UK’s Economy Racing as Lockdown Lifts, but Future Remains Uncertain
Analysts expect that the UK’s economy will expand at its quickest pace in decades this quarter after shrinking at its fastest pace in centuries last quarter, as large key parts of the economy have resumed operations following the emergence from a nationwide shut-down to control the coronavirus. The virus has infected almost 15 million people across the world and Britain has had the highest death toll in Europe so far, despite the government forcing businesses to close and citizens to stay home.
Many restrictions have now been eased, with more people leaving their homes and returning to work, spending money again. The economy is expected to expand 12.2% this quarter, up from the 10.5% recovery predicted last month. The bounce-back comes after a historic 18.9% contraction in for last quarter, with many economists fearing the biggest threat to the recovery would be a second wave of virus infections.
“The economy will almost certainly have imploded over Q2 as a whole. The good news is that in terms of the monthly trajectory, there is clear evidence that the economy has remained on an upward path since May,” said Philip Shaw at Investec.
“But the challenge of course is keeping the economy from running out of steam.”
This year, the economy was expected to contract 9.1%, and then recover to expand by 6.0% in 2021. In a worst-case scenario it will shrink 13.0% this year. Official GDP figures said the economy grew slower than expected at 1.8% in May. To tackle the hit from COVID-19 to the economy the UK government has massively increased spending, borrowing £128 billion last quarter, 5 times the amount during the same period last year.
The government has funded a support scheme to pay 80% of wage bills if the staff was put on leave rather than let go. But that is due to close in October and unemployment will likely peak at 8.0% in the fourth quarter. The Bank of England slashed borrowing costs to a record low of 0.10% and restarted asset purchases. But no change in policy is expected at its next meeting on August 6th.
The bank rate will not rise until 2022, but an additional £70 billion ($89 billion) will be added to the BoE’s existing £745 billion quantitative easing programme toward the end of this year.
Another risk is the expiry of Britain’s transition period with the European Union at the end of the year, after leaving more than 40 years of membership in March. The two sides resumed talks on Tuesday but while there has been little movement what divides them. The aim of reaching an agreement on future ties by October is ambitious but achievable, German Foreign Minister Heiko Maas said on Tuesday.
“Failure to sign a trade agreement with the EU in 2020 will go down as a major policy error. It is inconceivable to me that the British government would be prepared to take such a risk with the economy, particularly in the current climate,” Commerzbank’s Peter Dixon said.
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