“Worst contraction in history”: Economic hit of Covid-19 in the UK


Shahzeb Athar, Jamia Ahmadiyya UK


The world as we know it has drastically taken a turn into unprecedented waters, a turn so uncharted that the entire economic outlook seems dire and calamitous. I, nevertheless, deem it quite hard to believe that anyone could have predicted an epidemic clothed in the robes of a potential recession of this scale.

Jan Vlieghe, one of the Bank of England’s (BoE) top policy maker and a member of the BoE’s interest-rate setting committee, said that the UK was “experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries”. (Bank of England warns of worst contraction in centuries, as economic activity slumps – as it happened, The Guardian.com, 23 April 2020)

One of the world’s largest economies, America, is also showing cracks of economic instability. A Bloomberg economist reported that the chance of a recession now stands at 100%. This may be attributed, but not limited to the fact that 26.4 million have now filed for unemployment; this accounts to more than 15% of the US workforce. The astonishing pace of losses means more people have been put out of work in the last month than in the two years of the last recession.(The US economy has wiped out all the job gains since the Great Recession, CNBCbusiness.com, 23 April, 2020)

Now a prudent individual would beg the question, do the banks even have a contingency plan in place when such events occur? 

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The answer is quite unambiguous and evidently, it seems that the banks weren’t ready; the banks were prepared for a crisis but not one of such a magnitude.

The New York Times reports, “Government overseers would test whether European banks could survive a hypothetical perfect storm that included a steep economic downturn, plunging stock prices and a collapse in consumer spending. But before bank regulators could begin their planned stress test this year, they were confronted with the real thing.” (European Banks Prepared for a crisis. But Not This One, nytimes.com, 6April, 2020)

The truth is, no one really anticipated an epidemic of such a calibre.

The most significant commodity in the world has taken a huge blow as of 21 April – the price of a barrel of Brent Crude oil has plummeted to an 18-year low, but what is to be noted is that this is the future price of oil which means that this not only tells us the economic situation at present but more importantly represents the future outlook for the economy. As the head of research at Henderson Rowe (a UK based investment management company) explains, “The Covid-19 crisis is destroying the global demand for energy and without a timeline on the end of the lockdown in the developed world, the market is suffering from chronic oversupply.” (Why oil is still most important price in the world, bbc.co.uk, 22 April, 2020)

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It seems problems occur when there is an excess supply and even though supplies have been cut by 10%, the price of oil keeps on dropping, effectively becoming the first domino to fall. If we compare the last financial crash of 2008 with the current one, the economy lost 5% of output in one full year, whereas it is now facing 20% to 30% contraction in only one month. (Covid-19 has become an ‘economic crisis’ says chief economist, bbc.co.uk, 21 April 2020)

The Office for Budget Responsibility (OBR) based in the UK estimated a deficit for this year of 14% of Gross Domestic Product (GDP), whereas the worst year of the financial crash reached 11%.

Another domino which seems to have fallen is the property sector, according to Zoopla (a UK based house listing website) the number of new property sales agreed in the UK has dropped by 70% since the start of the coronavirus restrictions. The banks and mortgage providers have also taken a hit as repayments of mortgages have been allowed to be deferred, lenders have agreed that 1.2 million homeowners can delay repayments as jobs are cut and wages reduced. (Kevin Peachey, BBC Business, 21 April 2020)

The number of deferrals in place have more than tripled in the two weeks between 25 March and 8 April, growing from 392,130 to 1.24 million. This is an increase of nearly 850,000. Were they all to take a three-month break, a total of about £2.6 billion would have been deferred. (Ibid)

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But what about the rental market? Well, millions of people will most certainly see a dip in income and although the banks have agreed to a deferral of mortgage payments, the rental sector stands at a precarious place.

The residential landlord’s association based in the UK have said landlords should allow rent to be paid later assuming the tenant has a good payment history. However, the government is also temporarily making the housing benefit system more generous by increasing it to cover 30% of the market average rent in each area, effectively easing of the pressure for the tenant. The UK government has also prohibited the eviction of tenants for a total of three months. (Ibid)

This effectively means that as of the 21 April, businesses as a whole have put a million employees on furlough in just a single day, something that has never happened before. Although such measures which have been introduced by the Chancellor for the Exchequer, Rishi Sunak, seem to be the light at the end of this prolonged tunnel, the question still remains as to how long will the conservative British government try to bear the burden of an economy which is on the verge of collapsing and who will cover the bill which accumulates to more than £330 billion?     

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