The last few months have presented some of the most difficult challenges mankind has ever faced. Throughout the course of time, there have been numerous events that have tested the resolve of humans, and we have more often than not emerged victorious in the face of such arduous difficulties. However, the world pandemic that has wreaked havoc throughout the length and breadth of the universe is something very different, leaving us completely incapacitated to deal with the repercussions. Unlike previous historic events, the virus has had a universally indiscriminate effect sparing no one and making it a herculean effort to survive the first half of one the most difficult years. COVID 19 has created a situation of economic turmoil and recession, which essentially put to waste decades of development. With economic powerhouses such as the United States recording the largest unemployment rates, the Indian subcontinent battling to curb the rapid spread of the disease and the United Kingdom finding itself right in the middle of one of the worst economic meltdowns.
Recent Economic Troubles
Britain experienced a 20.4% month-on-month contraction, with a further 5.8% drop in March, which left the economy in tatters, eroding eighteen years of growth, in a mere two months. The vital services sector, which makes up the bulk of the English economy, was 24.2% down as compared to the pre-pandemic days. The manufacturing sector, which was severely affected by the social distancing norms, saw a functioning of 22.3% lower than its levels in February. Taking into account the following figures and the fact that the total economic output underwent a decline by 24.5%, the Organisation for Economic Cooperation and Development has said, “Britain, with its huge services industries which have been hit hard by the social distancing measures, could suffer the worst downturn among the countries that it covers, with an 11.5% contribution this year. Official figures have hinted that the economic impact brought about by the Virus is so devastating that the GDP may not recover till 2024.”
On that note, the Annual Fiscal Report published by the Office of Budget Responsibility, says that as the government winds down its furlough wage subsidy, unemployment in the country would rise sharply. This unemployment would be the product of the redundancy brought upon 10 to 20 percent of the 9.4 million jobs covered under the furlough scheme. Against this backdrop of rising unemployment, the economy is predicted to be 3 percent smaller than the predicted size for the year 2025. Economists, trade unions and businesses have warned against a long and uphill road towards recovery and one marked with substantial economic turbulences. The slight economic improvement in May was a result of the release of pent up demand, rather than an optimistic sign of economic recovery. The UK economy might display short term signs of improvement, but this may not last long, owing to the permanent scarring caused by the pandemic and the decline of the government’s fiscal support as the restrictions are eased gradually.
Hopes of an Economic Recovery
However, with the relaxation in the restrictions, Britain is seeing a ray of hope, as the economy is recovering faster than it was predicted to do so. Even if we assume the continuation of some restrictions, the British GDP is expected to grow by 6.5% by 2021. British economists and most notably the Chief Economist of the Bank of England, Andy Haldane has emphasized a recovery pattern, which he sees the British economy follow post this crisis. The pattern that Haldane has been expounding can be termed as the V-shaped recovery, where rapid economic growth is experienced following a steep downturn in economic activity. Expectations of a more rapid recovery, than what had previously been predicted, has led markets to achieve one of the strongest quarters on record. A prime example of this is the FTSE 100, in the UK rebounding by 9.1% over the quarter.
The biggest factor contributing to recovery, is the sooner than expected, materially faster and strong consumer spending. However, the Bank of England has emphasized the fact that the most important thing for the country to avoid is a repeat of high unemployment rates, as experienced in the 1980s. However, there persists the fear also mentioned by the Bank of England, that a rapidly growing economy may fuel the fire of inflation.
Job Retention Scheme
In an effort to plan for a speedy economic recovery, the UK government has diverted tremendous efforts coupled with an array of resources to preserve jobs. The government is of the belief that by doing so it prevents the long process of reattaching individuals to employers and jobs, allowing people a simple return to their work once restrictions have been relaxed. Within the scheme, the government pays for 80% of the employees’ salaries. In the month of May, the number exceeded 8.5 million, effectively bringing in 30% of the private sector workforce under the government’s monetary protection. Experts have predicted that had it not been for the Job Retention Scheme, the country would have experienced an unemployment rate of about 20%. However, the problem has not altogether been avoided as even with the scheme the unemployment levels are said to rise to 8% in the second half of the year. This is especially true for large cooperations who will have to make tough decisions regarding redundancies, owing to the lack of demand in the long term.
However, the return to pre-pandemic levels of activity is going to be severely affected by the permanent scaring done to the economy. Numerous businesses have failed in the time since the world pandemic began and many more are predicted to fail during the recovery phase when demand and revenue are still weak. This is due to the simple reason that during times of recovery businesses tend to look for additional working capital to finance inventories and growth, but recent trends have shown that banks might not be willing to extend loans to those businesses which they might consider weak or too vulnerable to economic shocks. Across Europe, we estimate that default rates in the speculative-grade category alone could rise to 8.5% by March 2021, from 2.7% in April. The following statistics provide a sufficient indication of the failure rates in the UK. Business failures have a knock-on effect on the economy. This happens when businesses fail, train relationships will end, supply chains will be broken and the production capacity will shrink. These factors deter the economy from growing back to its full potential and achieving the economic levels as seen during the pre-pandemic days. For the long term, things are still not very clear, there is a high possibility of the world adapting in such a manner that we see the emergence of new businesses, that might replace the struggling ones right now, and boost the capacity and long term growth potential.