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How might a COVID-19 recession affect the UK?

The coronavirus pandemic is expected to trigger a significantly deep recession. How could it affect your finances, and when might the economy recover?

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.

Read all the latest COVID-19 news and advice on our dedicated hub

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.

Phil says:
12 June 2020

It’s already hit my finances and those of many others I know. I was planning to retire this year but my investments have taken a real hit and and there’s no telling when things might recover, especially if we get hit with a second wave. Right now I can’t even get to see my financial adviser.

What has become apparent during the virus lockdown is the shortage of many products – PPE, food, electronics and general electrical goods are often too dependent on foreign supply.

We need more ring-fenced production in this country. We should be able to produce our own PPE and ramp up production when required. With the advances in horticulture why does most of our veg come from Spain? If finding workers is such a problem, encourage food production near Universities so students can earn as they learn.

With so many losing their jobs, more need to be created to enable the UK to be more self-sufficient in the future.

I agree. The aftermath of COVID coupled with our exit from the EU gives us an opportunity to consider our unbalanced economy. Whilst we should foster the service industries they are too significant a part. We need to work at developing the materially productive industries such as agriculture, horticulture, manufacturing not only for our home requirements but to boost exports and reduce imports.

I wonder how climate change will impact our ability to compete on crops currently bought in from warmer countries?

The coronavirus crisis has shown how much our service industries – retail, hospitality, leisure, travel, media, health, and personal services are exposed to the winds of fortune, so over-reliance on them has come at a high price in terms of job loss and trading opportunities. Our commercial landscape has gone through a seismic shift the like of which has not been seen outside wartime and might never revert, or at least, if it does, not as we know it. So it is imperative that we restore our manufacturing capacity and our self-sufficiency even at the cost of higher prices for the benefit of a more secure and prosperous future. With a home market of some 25 million households we should not be importing any domestic necessities.

We need 20,000 more police recruits, tens of thousands more in health and education , more in the military to populate the armaments on order, and a boost for house-building – properly managed I see no reason for prolonged unemployment.

In light of COVID-19, it is essential that the UK’s departure from the EU’s single market is postponed beyond the end of 2020, otherwise the economy will take another huge hit, because the UK’s imports and exports would both be severely impeded. But Dominic Cummings and Boris Johnson refuse to do this for political reasons, putting their party ahead of the economy. In the wake of this pandemic is not the time to be leaving the EU’s single market, if at all.

The reasons are not just political, NFH – that would imply a principled approach – they are dogmatic and intransigent. I became a convert to Brexit but circumstances alter cases and I can see the advantages of a pause before rushing headlong into the abyss.

The PM could at least ask his own Party if it still supports the “get it done” mantra; I believe there is a fair chance that it would prefer a sensible deal – based on reason and not on the calendar – although I remain concerned that the EU would just take a postponement as another reason to prevaricate. I am still convinced we should unshackle ourselves from the EU and will be better for it in the long run . . . just not at any price while we are in a deep recession.

As far as I am aware the whole of the EU is suffering from the aftermath of COVID and also in a severe recession. They are planning up to a € 1 trillion bail out via loans. Were we to remain in the EU I guess we would be contributing to that as well as financing our own recovery. Would it be selfish to suggest we should be looking after ourselves instead? Probably, but I would rather see us left free to manage our own recovery in our own way.

If we have products and services that are attractive to others then we should, eventually, trade our way with the world into a better position, unless spiteful barriers are put in our way.

Malcolm, I agree with you last paragraph.

But, isn’t the EU our most important market for many of these goods and services?

Derek P, yes, it is. I wonder how many EU businesses want to continue trading with us, and worry about the politics being played by the EU. Maybe we have to concentrate on other markets to make us less dependent upon the EU.

I wonder how well we really benefit from belonging. We are a net contributor to support other states, we suffer from their poor agricultural policy that primarily benefits our large landowners rather than farming, our fishing industry has suffered by giving open access to our traditional fishing grounds, their budget always seems in disarray, but I’m sure there are positives.

I believe being made to stand on our own feet, hopefully relying more on ourselves and less on imports, might be the benefit. Only time will tell.

Some companies have demonstrated remarkable versatility by switching to produce goods that are are currently in demand or providing a delivery service when they have not been able to trade in the normal way. They deserve to survive the present problems. Larger companies often don’t have all their eggs in one basket.

I think we must accept that there will be major changes to the world as we knew it. Some will need to change jobs and hopefully this will be catalysed by the measures planned by government. Loss of income, redundancy and mortgage arrears will be a problem for many and who knows what will happen to pensions and investments.

My parents’ generation lived through war. Living conditions and the economy improved with time. I see no reason why we should not be optimistic, but planning is necessary to ensure that if there was another pandemic we would be better prepared. As has been said many times, the lockdown has resulted in a significant reduction in air pollution. Can this be maintained?