United Kingdom: Anatomy of economy on lockdown life-support

Part One of this Five-part series of Insights into the UK economy and financial markets examines the devastating impact which the national lockdown – introduced on 23rd March – has had on domestic economic activity and the implications for the UK (and other major economies) going forward.

Records tumbled in April, for all the wrong reasons, with the GDP contraction during the 2008-2009 financial crisis a mere blip in comparison (see Figure 1).

Bank of England, retail sales and other monthly data for March-April reveal that an extremely risk-averse private sector facing acute uncertainty was building up cash reserves and shoring up balance sheets, not spending or investing.

Households were both deprived of the opportunity to spend and of purchasing power due to the slump in employment and earnings  – a theme we will explore in greater detail in Part Two.

After collapsing a staggering 20.4% mom in April, GDP likely fell further in May albeit at a far slower rate and will rise in June, in our view – a case of the “awful, bad and better” – the theme of Part Three.

Part four will look at the outlook for the economy, Sterling and rates market in the second half of 2020.

Finally, Part Five will explore the medium-term risk of Prime Minister Johnson’s government having to both slash spending and hike taxes to cut its deficit-to-GDP ratio to single-digits, despite its borrowing requirements being largely met by the Bank of England’s asset-purchase program.




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