The economic outlook post Covid-19

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It’s very hard to overstate the impact that the Covid-19 virus has had on nations and individuals.  Many reporters and analysts have used ‘unprecedented’ to describe the effect it has had, with government-imposed lockdowns resulting in countries coming to a virtual standstill.

As well as restrictions on movement and travel, governments have also been forced to quickly come up with levels of emergency economic intervention not seen since World War Two. We’re seeing high levels of corporate debt and national indebtedness.

Lockdown has resulted in many businesses reaching the edge of failure as government mandated restrictions on movement have drastically inhibited usual consumer activity. It has meant reduced spending and investment, resulting in some sectors almost grinding to a halt.

For example, the tourist industry has been hit particularly hard, and others such as entertainment and leisure are only just starting to slowly reopen.

The priority for all governments has been to support individuals and business – the latter with both support to stay open, and an encouragement to continue investing as far as possible.

The level of government stimulus has been massive. The Office for Budget Responsibility expects the UK bill to be more than £300 billion this tax year alone with the Treasury confirming that spending on measures to support public services, businesses and individuals amid the coronavirus has already risen to nearly £190 billion.

Markets suffered greatly as business reacted to the uncertainty. Many suffered their biggest falls since the 2008 crash, with the FTSE 100 losing around 34% of its value between 1st January and 23rd March 2020.

Interestingly, however, the recovery has been swifter than after the global financial crisis of 2008.

The FTSE 100 recovered a lot of the ground lost, climbing back to 6,484 by as early as 5th June, and it has hovered around the 6,000-mark ever since. That performance has not been unique to the UK. Stock markets worldwide mirrored this – following the same pattern of an initial dramatic decline, but subsequent recovery.

Market Pre Covid-19 2020 peak Lowest price (% fall) Value at 6 August 2020
Dow Jones (US) 29,343 18,591 (-36%) 27,224
FTSE 100 (UK) 7,457 4,993 (-33%) 6,024
ASX (Australia) 7,139 4,546 (-36%) 6,042
Nikkei (Japan) 23,827 16,552 (-30%) 22,418

Source – Google

This could be a possible sign that the underlying business structures are sound, and the initial fall was more a reaction to the unknown impact of Covid-19.

Covid-19 has created so much uncertainty that no one can confidently predict timescales or the scale of recovery. As a report from KPMG stated: ‘The only thing certain about the current global economic outlook is that it is uncertain’. The International Monetary Fund describes it, quite accurately, as ‘a crisis like no other’, and they are projecting global growth for 2020 at -4.9%, a figure not seen since World War Two.

The same KPMG report also suggests that it could take until Q4, 2021 to recover to the levels seen at the end of 2019.

Governments are already grappling with the difficult decision of how and when support for families and business can be unwound as things start to get back to normal. Given the levels of borrowing, they are obviously keen to do this as soon as possible to prevent the deficit spiralling totally out of control. But there’s also the understandable desire to maintain sufficient business structure to drive economic growth once the virus has passed.

After getting through the ‘reopening the economy’ phase, a key priority for all governments will be to restore full healthcare capacity. Often overlooked is the knock-on impact on other illnesses and treatment, given the almost total focus on Covid-19.

That will depend very much on finding an effective vaccine for the virus. Such is the urgency that over 140 teams are working on developing vaccines, with encouraging WHO data showing that seven are now in the final stages of testing.

What will be the ‘new normal’, and how normal can it be without an effective vaccine? Local lockdowns in places such as Leicester and Preston have demonstrated that it could well take longer for nations and regions to get over the virus as was initially anticipated.

Covid-19 has sent the UK into a deep recession. Borrowing exceeded 100% of GDP in the UK for the first time since 1963, and this has led to the usual debates about whether tax increases to help close the deficit will be required.

But there are some positive signs. Low levels of consumer spending during lockdown will have inevitably resulted in an underlying pent-up demand, which could see a big consumer boom once people are able to travel and socialise normally again.

In the government’s latest forecasts for the UK economy, the average of 21 predictions for 2021 suggest UK GDP will grow by 6.6% although much will depend on the severity of any second wave, and how the public reacts to the easing of lockdown measures.

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