Covid-19 – What to make of the economic outlook for UK

Tuesday, 26 May 2020

Economic forecasts regarding the size and shape of the recession in the UK, triggered by Covid-19 vary, but all agree it will be the biggest we have seen since the 1940’s. The reason why this is so important for farmers, growers and processors is that as the recession bites, unemployment will rise and incomes will fall. Consumers will have less money to spend which will impact on the type of food we buy and where we buy it.

Forecasts range from the Office of Budgetary Responsibility’s estimate that Q2 will see a 35% drop in GDP, followed by a swift recovery, giving a V-shaped recession, to The Economist Intelligence Unit predicting a 4.7% reduction in GDP for 2020 as a whole, and a slower recovery in 2021.

Whoever is right, it is clear that the UK is facing the biggest recession seen since GDP was first recorded back in the 1940’s.

One thing that economists do agree on, is the longer the recession lasts, the greater will be the ‘hysteresis’ or scarring to the UK economy. This scarring consists of the longer lasting effects on business, consumers, workers and the wider economy, and prevents a swift return to pre-Covid levels of activity.

For instance, at the beginning of the crisis, it was envisaged that businesses forced to close during lockdown, would be supported by the government’s fiscal measures during lockdown, and simply re-open when lockdown was lifted. What has transpired though, is that first, even though the government has committed over £40bn in its economic support package, many businesses have been forced to close permanently and make staff redundant rather than furlough them for a swift bounce back. This is evidenced by the rise in claimants for Universal Credit. The latest figures show that, as of 9 April, a total of 4.2 million people were in receipt of universal credit. This was a rise of 1.2 million people in a single month.

In addition, those businesses that are intending to reopen are now recognising that operating at pre-Covid capacity whilst still observing social distancing will be extremely challenging, with the majority having to operate at reduced capacity or restructure their businesses.

One of the sectors most affected is food service. Latest figures (May 2020) from AHDB show that only 26% of food outlets were open. Just as significantly, these outlets were operating at below 100% capacity, offering take-away and deliveries but no dining in option. The latest guidance from government states that the earliest these ‘high risk’ businesses could reopen is July, and this date is dependent on whether the gradual relaxation of lockdown in the government’s plan is successful, and a further spike in infections is avoided. This reduction in businesses for food service has had a knock on effect on suppliers, processors and farmers.

So, even if the gradual relaxation of lockdown goes smoothly, it is unlikely that businesses in many sectors will be operating at full capacity in the near future.

This scarring means the recession may be prolonged and U shaped, rather than the V-shape predicted by the OBR. In addition, there is, of course, the risk of lockdown being reimposed, leading to further downturns in the economy and deeper scarring of the economy.

The economic road ahead is uncertain. Some businesses will not survive lockdown, and those that do may have an extended period of time operating at below full capacity. Many may never operate in the same way as before Covid-19, but may have to find innovative solutions to the challenges ahead, and adapt to a new ‘normal’. Here at AHDB we will be closely monitoring the situation and examining a range of scenarios from view based on OBR estimates, through to an extended or repeated period of stricter lockdown measures including social distancing, to help support food and farming businesses to understand what the future may look like and how they can best prepare for the way ahead. The indicators so far show that a swift recovery for the economy is unlikely. We had best start preparing for change.