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The economic impacts of Coronavirus

Friday, 17 April 2020

As the Coronavirus crisis continues, and the country adjusts to life under lockdown, thoughts are turning to what the world will look like when we emerge from the current scenario. Economic predictions are always challenging, especially when facing an unknown trajectory of illness, incapacity and, sadly, mortality within the population. However, it is clear that predictions for the economy made before this crisis will be wildly inaccurate.

Globally, annual GDP growth was previously forecast at around 2.3%, according to The Economist Intelligence Unit. Their most recent report revises this downwards to a contraction of around 2.5%, with quarter 2 experiencing the greatest fall of 11%. This is an even deeper contraction than experienced during the global financial crisis in 2008. By country, this contraction is predicted as follows:

Real GDP growth rate (%), quarter on quarter

BRICS

2019 Q4

2020 Q1

2020 Q2

Brazil

0.5

-1.0

-11.0

China

1.4

-10.9

9.2

India

1.2

5.0

-9.3

Russia

0.4

-0.1

-10.5

South Africa

-0.3

-3.0

-7.7

G7

Canada

0.1

-0.3

-4.5

France

0.8

-2.0

-10.0

Germany

0.0

-3.0

-10.0

Italy

-0.3

-5.0

-10.0

Japan

-1.8

-0.5

-0.4

UK

0.0

-1.4

-9.3

USA

0.5

-1.3

-5.9

Source: The Economist Intelligence Unit.

The Office for Budgetary Responsibility has recently released a forecast showing an even greater drop for the UK in quarter 2, of 35.1%, although it expects a rapid bounce back with the economy rapidly growing in quarters 3 and 4.

Here in the UK, the negative effect on growth will come via both demand and supply channels. On the one hand, quarantine measures, illness, and negative consumer and business sentiment will suppress demand. At the same time, the closure of some factories and disruption to supply chains will create supply bottlenecks. Even if the pandemic is largely contained globally, the impact on consumer and business confidence and demand is likely to be long lasting.

Increased uncertainty is likely to lead to increased precautionary savings by households and delayed business investment. In addition, consumers may decide to continue to self-isolate after lockdown restrictions have ended for fear of contracting the virus. This would slow down consumer spending and delay the economic recovery.

It is clear that this is a crisis like no other. What this means for the UK agriculture and horticulture sectors is less clear. Looking beyond the immediate response of panic buying, stockpiling and the collapse of food service demand, we may expect consumer behaviour to follow a similar path to that seen during the financial crisis of 2008, and the subsequent recession. Read more about that behaviour here.

AHDB will be following the likely trajectory in a series of articles on consumer behaviour and the economy in the coming weeks and months.