Jumana Saleheen's picture
Affiliation: 
CRU Group
Credentials: 
Chief Economist

Voting history

Will COVID-19 Cause Permanent Damage to the UK Economy?

Question 2: Which aspect of the economy poses the greatest risk for a slow recovery?

Answer:
None of the above, other, or no opinion
Confidence level:
Confident
Comment:
Since this is a health crisis the most important policy is to tackle the virus. That failing (as track and trace has done so far), the government should support changes that allow the economy to operate well in a socially distanced way. As the economy opens up, people are keen to return to normal. They want to be able to earn money and spend it. But the virus creates actual and perceived (fear) difficulties in achieving that in certain sectors where social distancing is a challenge – hospitality, retail, and leisure. The best policy in this situation is for the government to provide funds to control the virus; but also provide support that helps us live with the virus. To do this the government should support firms and workers in the most affected sectors (pubs, restaurants, and cinemas) to transition to a world in which they can provide their services, in a socially distanced way. To support the return of the relevant workers back to work, government’s may also need to up their support of online schooling (should it be needed). This wider scope of support will benefit the labour market, firms, and society.

Question 1: How quickly will the economy rebound (e.g. to the pre-pandemic trend) once the COVID-19 pandemic has been contained and absent major policy interventions? 

Answer:
The economy will recover within a small number (1-5) of years
Confidence level:
Extremely confident
Comment:
I expect Covid-19 to give rise to a deep recession in the UK in 2020. GDP growth is likely to fall by 8-10% in 2020. Assuming the virus is contained by then, 2021 will be a year of sharp rebound. GDP growth is forecast to rise by 8-10% y/y. The large rebound needs to be understood in the context of a recovery from the very low levels of activity witnessed during lockdown. The UK will continue its recovery through 2022. By 2023 I expect the UK economy to return to its pre-crisis growth rate of 1.6% y/y. It is important to note that while the growth rate of the UK returns to its pre-pandemic trend, the level of activity does not. I expect the UK to endure a small permanent loss in the level of GDP. Put differently in 3 years’ time the UK will be 2% smaller than it otherwise would have been, absent Covid. That is what I define the UK recovery as U-shaped. It would be V-shaped only if all losses from Covid could be recovered later, such that there would be no permanent loss in the size of the economy.