The United Kingdom's economy, which relies to a large extent on tourism revenues and manufacturing, is already seeing the impact of coronavirus or COVID-19.
This live coronavirus article has been updated on April 2, 2020.
April 2, 2020 | AtoZ Markets – Britain’s economy is shrinking at a record pace, faster than during the 2008-09 financial crisis, as businesses across the services sector shut up shop in face of the coronavirus, a survey showed on Tuesday.
Britain under lockdown as Europe’s coronavirus cases swell
As the coronavirus pandemic continues to sweep across Europe, the UK has seen thousands of confirmed cases. In the UK there are more than 34,107 confirmed cases of the coronavirus and at least 2,926 people, who have tested positive for the virus, have died.
Prime Minister Boris Johnson, who has faced a storm of criticism for his laissez-faire approach to the coronavirus pandemic, on Monday placed Britain under virtual lockdown. He has ordered the closure of all nonessential shops, banned meetings of more than two individuals. This move now requires people to mostly stay home.
Those steps bring Britain and even France, into alignment with measures across Europe.
The drastic measures are an effort to avoid forcing doctors in overwhelmed hospitals to have to turn away patients — as they are already doing in northern Italy.
United Kingdom's economy is shrinking
According to a survey conducted last week, before the government ordered the closure of all pubs, restaurants and other non-essential businesses open to the public late on Friday, the monthly Purchasing Managers’ Index (PMI) points to the economy shrinking at a quarterly rate of 1.5-2.0%.
“This decline will likely be the tip of the iceberg and dwarfed by what we will see in the second quarter,” said Chris Williamson, chief business economist at IHS Markit, which compiles the survey.
At the worst point of the 2008-09 recession, Britain’s economy shrank 2.1% in a single quarter.
Economists at Morgan Stanley forecast British economic output will shrink by around 10% or more in the three months to the end of June, and just over 5% in 2020 as a whole, if social restrictions can be relaxed in the second half of the year.
“Should the outbreak - and the associated economic hit - be more prolonged than anticipated, we think that both the Bank of England and the Treasury could ramp up their response, with more spending and more QE,” Morgan Stanley economist Jacob Nell said.
Britain’s central bank restarted quantitative easing (QE) asset purchases last week.
Flash composite PMI sinks
The flash composite PMI - which includes about 85% of firms in the full survey - sank to 37.1 in March from February’s 53.0. That is the lowest since the survey started in January 1998. The services component sank to 35.7 from 53.2, also a record low.
“Any growth was confined to small pockets of the economy such as food manufacturing, pharmaceuticals and healthcare. Demand elsewhere has collapsed ... as increasing numbers of households and businesses at home and abroad close their doors,” Williamson said.
There was little immediate market reaction to the data. The sterling still close to the 35-year low it struck last week as coronavirus fears drove investors into U.S. dollars.
The PMI data reflected the decline across the eurozone and as far afield as Australia and Japan. This highlights the global nature of the economic crisis. U.S. surveys were similarly dire.
Factories also impacted by COVID-19
Britain’s manufacturing activity PMI fell by less, to 48.0 from 51.7. IHS Markit said this reflected an upward distortion. This is due to the positive impact on the index of lengthening delays from suppliers. That is a sign of a sharp rise in demand, but in this case, caused by the COVID-19.
Looking at the manufacturing PMI’s output component alone, production was falling at its fastest since July 2012. This is happening at the peak of the eurozone debt crisis.
The Confederation of British Industry said a survey it conducted between Feb. 25 and March 13, published on Tuesday, showed the biggest drop in factory output expectations since the financial crisis.
“It’s now more important than ever manufacturers get the support they need,” CBI economist Anna Leach said.
British finance minister Rishi Sunak last week promised businesses 330 billion pounds ($380 billion) in loan guarantees. He also offered to pay 80% of their wage bills if they put staff on leave rather than sack them.
The PMI data showed employment was already falling at the fastest rate since July 2009.
UK economic challenge tougher than 2008-09 financial crisis
The Bank of England, in turn, has said it will buy a record 200 billion pounds of extra assets - mostly government debt. Moreover, the BoE promised to cut its main interest rate to a record-low 0.1%.
Former Bank of England Governor Mervyn King on Monday commented on the economic challenge facing Britain. He said that it was tougher than during the 2008-09 financial crisis and that public borrowing will rise significantly.
But he warned against viewing the coming economic downturn like a conventional recession or depression.
“In order to deal with a health crisis, the government is deliberately pressing down on economic activity ... and at some point there will be a rebound,” King said.
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