The pandemic has brought economic stagnation and will drive up unemployment rates, says Graeme Davies.
We all knew the figures for the UK economy would be bad when they came in for March and April, as the Covid-19 shutdown took hold. But the scale of the slowdown as detailed by Office for National Statistics was still jaw-dropping. The decline in GDP in April of 20.4 per cent was the biggest ever recorded and explains why the government is scrambling to revive economic activity over the summer.
It seems the Bank of England’s scenario of a 25 per cent contraction in GDP across the second quarter wasn’t so fanciful. The rolling three-month figure to the end of April of a 10.4 per cent reduction in GDP surpasses even the 2008 financial crisis and 1978–79’s ‘Winter of Discontent’.
Few have been immune. Some FM players will have benefited from the additional funding being ploughed into the NHS and the increased demand for hygiene and deep cleaning services from across the economy. But many FMs these days operate across diversified sectors, as this is thought to be prudent practice in normal times, as weakness in one sector can be offset by redeploying resources elsewhere. In April manufacturing fell by 20 per cent, construction output by 40 per cent, and the accommodation and food services sector by 88 per cent. The sector worst hit was air transport, which fell by 92.8 per cent. All of these use FM suppliers to some extent while those servicing offices look set to remain underemployed for months to come.
Those trading updates we have seen have been broad-brush and predictably downbeat, so the forthcoming results season for the UK’s main companies will be keenly scanned for more detail.
The scale of the collapse renders understandable the government’s bids to open up the economy sooner than the scientific community might like. Millions of people are on the government’s short-term payroll through the furlough scheme, so the sooner the economy’s wheels start grinding again, the better. But the tax take will be down on previous years and unemployment will spike as those coming off furlough find their jobs no longer exist.
What is certain is that this government’s economic plan has been turned on its head. The scale of government borrowing to keep the economy afloat means extreme measures are likely to be required to pay back this debt in the coming years, especially as another punishing round of austerity is unlikely to go down well with the electorate. Indeed we would see another rash of private sector involvement in providing public services as part of the solution to the government’s economic dire straits, which may benefit FMs once more, but first we need to get the economy up and running and sift through the rubble of this economic earthquake.
Graeme Davies writes for Investors Chronicle