Economic update: coronavirus

The rapid spread of COVID-19 across the world means that this crisis is, fundamentally, a global one. Although data on global activity is limited as of yet, most economists expect a deep recession in the global economy over H1 2020 due to the scale of the disruption. Activity in China – which was the epicentre of the outbreak – was badly hit at the start of the year but is gradually coming back as quarantine restrictions slowly loosen. Meanwhile, Europe and the US are expected to see a large fall in output in the near-term due to the fast-growing number of COVID-19 cases in those countries.

Equity markets have been battered by the escalation in the coronavirus pandemic, with the S&P 500 and the FTSE 100 losing a third of their value from mid-Feb to 23 March. Markets have stabilised somewhat since then; however, volatility, as measured by the S&P 500 volatility index, remains high.

Sovereign bond yields across the UK, Eurozone and the US also rose over March, peaking between 17 and 18 March. Yields have subsequently fallen back following the strong easing in monetary policy from the Bank of England, US Federal Reserve, and the European Central Bank (ECB).

Oil prices have fallen sharply, by around 70% since their peak in January. Brent crude fell briefly below $20 pb on 30th March – it was last sustainably below this level in 1999. This drop in prices has been driven by the combined impacts of a reduction in global demand for oil (due to COVID-19) and excess global oil supplies caused by the ongoing Russia-Saudi Arabia oil price war.

The CBI Economics team has been collecting hundreds of stories from UK firms, across a variety of different sizes and sectors. We have summarised the latest anecdotes, which may be a helpful guide to tracking the impact of the pandemic (especially as there is still limited economic data available).

Supply

Supply chain disruption initially stemmed from China, but production in the UK has been more directly hit in recent weeks as the virus spreads globally. The impact is especially being felt in sectors that depend on globalised, just-in-time supply chains, such as automobiles and electronics. However, there are some early reports of Chinese production coming back online as the Chinese government has begun to ease some quarantine measures and encouraged factories to reopen.

Inventories have been providing a buffer for some UK firms, as many companies had built up stocks ahead of Chinese New Year and others were still holding stocks built up before Brexit deadlines.

Demand

Domestic demand has already taken a hit in several sectors due to travel bans, event cancellations, and social distancing measures. This is particularly impacting the travel, tourism, and hospitality sectors; however, it’s worth noting that non-grocery retailing and some professional services are also seeing reduced activity. Additionally, sharp financial market movements are creating significant revenue risks for financial services firms. That being said, some sectors, particularly grocers, are reporting a rise in business volumes as a result of the outbreak.

External demand initially fell sharply in Asia in the early stages of the outbreak, but firms are now reporting a drop-off in demand from Europe. Businesses are also citing concerns about the impact of lost orders due to the cancellation of events, meetings, and office closures across the globe.

People

The impact of COVID-19 on staffing levels, hours, and employment is growing, particularly in those sectors that are most affected by containment measures (such as travel and hospitality). In an early sign of the potential hit to UK employment levels, nearly half a million individuals registered for universal credit from 16 to 24 March.

Working practices are being adjusted in response to the crisis, with many firms closing their offices and encouraging remote working (where possible).

Operational risks

The cash flow situation for some UK businesses is deteriorating as a result of reduced demand and/or supply disruption. As a result, demand for credit has skyrocketed; for example, banks reportedly received over 30,000 enquiries in the first few days of the Coronavirus Business Interruption Loan Scheme (CBILS). However, a “stranded middle” of UK businesses – those with turnovers exceeding £45m but not large enough to be rated investment grade (BBB-) – have raised that they are unable to access the current available government funding schemes (detailed below).

Insurance coverage is becoming a topic of frustration for many firms (particularly SMEs), as many are finding that they are not covered for pandemics.

The UK government has made a significant effort to co-ordinate fiscal and monetary policy in response to the coronavirus outbreak. The measures have been ramped up each week, as the pace of the pandemic has quickened in the UK. All the while, the CBI has been working with government to help businesses overcome the challenges that they currently face (such as the need for cash and to protect jobs). Overall, the measures announced so far demonstrate a welcome willingness by the government to cover private sector losses in order to limit the economic and social fallout of the outbreak. View the CBI’s breakdown of financial support available for more information on those schemes.

However, despite these significant interventions, economic activity will suffer a substantial hit in the short-term as the government focuses on suppressing the spread of the disease.

Major economic policies so far

The Bank of England and HM Treasury first directly responded to the COVID-19 outbreak through a set of coordinated policy measures announced on 11 March. The Bank’s package included a Bank Rate cut to 0.25% (from 0.75%), the capital buffer reduced to 0% (from 1%), and the creation of a term funding scheme for SMEs (TFSME). Meanwhile, the Treasury announced £12bn in spending measures to tackle the outbreak as part of the Spring Budget.

The Bank and Treasury have continued to loosen policy in a coordinated manner as the crisis has escalated. On 17 March, they launched two new lending schemes – the Coronavirus Business Interruption Loan Scheme and Covid-19 Corporate Financing Facility – to provide liquidity to credit-stricken businesses. Then, on 19 March, the Bank cut the Bank Rate to a record low of 0.1% and announced that they would purchase £200bn of (mainly) government bonds in what is, essentially, a restart in quantitative easing. Most recently, the Treasury announced two separate schemes to subsidise the wages of furloughed and self-employed workers.

Although it is too early to have much economic data on the impact of COVID-19, the CBI’s March business surveys give an initial insight into the extent of the disruption so far. For example, consumer services saw the fastest fall in business volumes since 2012, while manufacturers’ order books deteriorated on February. Looking ahead, firms anticipate a sharp hit to activity due to the COVID-19 outbreak. The retail, consumer services, and manufacturing sectors reported their weakest expectations for output since 2009. Note that these surveys were in the field before the most recent social lockdown measures that were put into place on 23 March.

The IHS Markit/CIPS Purchasing Manager’s Index (PMI) reported a significant slowdown in UK economic activity in March. The headline Composite PMI dropped to a survey-record low (since January 1998), largely driven by a sharp fall in the Services PMI (which also declined to a survey-record low). These results suggest that the UK began to experience a sudden slowdown in economic activity even before the social lockdown measures were fully put into place.

Forecasters have been cutting their expectations for GDP growth in the UK and world in response to the rapid spread of COVID-19. The range of new economic forecasts is much wider than usual at present due to the high degree of uncertainty clouding the path forward. At present, recent forecasts for annual UK GDP growth in 2020, as collected by FocusEconomics between 24 to 29 March, range from 1% to 8% (average of -3%), with the bulk of the decline occurring in Q2. By comparison, the UK economy contracted by -4% in 2009. Note that the overall output loss from the financial crisis was 6%, but it was spread over a longer period (Q1 2008 to Q2 2009) than the output loss from COVID-19 is expected to be.

If we assume that the UK (and other European countries) can suppress the outbreak in the next few months, the UK will likely fall into a deep contraction in the first half of 2020 but then recover in the second half of the year. In this scenario, we can generally expect the UK to follow a similar contractionary path to major Eurozone economies, albeit with a shallower trough compared to Italy, Spain, and Germany (which are being harder hit by COVID-19). However, the possibility that the outbreak continues to gain pace in the UK and elsewhere, and that social lockdown measures remain in place for longer, presents a significant downside risk to this outlook.