Skip to main content

UK MACRO-ECONOMIC FORECAST UPDATE

Our friends at Oxford Economics (OE) have been busy updating their forecasts and over the next few weeks this will gradually be rolled out to their clients.  Next week there will be some details of the implications for industries around the world and shortly after Easter we will have the new forecasts for the machine tool and (UK only) cutting tool markets.  This week saw a presentation on the UK economy - this included a regional outlook which we have left in the slides (see below for how to get hold of these), although these comments will focus mainly on the UK macro-economic forecast.

In assessing the impact on the UK economy of the virus, the “reasonable worst case” scenario assumes that 20% or workers would be sick or not able to work normally, exacerbated by the impact of school closures, especially on single-parent families.  The impact on consumer spending will vary with things like restaurants and hotels most exposed and areas such as utilities and food & drink retail less so.  So while there will be massive negatives on GDP, there are also some off-sets and support from fiscal and monetary policy will ease the downturn.

Clearly a “managed recession” is the best approach on public health grounds and preserving employment is the most important priority to ensure that spending and demand can recover quickly when the crisis has passed.  Therefore, support has, at least initially, been channelled through the corporate sector to prevent a spiral of bankruptcies and job losses and it is easier to support payrolls than to do this via social security systems which would probably involve new systems - hence the controversy over the lack of support for the self-employed.

As a result, public sector borrowing will reach the sort of levels last seen in the financial crisis, although it is going into other parts of the economy this time (not the Banking sector), so the impact will be different.  Lowering of interest rates will also help and even if the jobs support mechanisms only last for 3 months (because the health crisis has passed), it is likely to be 2021 at least before these are raised from their record low levels.

As a result, GDP is likely to contract significantly in the 2nd quarter of 2020 (with some effect in Q1, although that only really came in March).  This is a bigger fall than in the financial crisis and more like the events of 1974 when we had the 3-day week.  However, the impact of Covid-19 is expected to be short-lived and a strong rebound is expected for the economy as a whole once activity returns to normal.

There are 4 main risks and questions around this latest forecast:

  1. How long with the crisis last and will there be further waves?
  2. Could more draconian measures be needed to halt the spread?
  3. Has enough been done to limit the spike in unemployment?
  4. Will the crisis lead lasting changes in consumer behaviour (and from a manufacturing perspective, on the behaviour of businesses - have we all discovered the joys of tele-conferencing that could lead to a permanent reduction in travel)?

Historical evidence from short recessions and previous pandemics suggests that most activity is postponed rather than lost, although the sectoral balance in this does vary.  Natural disasters do not lead to depressions and the boost from lower oil prices and the various economic stimuli will support the resumption of activity.  There may be a need for more conventional boosts to the economy in the medium-term depending on how much uncertainty and lack of confidence persists.

The slide pack from this presentation is available in the members area of the MTA web-site at https://www.mta.org.uk/members-area/mta-forecast-documents;  if you don’t have your login details or are struggling to get the download to work, please e-mail Geoff Noon (gnoon@mta.org.uk) and we will send you the file.