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HSBC – Five Key Questions For The UK Economy

By Elizabeth Martins, Senior Economist, HSBC

The UK government faces tough decisions as it tries to control coronavirus at the same time as reopening society and reigniting economic growth. We look at five key questions that could help determine their tactics – and the country’s economic outlook.

How prevalent is the virus?

Infection rates have fallen dramatically since the early weeks of the UK’s outbreak. On 30 July, the number of confirmed new cases was 763, compared with a peak of 5,487 on 24 April. Daily COVID-19 deaths have also plummeted.

As a result, the UK ‘R-rate’ – the average number of people that each infected person passes the virus to – was believed to be 0.7 to 0.9. At that level, case numbers will continue to fall. However, there are concerns over local and regional outbreaks, and experience in Europe suggests infection rates could rise again.

What is the economic hit so far?

The economic hit from COVID-19 can be divided into two phases: lost output as a consequence of enforced closures between March and May; and then – more importantly – lost output as a result of the financial consequences of those closures for businesses and households from June onwards.

The UK economy contracted by 2.2 per cent in the first quarter of 2020, and then a record-breaking 20 per cent in April. A disappointingly small recovery in May and June means there are downside risks to our second-quarter GDP growth forecast of minus 16 per cent.

In the second phase of the crisis, we have already started to see a bounce in activity, reflecting the reopening of businesses across the country from mid-June onwards. But again, the headline numbers belie underlying consumer caution. As long as consumers fear returning to ‘normal’, the economy will continue to suffer.

57 per cent of firms surveyed by the Office for National Statistics reported lower turnover”

How have consumers and businesses coped?

Despite the drop in COVID-19 case numbers since the April peak, surveys show that people remain cautious. A majority remain uncomfortable with the idea of using public transport, and only half of respondents felt comfortable to return to their normal place of work. Indeed, the percentage of people who are working from home exclusively has fallen only slightly, from 33 per cent in mid-May to 27 per cent in mid-July – well up from about 5 per cent in 2019.

In the corporate sector, 57 per cent of firms surveyed by the Office for National Statistics reported lower turnover, though a perhaps surprisingly high 26 per cent reported turnover was unaffected by the crisis. Of all surveyed businesses – those trading and those still on pause – 79 per cent were using the Job Retention Scheme, with 39 per cent answering that they were providing top-ups to the wages covered by the scheme.

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