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Economic Overview – June 2020
When I wrote CB’s last review back in January, I opened with “here in the UK we find ourselves, post- election, in a more certain position than at any time over the last 3 years”. What an intervening period!
I chose not to write a March review, as we were moving into lockdown, and probably had more uncertainty than since the Financial crisis in 2008/9. I feel it now appropriate to again put pen to paper, but with all the caveats possible . . .
Interest Rates and Inflation
The Bank of England Monetary Policy Committee (MPC) made emergency interest rate cuts on 11th & 19th March to try and reduce the economic impact of the coronavirus outbreak, cutting from 0.75% to 0.25% initially, and then further to 0.1%, the lowest level on record. At the time, the moves were unexpected, and the MPC stressed that it would be unlikely to cut rates further, as it would seek to keep rates above zero. How long we can expect to see base rate at this level is difficult to predict, but it is hard to see any change for some time.
Consumer price inflation dropped to 0.5% year-on-year in May, from 0.8% in the previous month and in line with market expectations. That was the lowest rate since June 2016, as the coronavirus pandemic hit demand and oil prices. There was a sharp decline in prices for transport, in particular motor fuels, and a slowdown in cost for a variety of recreational and cultural goods, restaurants and hotels. Additional downward pressure came from housing and utilities. At the same time, rising prices for food and non-alcoholic drinks resulted in a partially offsetting upward contribution to change.
Gross Domestic Product (GDP) fell by 10.4% in the three months to April, as government restrictions on movement dramatically reduced economic activity. To give some context here, throughout the 2008 Recession, GDP shrunk by no more than 2.1% in a single quarter. This shows the direct effects of the coronavirus pandemic and the government measures taken to reduce transmission of the virus.
The most significant was the introduction of restrictions in movement across the UK, which began on 23 March 2020. GDP fell by 20.4% in April 2020, the biggest the UK has ever seen, more than three times larger than March and almost ten times larger than the steepest pre-covid-19 fall. In April the economy was around 25% smaller than in February.
Virtually all areas of the economy were hit, with pubs, education, health and car sales all giving the biggest contributions to this historic fall. Manufacturing and construction also saw significant falls, with manufacture of cars and housebuilding particularly badly affected.
The UK’s trade with the rest of the world was also affected by the pandemic, with large falls in both the import and export of cars, fuels, works of art and clothing.
UK surveyors & Estate Agents are predicting falls in house prices in the next few months as the economy deteriorates and they expect demand to shift towards properties with access to outdoor space. Savills have predicted a fall of 7.5% over the next 12 months, however with a significant bounce after that – while the UK is forecast to see an average 5 per cent house price gain next year. On a regional level, property inflation is tipped to be at its highest in the North West, at 8.5%, but lowest in the North East, West Midlands and Wales at 2%.
Over five years, Savills suggests a 15.1% national average rise in house prices, ranging from the North West’s 24.1% gain to London’s more modest 4% rise.
Agents have also reported a release of pent-up demand since the reopening of the housing market.
More than 80% of surveyors said there will be increased demand for properties with a garden and 74% feel there will be a shift in demand towards homes near green spaces. In contrast, most respondents said properties located in highly urban areas will be less enticing in the future and the vast majority of surveyors expected a fall in the appeal of tower blocks.
The UK unemployment rate held steady at 3.9% in the three months to April, but separate figures from the ONS show that the number of workers on UK payrolls dropped by more than 600,000 between March and May.
Meanwhile, the number of people claiming work-related benefits jumped 23% in May to hit 2.8 million. This figure doesn’t include everyone who is out of work, since not all can claim assistance, but it does provide a snapshot. It also captures some low-income workers.
These early estimates hint at the impact of lockdown measures in the UK, which has seen more than nine million workers furloughed under the government’s job retention scheme. Some economists say the full impact on the jobs market won’t be felt until the furlough scheme ends in October.
Young workers seem to have been most impacted by lockdown measures so far. 9% of those aged between 18 and 24 have lost their jobs altogether, the highest of any age group. Shutdown sectors employed nearly one-third of all workers under the age of 25, or 25% of young men and 36% of young women. That compares to just one in eight workers aged 25 and over.