UK economy headed for record contraction as coronavirus has heavy near-term impact

… and no defined path forward …

Not only is the current state of the economy difficult to discern but the path forward is even harder to forecast. As the EY ITEM Club identifies, 44% of consumer spending — the major engine of UK growth over the last couple of decades — is at risk of either being delayed or lost completely. Until we have clarity on the pace and level of the removal of the lockdown restrictions, forecasting the scale of the shock and the pace of recovery will remain very difficult.

The discussion around the future path of the economy has centred around defining scenarios with V, U and L the most common stylised versions, describing different lengths of slowdown and alternative paces of recovery. The initial consensus was that a V-shaped recovery was most likely but without either a vaccine or any definitive view on the possibility of using drugs developed for other purposes to mitigate symptoms, a rapid recovery looks increasingly unlikely and a U-shaped, slower recovery with possible shifts back into lockdown is now the scenario I am seeing used most widely.

… mean new thinking is required, now …

In this highly uncertain environment, businesses need to think differently about how they plan. Scenario analysis is the best technique to allow companies to test the resilience of their operations and finances against a range of plausible shocks. This analysis should be designed to reflect the scale of each shock, with the reboot reflecting the approach taken to the relaxation of the lockdown, and the likely future state and how close to historic trend growth the economy recovers to, and in what time frame.

The UK government has responded to the crisis at scale providing support for business, employees, the self-employed and charities in a series of initiatives designed to protect the economy and preserve capability for the upturn. Rightly, constraints that have been imposed on public spending and borrowing have been relaxed. However, this may only be the start. The longer and deeper the hit to the economy is, the greater the role the Government will need to play in future. In my view, it is inevitable that the economic support measures will need to be expanded beyond the initial few months currently proposed and that this will have to be followed by stimulus programmes to restore economic growth to pre-crisis levels. We will have to get used to higher levels of public spending and debt for a sustained period.

… and into the future

I appreciate how difficult it is to look beyond the immediate challenges, but it seems very likely to me that coronavirus will amplify the megatrends we have already seen emerging in recent times. The moves towards deglobalisation, more rapid introduction of technology and the need to address the challenges of ageing populations are likely to become more significant issues for business and governments alike. Perhaps the most significant developments may be in policies to address the climate emergency. On one hand, the fall in oil prices and the challenging economic circumstances could combine to slow momentum towards reshaping the economy to protect the climate. On the other hand, the experience of home working and reduced travelling and the clear impact it has had on the environment might accelerate moves to decarbonise the economy, especially if governments perceive that policy could be used to provide stimulus to activity.

These are unprecedented times. Businesses need to prepare themselves to manage across multiple scenarios and for continuing change for several years into the future. And there is still the small matter of adjusting to life after Brexit.