-19 became increasingly evident and global lockdowns were imposed, the UK economy plummeted. Despite this being a health crisis first and foremost, the ripple effect extended across all sectors, with some hit harder than others.
Once we reach the end of the second quarter of the year on June 30, it’s expected that in comparison to the 2% decline we saw in the first quarter, the UK will see a 20%+ decline in GDP, accounting for levels across every sector.
High risk global sectors
The global sectors most at risk have been highlighted as the travel, automotive, electronics and the retail sectors. Since last December, major airlines have seen their Revenue Passenger Kilometres (RPK) drop by -40% and through the extended closure of their stores, supply chain disruptions and a crash from -7 to -34 in the Consumer Confidence Index, the British Retail Consortium have said they do not know when the retail sector will fully return to normal.[iv]
Within the insurance industry in particular, insurers and brokers are having to carefully navigate their way through the impact that the pandemic is having on both their financial position and the reputation of the industry as a whole. With concerns from commercial clients surrounding their Business Interruption coverage alongside falling interest rates and increasing credit risks, the industry has experienced countless roadblocks in this relatively short period of time. It’s predicted that within the industry, life insurers[v] will experience one of the most severe knocks due the volatility in the financial markets.
Combined with Britain’s exit from the EU at the start of the year, every industry across Britain remains uncertain about what the future will bring.
Tackling Brexit during a storm
When Britain left the EU officially on January 31st 2020, nobody could have anticipated what happened next. While the Government did not account for a global pandemic to stand between the negotiation period with the EU, it’s currently still set to end on December 31st 2020. This could mean more abrupt and significant changes to our economy if nothing is agreed in the meantime.
Despite calls to extend this transition period, the Government has so far rejected this notion as a possibility which has led to fears that we will end up with no deal come the end of the year.
In reaction to the Government’s aim to push forward Brexit despite the ongoing presence of COVID-19, James Smith of ING Economics raised concerns that many scientists expect there will be future outbreaks even after the current lockdowns are lifted, and these could be deeply disruptive to the extent they overlap with the end of the Brexit transition period.[vi]
It’s hoped by the Government that they will reach a breakthrough which could mean a free trade deal is put into place by the end of the year.[vii] This will help to encourage trade and make it cheaper by reducing or eliminating charges for trading across the borders. If this happens, it should help the economy get back on its feet more easily, reduce bottlenecks in traffic and enable workers to continue travelling to the EU.
Managing public perception
As lockdown eases, while the public may be able to leave their homes again, the question remains as to how we return to the stage where the public is comfortable to return to non-essential shops and services.
When the Government introduced their initial message of ‘Stay Home, Protect the NHS, Save Lives’, 90% of the public understood and abided by that message. Since the official slogan has been amended to ‘Stay Alert, Control the Virus, Save Lives’, the percentage of the public who think the guidance is clear has dropped to 56%.
At present, only 13% of people currently believe we should fully come out of lockdown and many think that we’re coming out of lockdown too quickly. While the threat is clearly still evident, this perception could be partially due to conflicting news stories as when questioned, the public were under the impression that 40% of people who get the virus will end up in hospital, whereas in reality, it’s around 4%.[viii]
Another challenge for the economy could also arise in the form of reluctance to spend money again. During lockdown, many people have noted that they have started to save money in areas such as travelling to and from work and partaking in activities outside of the home, including eating out and high street shopping.
While it’s anticipated that spending habits will return as these facilities start to reopen, this desire to save coupled with the fear of unemployment and uncertainty about the future could delay the UK’s return to pre-Covid levels of consumer spending.
Speed of recovery
At present, it remains impossible to say how quickly the economy will recover to its post-Covid state, although leading forecasting group, EY Item Club, believe it will take up until 2023 to restore the full extent of the damage.[ix] The group of economists calculate that by 2021 the economy will grow by 4.5% after dropping by 6.8% in 2020.
Howard Archer, the chief economic adviser to the Item Club noted that the support that the Government gives to businesses and saving jobs during this time will be critical in order to reduce longer-term economical damage.
Once the UK has got the point where businesses are back up and running, it’s anticipated there will be a huge push on employment. There have been few moments in history which have seen comparable levels of able workers sitting on the side-lines and it is imperative that the Government quickly gets as many inactive workers back to work. Much of these efforts are reliant on keeping small businesses solvent so they can continue to survive and recruit new workers.
Of course, this is all dependent on what happens in the autumn in terms of the virus. If another peak hits the nation, this could have further crippling effects on both individuals and businesses.
COVID-19 vs past recessions
In order to anticipate what will happen off the back of a major economic crisis, economists are inclined to draw from past experience. Larry Elliot, Economic Editor of the Guardian, found that in order to find an economic downturn as sharp as the one caused by COVID-19, we actually need to go back 300 years to ‘The Great Frost’ in 1709, when the Thames froze over and the UK saw around a 14% fall in the economy. He notes that during the 2008/2009 recession, our economy contracted in a peak and trough by about 6% of GDP, while this time we will contract between 20-30% of GDP in the first 2 quarters alone.
The good news is that, while we have experienced such a rapid economic downfall, the circumstances leading up to COVID-19 don’t reflect the shape of recent recessions and due to that, it’s hoped that the recovery will take a different route as well.
Although it’s difficult to anticipate the form in which our recovery will take, many expect a ‘V’ shaped recovery in which our economy bounces back much more quickly than it would after other recessions, while other predict a more typical ‘L’ shaped recession with a longer recovery period.
If lockdown ends in alignment with the current Government roadmap, a ‘V’ shaped recovery is much more likely, but if we experience a ‘second-wave’ and lockdown needs to be reinstated, this could significantly delay the recovery.
We have seen from previous experience that if you withdraw the stimulus too soon, you will kill the growth and limit the bounce back. In 2010, the Government retrenched too soon, and growth faltered, making it take longer to get back on top of finances. Larry Elliot points out that it’s inconceivable that the government will follow the same remedy that was implemented in 2010 by George Osbourne and David Cameron as it’s simply not politically feasible or justified economically.
Steadying the decline
As lockdown has steadily eased, we have seen already some stabilisation, signs of a very modest recovery and a small improvement in business sentiment even at these very early stages.[x] Even though the first half of this year will see less than desirable results in terms of consumer spending, these small wins do offer some optimism. If the current COVID-19 measures work and lockdown continues to ease – the economy will likely see a much more rapid improvement as people and businesses start to return to some form of normality.
Could this change our economy for the better?
Although recent figures show that lockdown has temporarily devastated the economy, we have seen some light in the way of significant interventions for those most affected. Through furlough, the Government has subsidised 80% of wages of workers and some ideas which used to be quickly dismissed are now being taken much more seriously.
Instigating these world-leading economic interventions appears to have opened up the floodgates for the consideration of the controversial Universal Basic Income (UBI), Modern Monetary Theory (MMT) and the Green New Deal UK (GND) to name a few.
We’ve also seen a shift in perception of public sector workers. While in recent years workers and unions have been battling against pay freezes and even cuts, this could potentially alter the way in which these types of jobs are valued irrevocably.
Perhaps this major shift to our economy could open up a whole new landscape of discussions, benefits and economic ideas in the future, as well as fast-tracking our digital progress. Many workforces will not operate in the same way after the pandemic and others will alter their practices to allow for more flexible and greener working for employees.
In terms of the insurance industry, work has started on exploring Pandemic Re, which would follow similar initiatives such as Flood Re and Pool Re to provide a longer-term solution for the pandemic. The aim of this would be to strengthen the industry’s response to any future pandemics by enabling insurers to transfer their risk to Pandemic Re who would reimburse the cost to the insurer.
The shift in working during lockdown will likely pave the way for more innovation within the industry, putting the emphasis back on the policyholder and the importance of human connections. The industry’s sudden increased reliance on technology and digital practices, along with the apparent gaps in commercial cover we have seen in the midst of the pandemic, could allow for more flexible, targeted policies.
The immediate future of our economy remains uncertain for the time being, but we’ve proved time and time again that we can rise from adversity stronger than ever – the evidence suggests this time will be no different.