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Economic update: Evidence of a recession arrives

The ongoing coronavirus pandemic is continuing to have a serious impact on the economy. However, as official statistics tend to take some time be released, most of the data is yet to show the scale of this impact.

This doesn’t mean that we have no way of seeing the current state of the economy. The analysis below is based on such data as we can see in official statistics, some lesser-used (but more timely) data, and projections from some of the institutions most involved in the economy.

Unemployment to rise as businesses close

The latest figures from 21 April seem to show the labour market in good health, with the employment rate at a record high. However, as we explained in a recent briefing, this is about to change rapidly. In a survey of businesses conducted by the Office for National Statistics (ONS), an average 21% of the workforce in businesses that continue to trade had been furloughed between 23 March and 5 April. 41% of businesses are also making redundancies.

Although the official unemployment figures have yet to show this, there are signs they may do before long. In particular, Universal Credit declarations increased sharply towards the end of March. The number of declarations in the six weeks to 12 April 2020 was almost five times higher than in the equivalent period last year.

Even with these cuts to staffing, many businesses are likely to go under. Analysis from the Enterprise Research Centre shows that the number of firms that went out of business in March was 70% higher than a year ago. The number of new firms established is down by 23%. Not all of this change will have been caused by the pandemic, but the trend seems to be clear. 

The latest IHS Markit Purchasing Managers’ Index figures also show sharp reductions in business activity, with both services and manufacturing experiencing the fastest decline since comparable records began two decades ago.

Inflation drops back as retail and oil prices fall

With the country in lockdown, retail sales volumes have dropped rapidly. Figures for March show the largest monthly fall (5.1%) since records began. However, the proportion of purchases taking place online grew to its highest ever level, as customers stayed home and switched to online shopping.

Consumer confidence has declined sharply, with market research institute GfK’s latest report showing that its Consumer Confidence Index dropped by 25 points between March and April. The last time it fell this steeply was during the 2008 financial crisis.

Oil prices have also fallen. This is due to reduced demand during the coronavirus pandemic and a price war among producers. While Brent crude prices, the European benchmark, have not entered negative territory, as they briefly did in the US, they are still lower than they have been in two decades.

In recent months the CPI inflation rate had been heading back upwards towards the Bank of England’s 2% target. However, it has now fallen for two months in a row. The most recent decrease in March (down from 1.7% in February to 1.5%) is mostly due to the factors mentioned above. Clothing and footwear retailers put more of their products on sale in an attempt to boost flagging sales, while the rapidly falling oil prices have led to lower costs in transportation.

A shrinking economy

On 14 April, the Office for Budget Responsibility (OBR) produced a ‘reference scenario,’ looking at the possible impact of coronavirus on the public finances. 

The OBR was careful not to call this a ‘forecast’; it was instead positioned as a possible illustrative ‘scenario’ to form a baseline for other work. Nevertheless, it provides a realistic picture of how the economy might look over the next few months.

The OBR’s scenario shows the economy shrinking by about 35% in the second quarter of this year. It assumes there will be no lasting damage to the economy, so this decrease is then followed by a fairly quick rebound. This would result in public borrowing (also known as the deficit) increasing sharply in 2020/21, from its current level of around 2% of GDP to 14%. This would be higher than the level of borrowing during the financial crisis. In fact, it would be higher than at any time since the end of the Second World War.

Andrew Bailey, the Governor of the Bank of England, said this scenario is plausible. However, he also warned there could be longer-term scarring to the economy, caused by businesses failing and higher unemployment.

Further reading

The Library has looked further into the possible impact of coronavirus on the economy in its briefing Coronavirus: Effect on the economy and public finances, and we continue to update our briefing on the latest economic data.

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