By Jonathan Cable
LONDON (Reuters) – Britain is in the midst of its deepest downturn in peacetime as the coronavirus pandemic wreaks havoc on the economy, a Reuters poll of economists found, while an expected recovery in the second half is already in jeopardy.
The coronavirus has swept across the world, infecting more than 2.5 million people and killing over 177,000, forcing governments to impose strict lockdowns and shutter industries while pushing central banks to unleash unparalleled stimulus.
Britain closed up shop late last month, causing vast swathes of the economy to cease activity, and according to the median forecast in a Reuters April 15-22 poll of nearly 80 economists, gross domestic product will contract 13.1% this quarter. That would be the biggest quarterly drop since World War Two.
As in other Reuters economic polls in recent weeks, those forecasts were hacked from something previously more optimistic – but still dire. Only last month, the median forecast was for a modest 0.3% contraction this quarter.
“The coronavirus crisis is delivering an unprecedented hit to GDP that the economy will take many years to recover from,” said Paul Dales at Capital Economics.
The economy was expected to grow 6.3% next quarter and 3.3% in the final three months of this year, but more than 90% of economists who replied to an additional question said the risks to their second-half forecasts were to the downside.
“If COVID-19 returns with equal, or greater vigour, such that the initial drop in output sticks for several quarters, then it is hard to see a severe financial crisis being avoided,” said Andrew Brigden, chief economist at Fathom.
In the worst case, the economy will contract 15.0% this quarter, the median showed, and 11.4% across 2020. The base case was for a 5.0% contraction in 2020 and growth of 4.0% next year.
Earlier this month, the International Monetary Fund forecast the British economy would contract 6.5% this year and grow 4.0% next year.
The most pessimistic base case in the Reuters poll was for a 35% contraction this quarter and for the worst case 40%. Respondents gave a median 100% chance of a recession within a year.
Last week, the Office for Budget Responsibility warned Britain’s economy might shrink 13% this year because of the coronavirus shutdown, its worst recession in three centuries, and contract 35% this quarter.
A purchasing managers’ index due to be published later on Thursday, the first key indicator for April, is expected to show activity contracted at the fastest rate by far this month since the survey began over 20 years ago.
Half of the 22 economists who responded to another extra question said the recovery would be U-shaped. Four said it would be V-shaped, four said tick-shaped while three said W-shaped.
“The pace of the recovery will be muted by demand constraints as consumers and firms will not come unscathed out of these lockdowns,” said Stefan Koopman at Rabobank.
The centrepiece of the British government’s plans to protect the economy is its pledge to pay 80% of wages if staff are put on leave rather than let go. It has also launched a 330 billion- pound lifeline of loan guarantees to businesses.
For its part, the Bank of England slashed Bank Rate to a record low of 0.10%, restarted its quantitative-easing programme and agreed to temporarily lend the government money if needed to help finance its massive COVID-19 spending plans.
“The Bank of England has made the government’s transaction account limitless until (so far) the end of the year, which means that the UK government can – literally – print its own money without first issuing debt and then wait for the central bank to buy it in the secondary market,” said Erik Nielsen at UniCredit.
But despite the huge amounts of fiscal and monetary stimulus, the Bank’s chief economist, Andy Haldane, warned on Tuesday the economy was not certain to recover rapidly once coronavirus restrictions were lifted, because people may be reluctant to spend or socialise as they did before.
When asked if the central bank was done with announcing new policy measures, over 60% of respondents to an extra question said no, most likely by increasing its quantitative easing programme.
The Bank Rate, however, was expected to remain at 0.10% at least until the end of 2021.
(Polling by Manjul Paul and Sumanto Mondal)