The economic impact of Coronavirus in the UK

29 Jun 2020

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In common with many countries around the world, the UK has suffered a major economic blow from Covid-19 and the resulting restrictions imposed on individuals and businesses.

The impact has been felt most strongly by those sectors of the economy where physical contact is difficult to avoid, for example the hospitality, leisure and retail sectors. The Office for National Statistics recently reported that 81% of businesses in the accommodation and food service industries have ceased to trade during the pandemic. Whilst most professional services businesses have continued to operate, there is likely to have been a decline in activity levels. Conversely, information technology and many online businesses have experienced surging demand, as the nation at large has stayed at home during lockdown.

To help businesses experiencing reduced demand to manage cash flow, and to limit the risk of mass unemployment, the UK government has introduced the Coronavirus Job Retention Scheme (CJRS), under which it pays 80% of the wages of employees who are temporarily furloughed, up to a maximum of £2,500 per month. By early May, over 7 million employees were covered by this scheme, reducing cash outflows for around two thirds of all employers in the UK. The scheme will run (albeit with a larger financial contribution from employers after July) until the end of October 2020.

The CJRS is part of a suite of measures aiming to limit the economic impact of the virus, including various government loan schemes under which £14 billion has been lent as of 12 May.

The enormous cost of the various measures is, as yet, unquantified, but according to some estimates could range as high as £300 billion in the current fiscal year; equivalent to 15% of GDP. Borrowing on this scale has not previously been seen outside of wartime. It is likely to be accompanied by a sharp contraction in overall economic output, although the consensus view is that there should also be a quick recovery in activity levels once the pandemic subsides and the economy fully reopens. However, certain sectors may fare better than others, with the aviation and hospitality industries expected to face long-term pain.

The UN has forecast a 30%-40% global contraction in flows of foreign direct investment, which is comparable to the impact of the 2009 global recession. However, the significant support packages offered by the UK government are designed to keep businesses active and primed to resume normal trading when the pandemic passes. Potential investors in the UK are no doubt monitoring growth forecasts with interest.

With volatile equity markets, countries around the world, including the UK, have implemented new measures to restrict takeovers by overseas companies. These may limit larger international corporate transactions for the short-term.

More generally, the attractiveness of the UK to potential overseas investors will depend on the industry they are seeking to invest in and the ability of the country to recover from the expected short-term economic contraction, as well as the outcome of trade talks with the European Union. In the absence of any agreed extension of the Brexit transition period, these will need to be concluded before 31 December 2020.