Economic Recovery – How Long Will It Take?
Everyone will likely be familiar with the depressing financial headlines at the moment. But just how much is sensationalist hype and how much is real? It can be difficult to discern just how good or bad things are with a market that is fluctuating wildly. One thing we do know is that the Covid-19 crisis will push the country into an unprecedented economic slump. No one knows how big that slump will be. Nor do we know how long it will last. But it’s fair to say that (for the moment, at least) the expert predictions on economic recovery aren’t exactly optimistic.
With so many unknowns, inevitably, there is a great deal of uncertainty around talk about recovery. This is likely to be the case all the while the full economic impact of the current lockdown is unknown. It remains unclear how far the fall will impact the economy. It’s also uncertain how well firms will cope with any partial restrictions once normality returns. Then there is also the threat of further lockdowns for future outbreaks while a vaccine is sought.
What is being done, and what does it mean for the economy?
The government does seem to be honouring their pledge ‘not [to] just stand by’ and let the economy slide. Literally putting their money where their mouth is, the government has backed up their claim. We will all be familiar with the numerous measures designed to protect millions of jobs, businesses and self-employed businesses. In fact, for many, the gravity of the Covid-19 outbreak wasn’t fully brought home until the Chancellor announced the substantial financial measures that would be taken.
That being said, even the government will agree that there is a limit to how much they can do. So, it is little surprise that the ORB predicts a further rise in the amount of borrowing by the end of 2020 up to £273 billion. To put this into perspective, such a rise would represent the largest deficit as a share of GDP since the Second World War. Undoubtedly there is cause for concern around how quickly economic recovery can come. As Robert Chote, chairman of the ORB, pointed out, a drop of 35% in the economy would be “the largest in living memory.” Compounded by predictions that unemployment will rise by 2.1 million to 3.4 million by the end of June, it would be counter-intuitive for people not to be anxious.
So, what is the current expectation?
The current thinking is that the total economy will contract by around 13% in 2020. To put this in context, the last time the world saw an economic shrinkage of a similar size was in 1709! That’s right – not even the World Wars matched it. But, importantly, despite all the doomsaying, the OBR does expect the UK economy to start getting back on a growth trend by the end of the year. They are also predicting that unemployment will start to fall, steadying to around 7.3% by the end of 2020.
Looking further afield, a substantial amount of public debt will be the inevitable economic legacy of the Coronavirus. Public debt is expected to remain at 84.9% of GDP in four years’ time after peaking at over 100% by the end of this financial year. So, questions over whether a return to austerity is likely are beginning to emerge.
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Written by Ben Griffiths
Ben is a financial planner from our Whiteley office. While he specialises in pension planning, Ben is also able to generalise into all other areas of financial planning.