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The coronavirus crisis: the debate shifts towards the exit strategy

Date: 5th May 2020

The coronavirus crisis: the debate shifts towards the exit strategy
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the key issues as the debate shifts toward the exit strategy:
    • A second review of the lockdown measures is due on Thursday 7 May. It is expected there will be some relaxation of the measures, albeit modest ones.
    • The Prime Minister announced that he would set out a “comprehensive plan” for “restarting” the economy, reopening schools and helping people travel to work following the coronavirus lockdown, week beginning 4 May.
    • It has been reported the government will release a series of papers this week outlining its approach on “restarting” the economy, safely and gradually.
    • The current pandemic, and the government’s response, has affected both the supply and demand sides of the economy.
    • In considering future developments, there are two major questions.
    • The first question relates to how/when the lockdown will end and how will the economy respond. There are, of course, many unknowns concerning the nature of the exit strategy. Concerning the economic response, there should not be a large permanent reduction in supply potential after lockdown, providing the government’s extensive support packages have effectively mitigated the damage to the supply side. Demand should recover (at least partly) after lockdown but recovery will be held back by several factors, including impaired balance sheets and higher unemployment. Taking the supply and demand sides together, the economy should begin to recover fairly soon after lockdown. But it is highly unlikely just to “bounce back”, making up all lost ground quickly.
    • The second question relates to the long-term effects. These include an enormous increase in government borrowing this year, increased state intervention (at least temporarily) and a possible further pushback against globalisation and multilateralism.
    Business update:
    • The Chancellor announced a new Bounce Back Loan scheme for SMEs on 27 April.
    • The ONS’s latest Business Impact of Coronavirus Survey (BICS) showed nearly quarter of respondents reported they had temporarily closed or paused trading, while just 0.5% had permanently ceased trading. Concerning government support schemes, the Coronavirus Job Retention Scheme (CJRS) was the most popular government scheme applied for.
    • The especially vulnerable sectors to lockdown continue to include non-essential” retail; transport; accommodation and food services; and arts and recreation.
    UK economic update:
    • In their main-case scenario, NIESR forecast GDP falls by around 5% in 2020Q1 and 15% in 2020Q2. On the assumption of a progressive relaxation of stay-at-home measures, GDP then recovers some of the lost ground and almost re-attains its 2019Q4 level by 2021Q4, but there are significant downside risks. GDP is expected to fall by 7.2% (YOY) in 2020, followed by growth of 6.8% in 2021.
    • Households repaid £3.8bn of consumer credit (net) in March, the largest net repayment since the series began, whilst mortgage approval statistics fell by over 20% in March.
    • The Markit/CIPS PMI fell to a record low of 32.6 in April, down from 47.8 in March.
    • The Society of Motor Manufacturers and Traders (SMMT) said car production in March fell 37.6% (YOY).
    • Note the Bank of England’s Monetary Policy Committee (MPC) will meet next week, when updated economic forecasts are expected.
    International developments:
    • US GDP fell 4.8% (QOQ, annualised) in 2020Q1.
    • Eurozone GDP fell 3.8% (QOQ) in 2020Q1, whilst French GDP fell 5.8%, Italian GDP fell 4.7% and Spanish GDP fell 5.2%. German GDP data are not yet available.
    • The ECB stepped up its support measures, including the new pandemic emergency longer-term refinancing operations (PELTROs).
    • EU leaders agreed a €540bn emergency package for the EU. In addition to the emergency measures, the EU has agreed to set up a recovery fund, closely tied to the EU27’s seven-year budget (covering the years, 2021-27).
    Ruth Lea said, “We remain in unknown territory. But as the lockdown enters the seventh week, we may expect some guidance from the government as to its exit strategy, expected to be gradual, this week. There may even be some relaxation of the restrictions this week, albeit modest.

    Concerning the economy’s response to the end of lockdown, we are, of course, some way from knowing. But, providing the government’s support schemes have effectively mitigated the lockdown’s damage to business, the permanent reduction in supply potential should be containable, albeit unwelcome. The impact on demand following lockdown is harder to judge, but it should, at least partly, recover quite quickly. All in all, and taking the supply and demand sides together, the economy should begin to recover fairly soon after lockdown. But to expect it just to “bounce back”, making up all lost ground quite quickly, is unduly optimistic. NIESR’s assessment that GDP will almost have attained its 2019Q4 by 2021Q4, with downside risks, looks all too plausible.”
    For full story:

    Press enquiries:

    Arbuthnot Banking Group PLC:

    Ruth Lea, Economic Adviser
    07800 608 674, 020 8346 3482
    Follow Ruth on Twitter @RuthLeaEcon

    Sam Cartwright
    020 7379 4415
    Jais Mehaji
    020 7379 5151
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