The UK has been in lockdown since March 2020 as part of the measures to mitigate the impact of COVID-19 across British society. Countries around the world have adopted a variety of strategies with many across Europe following a similar stance. This strategy was put in place following the alarming figures coming out of China at the beginning of the year, giving rise to the fear that the highly contagious virus would have a devastating impact on global public health.
The economic impact of the societal-wide shutdown is severe. The Office for National Statistics (ONS) has recently released figures for April, the first full month during lockdown measures, showing that Gross Domestic Product (GDP) contracted by 20.4%. This brings the total GDP loss during lockdown to 25%, which still does not include any economic readings from May or June.
It is important to understand the scale of these drops in a historical context. A single month drop of 20.4% is more than three times the record fall in GDP, set in March this year. This is the largest single-month drop in the UK economy since records began and dwarfs any previous economic collapse experienced by over 10 times.
All areas of the economy have been affected, many severely. Overall productivity in the UK has declined by 20.3%, including measures like factory output, energy production, and mining. This is more than double than that suffered historically even in severe periods such as the miners strikes and Winter of Discontent in the 1970s. The biggest casualties are air transportation, which has seen a decline of 92.8% and accommodation and food services with 88%. Given the restrictions on travel and the closure of hotels, restaurants, and catering services, these figures are to be expected but make shocking reading, nonetheless.
We are now beginning to see some lockdown measures eased, with some high street shops reopening next week. Despite these steps, there are fears that we are entering a severe economic depression. The Bank of England estimates that total GDP contraction in the second quarter of 2020 could be 25%, signaling the deepest recession in the UK for over 300 years.
However, April is likely to represent the worst point of the crisis and economic activity could recover faster than in previous recessions. This is because households, jobs and businesses have been fairly well supported, so pent up consumer demand could drive higher economic activity.
This will also be affected by whether we see further increases in infections, prompting similar lockdowns again. It will clearly be a delicate balancing act between allowing economic activity to restart and the lifting of policies aimed at supporting workers and businesses.
The UK has been particularly affected by this crisis economically, with the Organisation for Economic Co-operation and Development (OECD) stating that the UK economy has contracted economically more than any other developed nation.
Fortunately, the UK has a very strong service sector, which has remained around 80% of its economic output during the crisis. This, combined with the financial powerhouse of the City of London, could be the catalyst that sees the UK economy bounce more sharply than some analysts are predicting.
Throughout the coronavirus pandemic, financial markets have proven to be particularly resilient, highlighting the fact that stock market valuations and the underlying economy are often not closely correlated.
Stock markets around the world plunged sharply in March when lockdowns were announced, but then rebounded sharply – pretty much in line with what we had predicted.
This week has seen further corrections in the markets as data is released, outlining the scale of economic damage being felt around the world. We expect this pattern to be repeated over the coming months, with continued volatility. This will be largely driven by investors digesting new information on a regular basis and being further driven by a combination of profit-taking, portfolio reallocations, and buying on market dips.
We are also in a US election year when it is quite common to see heightened market volatility. The death of George Floyd in the US has triggered protests from the Black Lives Matter group. In certain cities, this has led to riots with violence, looting, and civil unrest.
It is difficult to determine what impact these events are having on financial markets, but they could impede economic recovery and cause further social disruption, particularly in the US. With so many volatile factors at play, the wild ride of the first half of 2020 is far from over and many further twists and turns may occur before the year is out.
At Foresight Wealth Strategists, we have remained focused on analysing financial markets and our clients’ investments in a calm, rational and analytical manner. Whilst it can be easy to give in to panic and allow emotional responses to dominate, it is important during extreme events to maintain a focused long-term view on investment strategies and goals.
We remain optimistic about the mid-term valuations for financial markets. We expect to see growth in stock markets driven by a range of factors, including ultra-low interest rates, record levels of government stimulus, fiscal stimulus from central banks, and huge quantities of ultra-cheap oil. All these factors will aid in driving economic growth as we recover.
Additionally, cash and bond markets are delivering exceptionally low yields, with returns being negative in real terms across much of the fixed income space. Consequently, there is likely to be a continued move up the risk curve (predominantly into equities) to obtain the yield that investors require.
Our regular portfolio and market updates will provide you with the main output from our Investment Committee meetings and give you an understanding as to how we are positioning portfolios during fast-changing markets. During these unprecedented markets, it is important to remember that the biggest opportunities often abound during times of uncertainty.
If you have any queries about any aspect of your financial planning or investment portfolio then please do not hesitate to contact us.