The Impact of the Coronavirus Outbreak on the UK Economy

The impact of the COVID-19 outbreak is expected to see the UK economy contract by 2.6 percent in 2020, according to KPMG UK’s latest quarterly Economic Outlook. 

In a joint statement issued by the UK Treasury and the Bank of England on the 9th of April, 2020 said they had agreed to extend the use of overdraft facilities as a temporary measure to finance the economic disruption caused by the COVID-19 pandemic. The use of the “Ways and Means” facility echoes a similar move during the 2008 financial crisis.

The likelihood of a global recession is not a question anymore, it is a reality. What is yet to be determined is the duration and severity of this recession. A prolonged outbreak and lockdown could result in a more severe impact than the  2008-09 recession. Experts say that this pandemic could trigger a global slump bigger than than the Great Depression of the 1930s. 

Coronavirus can strike anyone, including the monarchs and the head of states. As of writing this blog, the UK has over 60,733 confirmed COVID-19 cases including Prince Charles, the Prince of Wales and the British Prime Minister Boris Johnson. The deadly virus has claimed over 7097 lives so far.

COVID-19 impact on the UK economy 

The UK economy was already experiencing an economic slowdown before the outbreak due to Brexit.  Also read: What Does Brexit Mean for the NRIs Sending Money to India?

The impact of the COVID-19 outbreak is expected to see the UK economy contract by 2.6 percent in 2020. The British economy, which relies extensively on tourism and manufacturing, which has been impacted heavily due to the pandemic.

Manufacturing Industry 

The COVID-19 pandemic is affecting both supply and demand sides to the global economy by shutting production and cutting consumption. For the UK, like most countries relying on China for materials and parts, they felt the disruptions in the supply chain way before the Coronavirus hit the country.

Before the Coronavirus outbreak hit the UK in full force, many leading businesses were facing major supply chain issues due to the lockdown in China. According to an analysis in Harvard Business Review, with over 50% of UK tool manufacturing being sourced from China, the impact on the manufacturing sector and the economy, in general, was expected to be depressed for months. Now, in the second phase, as Chinese factories are going back to production, the UK is on lockdown in an effort to contain the virus. The combined effect will be disastrous. 

Supply lead times will also have an impact. Shipping by sea to Europe including the UK takes 30 days on average. This implies that if Chinese manufacturing plants stopped manufacturing in the month of January, the last of their shipments would have arrived in the last week of February or early March. Just in time when the UK went on a complete lockdown due to the rapid spread of the virus. 

Tourism Industry 

The tourism industry currently accounts for around 10% of global GDP. As borders close, temporary lockdowns in place, social distancing as a norm, and WHO advising people to stay home, the tourism industry has seen a devastating decrease in revenue and demand. 

The World Travel and Tourism Council estimates that this pandemic could cut 50 million jobs worldwide in the travel and tourism industry. It might take almost a year for the industry to recover.

In the UK's domestic tourism industry, VisitBritain,  British Tourist Authority predicts that the tourism sector will lose approximately £11 billion in the summer months if the extensive lockdown measures continue until the fourth quarter. 

Unemployment

The UK government has received nearly a million applications for universal credit benefits in the past two weeks as the coronavirus pandemic has intensified. The Department for Work and Pensions reported 950,000 successful applications for the payment since 16th March 2020, up from around 100,000 in a normal two-week period.

Tax deadline extension 

Rishi Sunak, Chancellor of the Exchequer unveiled a £330 billion bailout to save the British economy from the coronavirus crisis.  Here are some key tax-related announcements: 

• UK VAT paying businesses can apply to defer Valued Added Tax (VAT) payments to the end of the tax year, on 31st March 2021.
• There is a 12-month business rates holiday for all retail, hospitality, and leisure businesses in England and Scotland for the 2020 to 2021 tax year. This relief applies for estate agents, lettings agencies, and bingo halls that have been required to close due to social distancing norms. 
• Income tax payments that are due on 31 July 2020 may be deferred until 31 January 2021, without penalties or interest for the late payment of income tax. This relief is applicable for professional services firms and fund management firms, and the deferment is optional.

Immigrants and the economic impact of Coronavirus 

In a study IPPR, there are three primary effects to consider for the migrant communities

• The industry profile and the level of health and economic risk in that industry. In the UK, the Hospitality industry, which is the most exposed and impacted sector has a large population of migrant workers.
• The employment status and how that affects their ability to access government support.
• The housing tenure and accommodation conditions of migrant households. Migrants are less likely to own their own homes.  61 percent of EU migrants and 50 percent of non-EU migrants, compared to 29 percent of the UK born.

It is also important to note that migrants make a large contribution to the economy. India in the UK: The Diaspora Effect report, found that the Indian diaspora alone pays over 1 Billion GBP in Corporate Tax.

Health and social sectors that are of particular importance in the context of the current crisis are notably concentrated by the non-EU migrant workers. In total, around 850,000 migrants work in health and social care, which is around one in five of the total workforce.

Visa Extension 

The announcement of automatic visa extension for a year by UK Home Secretary Priti Patel will impact around 2,800 migrant healthcare workers including doctors, nurses, and paramedics employed by the National Health Service (NHS) as the UK fights the coronavirus pandemic. The applies to visas were due to expire before October 1 of 2020.

Economic forecast for the UK economy

• Rating agency Fitch downgraded the United Kingdom's Long-Term Issuer Default Ratings (IDRs) to 'AA-'from 'AA'. The downgrade reflects the weakening of the UK's public finances caused by the impact of the COVID-19 outbreak and the looming uncertainty regarding the post-Brexit UK-EU trade deal

• British Chamber of Commerce (BCC) expectations for export growth have been downgraded to 0.1% in 2020 (from 1.1%) and 0.9% in 2021 (from 1.4%), before growth of 1.4% in 2022

• The forecast for household consumption growth been downgraded to 0.9% for 2020 (from 1.3%), 1.4% for 2021 (from 1.5%), before growth of 1.5% in 2022

• UK GDP growth forecast has been lowered to 0.8% for 2020, followed by a growth of 1.4% in 2021 and 1.6% in 2022

Several industries have been adversely impacted due to the coronavirus outbreak globally. If the virus remains to be potent for a long time, it is feared that the global economy may slip into a deeper recession.

According to McKinsey & Company’s report, the effectiveness of the public health response in controlling the spread and the human impact of COVID-19 will determine the recovery of the global economy. Failure of public health interventions will prolong a downturn further to a potential banking crisis, widespread bankruptcies, and credit defaults without economic recovery.

As uncertainties surround this coronavirus  pandemic, it is expected that the economy will remain flat in the second half of the year with a strong recovery in the first half of 2021. This is part of a developing story, follow us on Twitter for more updates @CompareRemit.