Coronavirus is pushing the UK to the brink of recession according to Goldman Sachs, a leading global investment banking, securities and investment management firm. The American firm is predicting the UK’s economy to shrink by -0.2 by the end of March because of coronavirus. This will be the second time the country’s economy will be registering negative growth in two consecutive quarters.
What Defines a Recession?
Technically recession is described as two consecutive negative growths. Therefore if Goldman Sachs’ prediction is right, then UK is likely to descend in recession unless concrete measures are introduced and implemented.
According to the bank’s analysts, the UK is highly vulnerable to global activity such as terrorism and epidemics . Tourism is a major sector and with the coronavirus spreading steadily, the repercussion on the economy will be significant.
Major tourist hotspots are already reporting a decrease in the number of visitors as cases of coronavirus rise. Places such as Oxford Street which are normally bustling with shoppers are almost empty, and tubes and airports are operating at minimum capacity.
‘The Virus Outbreak is Expected to Push the UK Economy to the Edge of Recession’
Last week, the outgoing Governor of the Bank of England Mark Carney said the Bank was coordinating with the Treasury to make sure British businesses are protected from the economic impact of coronavirus.
In advising the Bank of England, Goldman Sachs’s economist had suggested an easing policy which involves the central banks buying predetermined amounts of government bonds or other financial assets in order to pump money directly into the economy in order to encourage lending and investment.
“The virus outbreak is expected to push the UK economy to the edge of recession, the hurdle for action is low and the [rate setting ] Monetary Policy Committee (MPC) has sufficient policy space to join other major central banks in easing policy,” said the economist.
Will the Bank of England Follow the Fed’s Lead?
The US Federal Reserve had already began implementing an easing policy to combat the impact of coronavirus by introducing interest rate cuts in February. Its aim is to push interests rates to zero by April, and to begin issuing forward guidance to show “commitment to low rates.”
Last week, however, the Governor of the Bank of England refused to comment on whether he could carry out similar measures. He said the Bank’s Monetary policy committee (MPC ) “is assessing the economic impacts and considering the policy implications of various possible scenarios.”
“We are also coordinating with the Treasury to ensure that any initiatives are complementary and that they will collectively have maximum impact consistent with our independent responsibilities,” he said at University College London.
However a few days later, he hurriedly convened a press conference to announce emergency measures taken in response of the potential impact coronavirus could have on the economy. The interest rates were reduced from 0.75% to 0.25%. This is set to reduce borrowing costs to the lowest in history.
How Central Banks Respond to Potential Recessions
Reducing short term interests rates to encourage spending has always been favored by Central Banks in responding to threats of deflation and recession.
The interest rate cuts were agreed at an emergency meeting of the Bank’s Monetary Policy Committee held on Tuesday this week. “It forms part of a comprehensive and timely package of measures to help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19,” the Bank said. “These measures will help to keep firms in businesses and people in jobs and help prevent a temporary disruption from causing longer lasting economic harm.”
Among other measures announced include A new $129bn funding scheme aimed at maintaining bank and building society lending to small and medium sized businesses, and cutting the counter cyclical buffer to enable banks to access £190bn they can lend to people and businesses. A directive has also been issued to lenders not to hike dividends and bonuses on the aforementioned money.
Hours later Chancellor Rishi Sunak unveiled additional measures to support UK’s economy through the coronavirus outbreak. In announcing the budget, he said the virus will have a significant impact on the UK economy but added that “it will be temporary.”
Among the key policies include the abolition of business rates for small businesses for one year. “Over the next twelve months , nearly half of all business properties in England will not pay a penny of business rates,” Sunak said. He also announced a coronavirus business interruption loan scheme which will enable banks to lend loans of up to £1.2 m to small and medium sized businesses.
There will also be support for the self employed and those in an unstable employment. The minimum income floor in universal credit will be removed and a £500m hardship fund created for assistance to the needy by the local authorities.“Taken together, the extraordinary measures I have set out today represent £7bn to support the self -employed businesses and vulnerable people,” the Chancellor summarized.
While many have agreed with the measures taken, others have accused the Chancellor of spending like a drunkard. However the Chancellor has insisted that these are just temporary measures meant to cushion the economy from the impacts of the Coronavirus.
Despite the fear of UK descending into economic meltdown, the Governor of the Bank of England has ruled out a major recession similar to that of 2008, saying “There is no reason for this shock to turn into the experience of 2008, a virtual lost decade in a number of economies, if we handle this well.”