How might a COVID-19 recession affect the UK?

The UK’s economy suffered a 20.4% plunge in April, the largest monthly contraction on record.

Since the government imposed strict restrictions on the UK population to tackle the health ramifications of the coronavirus on 23 March, there’s been a mammoth halt to economic activity.

April was the first full month the UK was in lockdown, which affected all areas of economic activity. The decline was three times as big as the contraction in March and 10 times as big as anything before the coronavirus crisis.

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Very few industries have escaped the effects of coronavirus on their cash flow due to the uncertainty around the virus, and consumer demand has fallen amid a sea of closed retailers, cafes, pubs, gyms and more.

Are we already in a recession?

The Chancellor warned last month that we’re already in the middle of a ‘significant recession’. This means there’s been a significant decline in economic activity for a prolonged period.

According to the Office for National Statistics, the UK economy plunged by 2% in the three months to March, following no growth in Q4 2019.

Stock markets around the world have endured heavy falls. The FTSE 100 alone – which measures the performance of the biggest firms in the UK – has fallen by almost a fifth since the start of the year.

Following the stock market panic, the Bank of England (BoE) slashed interest rates down to the lowest levels in its 325-year history, to 0.1%, while government borrowing has hit a peacetime record; it borrowed £62bn in April – more than had been anticipated for all of 2020. 

It’s expected that the economy is on track to shrink 14% by the end of 2020, making it the deepest recession for more than three centuries. The BoE estimates show the economy only shrank more in the early 1700s, by 15%. 

What might this mean for your finances?

The harsh reality is that all aspects of people’s finances could take a hit, even if they haven’t already.

The number of people claiming unemployment benefits in the UK soared to 2.1 million in April, the first full month of the coronavirus lockdown. 

Around a quarter of the British workforce are receiving wage subsidies from the Treasury at a cost of £14bn per month, with 8.7 million jobs protected under the government’s job retention scheme. 

Furlough leave: common questions answered

The initiative is due to cease by the end of October, with a gradual phasing out starting from August. 

This means employers will have to start fully paying employees again, which could inevitably lead to a series of redundancies for businesses with cash flow problems caused by the pandemic. 

But even if your job is safe you’ll likely be affected financially in some way.

For instance pay growth may slow down, bonuses could disappear and workers who receive commission on their base salary are likely to be heavily affected. 

Furthermore over 10 million UK workers are enrolled into a defined contribution pension scheme, which sees a chunk of people’s savings invested in the stock market. Due to hefty market plunges, your savings will likely have taken a hit too. 

A similar story rings true for investors, who will have also seen a fall in value of their pots. 

It’s not all doom and gloom

However, not all is lost. If you’re a while away from retirement, your pension has time to recover. If you’re close to retirement you can consider delaying withdrawals. 

For investors the advice has remained the same throughout: invest for the long term, at least five years, don’t panic trade and diversify your investment portfolio to ensure some money is invested in safer assets.

The longer you leave money invested, the more time there is for the markets to recover. 

Meanwhile inflation is also expected to slow down; the inflation rate sank to 0.8% in April from 1.5% in March, and economists have warned it could fall even lower.

Such low inflation can be beneficial for the economy; it encourages consumers to buy goods and services, and should ease some strain on the cost of living. 

When and how will the economy heal?

The UK economy is on course for a slow rebound from coronavirus due to concerns over the hit to consumer demand. 

According to EY Item Club, it will take the UK economy three years to fully recover from the fallout of the pandemic. 

But this is just an estimate. Unfortunately, it’s still too early to tell when the economy will fully recover. There’s still a lot of uncertainty about the future of travel, work and worryingly, whether or not there will be a second wave of the virus.

However, we are starting to see some positive signs of recovery.

The number of new coronavirus cases hit its peak at around the end of April, and since then there’s been steady progress; the number of confirmed cases of Covid-19 has been steadily falling since lockdown began, and new daily cases in London are now close to zero.

Despite a period of uncertainty, plunging stock markets and high volumes of volatility, it seems financial markets are starting to recover slightly.

Business activity in China and the US – the two biggest economies in the world – has started to recover from low points during the pandemic. It is believed this has instilled a new wave of optimism across global markets. 

Signs of recovery

Hopes for a coronavirus vaccine have also instilled some investor confidence. Meanwhile UK energy firms, life insurers and aerospace-related stocks have experienced gains amid the gradual easing of lockdown restrictions.

Travel and leisure stocks have also risen after the government said it would review its quarantine procedures for international arrivals. 

For more information on how markets have been performing during the pandemic, see our guide on how to protect your pensions and investments amid stock market panic.

Ultimately until we know how and when the COVID-19 outbreak will end, the scale of the negative economic impact will be difficult to quantify.

While the jury is out on the degree of long-term scarring on the economy, it’s very likely we’ll be paying for this recession for many years to come. 

Are you confident the UK economy can make a speedy recovery? How long do you think it will take for it to heal?

Do you think the government is taking the right steps? Let me know in the comments.