If you had read economic forecasts in January, the consensus was that 2020 was going to be a good year. Economic growth, unemployment and living standards were predicted to improve and shareholders were expecting high share prices as profits increased.
Things have changed in a way that no one could have expected. Data suggests that, in March, which only included one week of the lockdown, we had a 5.8% GDP drop, the fastest monthly economic contraction ever recorded, causing a 2% contraction overall in the first quarter and there are forecasts that, in Quarter 2, GDP will fall by 30%. If these predictions are correct, the world will be looking at the largest decline in economic activity since at least the 1920s and probably longer.
So what is likely to happen next? There is discussion about whether our current recession is likely to be V, U, W or L shaped. V is what the government is hoping for – a sharp decline followed by a sharp recovery; U is a sharp decline with a long period of low activity followed by a recovery, W is the sharp decline followed by a series of small recoveries and declines until an eventual recovery and, the worst scenario is L – the sharp decline followed by no recovery in the immediate future. Predicting the likely outcome is not helped by a lack of data since much macroeconomic data is based on surveys which are likely to be inaccurate, especially in the current situation where so many businesses are only slowly reactivating themselves.
There is also much discussion about likely short and long-term changes as the UK moves out of lockdown. In the short term what will happen to interest rates is unknown. Central banks have reduced interest rates both to reduce the cost of the current government borrowing and to keep their economies buoyant but there is the danger that if investors lose confidence in an economy, it will be necessary to increase interest rates to compensate for greater risk. What will happen to inflation is also uncertain. Governments have injected billions into their economies and, given that supply is limited, what will happen when relaxations are further reduced and more shops open is unknown. Another influence on inflation will be what happens to the exchange rate. Again, confidence is crucial since, if foreign investors lose confidence in the UK, then sterling will fall, increasing the cost of imports.
There are also several unknown long-term factors. Will the trend of working from home continue, possibly on a smaller scale (Twitter has decided to give its employees the opportunity to do this)? Although this is not possible for many workers, even if some in major cities worked a day or two from home, it might be enough to reduce congestion and pollution. Similarly, if more people are working from home, might they be encouraged to move further away from where they work and will companies down-size their offices and therefore what will happen to city property prices.
What will happen to business travel as we have got more used to on-line conferencing?
What will happen to on-line shopping? Will it drop back to previous levels or is the decline in physical shopping and the rise of on-line shopping going to be permanent?
Another long-term question is what will happen to globalisation as businesses discover problems with having long supply chains which can be disrupted and governments are seeing the dangers of relying on imports of such things as PPE as domestic manufacturing capacity has declined?
Finally, what will the crisis do to our views of the value of key workers and government spending in key areas? Care workers and nurses are relatively low paid and the crisis has revealed the impact of a decade of austerity on their activities.