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Plumbing the depths

The new economy after the pandemic will be smaller with more companies and people worse off from the period of lost work, lost cash flow and lost jobs.

world map on money and business financial network city background

John Redwood

in Features


Yesterday The Office of Budget Responsibility in the UK tried to update its forecasts for the UK economy. They emerged at the pessimistic end of the current range of estimates but attracted news coverage because of who they are. They anticipate on the scenario they published a fall of 35% in the UK second-quarter GDP, with a recovery thereafter. The half-yearly fall would be 17% and the annual 13%. They assume for this forecast a three month shut down followed by a three month period of progressive relaxation. This leads to a big increase in the unemployment rate to 10%, up from 4%. Public sector receipts plunge by £130 billion as less income is available to tax and fewer transactions means lower turnover based levies. Public spending rises by £85bn compared to non-virus budget plans. Additional state borrowing in 2020-21 rises from the planned £55bn to £278bn. The downturn is considerably larger than in any recession in the last 100 years.

The OECD has also tried to put some numbers on the damage for a range of economies and came up with high figures as well. They suggested the German economy could lose 29% of its GDP, Italy, France and the UK around 26% and the USA 25% before recovery as the lockdowns end. According to official figures, the Chinese losses were much more modest, with industrial production down 13.5% in their bad months of January and February, retail sales down by a fifth, and unemployment up by just under 1% of the workforce to 6.2% from 5.3%. That was still 5 million people losing their jobs.

It seems likely that the annualised losses of GDP during the period of the shutdowns will be high for obvious reasons. The forecasting issue is for how long will so many businesses be locked down? How many can find electronic ways of providing goods and services that offset some of the revenue loss? How many can switch to making or providing things that are in demand and are permitted? How many obtain enough compensating grants from the government to allow them to pay staff, landlords and suppliers? Better scenarios all thrive on predicting a shorter period of shutdown and more flexibility from all concerned to limit losses.

France decided to prolong the shutdown there until the end of April. India extended her original three-week closures. The UK looks set to continue with its measures. President Trump has seen his Easter deadline for a return to normal come and go, and will be under pressure from medical advisers to keep the controls in place given the prevalence of the disease. It looks as if we are moving to a generally longer period of lockdown and a slower period of relaxation of closures. This means forecasts edge closer to the pessimistic outliers, as we saw yesterday with the OBR.

Meanwhile, there are various companies and some sectors that do well in this gloomy landscape and are well placed to benefit from the recovery. Online retailers keep driving forward their market share in many places around the world. Amazon is using it to get more people to sign up for Amazon Prime so it gets a regular payment from them whether they buy or not. When shops reopen more customers will stick with the choice and convenience of internet service.  More people and businesses are learning to communicate through a range of audiovisual meetings. Some of those too will stick with the new ways of contacting family or making office decisions, and an increasing number will pay for added value services on top of the advertising revenue that the providers often enjoy.  Advertising rates will come to reflect the larger numbers of people visiting the online sites.  The market for downloading films and music will also hold some of the gains it must now be making as families seek entertainment in their homes.

The new economy after the pandemic will be smaller with more companies and people worse off from the period of lost work, lost cash flow and lost jobs. This will heighten moves to cheaper online ways of doing things, to the continuing detriment of the travel, entertainment, hospitality and discretionary retail sectors.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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