United Kingdom and Channel Islands
The UK has suffered one of the sharpest contractions in economic output during the coronavirus lockdown among European countries. The government has reacted quickly and forcefully by introducing a number of stimulus measures, including a novel furlough scheme. Over the course of the scheme, the government paid wages for over 9 million people, over one-in-four workers, absorbing to a large degree the falls in income households would have otherwise experienced. The reopening of the economy over the summer was accompanied by a sharp bounce back in economic activity. More recently, however, the recovery has started to slow, as a second wave of coronavirus infections has required the re-introduction of increasingly tight restrictions. The outlook for the rest of 2020 remains, therefore, highly uncertain with risks firmly tilted to the downside, especially if unemployment rises strongly in the fourth quarter following the suspension of the Job Retention Scheme.
In 2021, the UK not only needs to secure the economic recovery from coronavirus, but it also has to establish a new trading relationship with the European Union, which it officially left on 31 January 2020. Following the end of the transition period on 31 December 2020, the UK’s exporters will have to be compliant with new customs regulations in order to trade with the EU’s internal market. In the short term, the additional administrative and compliance costs are expected to lead to a fall in exports to the EU and put UK manufacturers at a disadvantage.
The ongoing political and economic uncertainty since the 2016 referendum has led to a dearth of business investment in recent years. A clearer picture on the UK’s trading position both with the EU and the rest of the world could unleash a considerable volume of pent-up investments in coming years.
The government, meanwhile, has announced that notwithstanding the ongoing coronavirus stimulus measures, it intends to bring the deficit back down in the medium term. Given the substantial economic damage caused by the pandemic, the government’s longer-term aim to ‘level-up’ economically weaker regions, and ultra-low borrowing costs, we expect a much more gradual dialling back of public spending than seen after the financial crisis.