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Pound Falls as the UK Economy Crashes

Pound Falls as the UK Economy Crashes

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The British economy has contracted this year ten times more than at the height of the financial crisis in 2008 according to the latest data by the Office for National Statistics (ONS).

From January to March, the economy fell by 2.2%. In all of 2008, it has not fallen by more than that, the ONS says.

Up to April however it fell by 10.8%, and despite a slight growth of 1.8% in May, the economy was 24.5% smaller in that month than in February 2020.

That means about half a trillion has been wiped out of the British economy so far, with the Office for Budget Responsibility sounding the alarm bell. They say:

“The UK is on track to record the largest decline in annual GDP for 300 years, with output falling by more than 10 per cent in 2020 in all three scenarios.

This delivers an unprecedented peacetime rise in borrowing this year to between 13 and 21 per cent of GDP, lifting debt above 100 per cent of GDP in all but the upside scenario.”

The question of course is whether this will be a blip, with the downside limited to that Q2 primarily in the period between March to May.

The slight growth in May is encouraging, with these being preliminary data which most likely will be revised.

The United Kingdom was still in a lockdown in May, but it was beginning to ease. So if we see improvement in June, with the data to be released next month, then overall it might not be as bad as the worst case scenario of continued contraction.

The lockdown generally ended on the 1st of July, but still people are working from home, with that potentially having knock on effects as they may not eat out as much as they would have done if they had to go to the office.

There appears to be a lagging effect moreover in numerous industries. ‘Luxury’ parts of budgets, like advertising or marketing, may be slower to see a bounce.

Likewise services such as the legal industry probably felt the effects later, but also will be slower to feel any recovery.

The creative industries remain still somewhat restricted, as does tourism which has seen the hotel industry plunge by 70% up to May.

The government has tried to cushion, borrowing 20%, but the economy contracted by 25%. That means they are missing many spots, especially for the self-employed, the creative industries and other less traditional 9-5 jobs.

In all, about 5% of the economy has received no support based on our own estimate due to this discrepancy between borrowing and contraction.

Nonetheless if it comes to a 10% contraction for the whole year, that’s what was estimated so it probably has generally been priced in by now.

But just how much that is the case may well depend on the outlook which is not too clear it is optimistic right now as so far there has been no global coordination on the economy with the elected generally focusing on their own country instead of a wholistic response to build global infrastructure as well as nation specific infrastructure.

Fibre optic cables, train lines, motorways, upgrading current infrastructure, upping research and development budgets, digitization of the civil service in particular, but the economy in general.

We all will have to pay for this of course, but now is the time to build them and now is the time to have a more holistic outlook rather than just ones own backyard as clearly we have seen what happens somewhere, affects us all everywhere.

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