How the UK is Handling the Pandemic-Induced Economic Slowdown
The UK has a high coronavirus death rate and the economy suffered as the government entered lockdown at a later stage than other countries. The structure of the UK economy, which has a great dependence on social consumption - face-to-face spending in shops and restaurants - no doubt contributed to its poor performance.
The data released this year shows that the economy appears to have adapted well to the lockdowns, as there was a much smaller decline in economic activity in early 2021 than in the first lockdown. More than 30 million people have now received their first dose of the vaccine. This is one of the highest rates in the world and is more than half of the adult population.
Brexit trade deal finally happens
At the end of last year, the UK finally struck a "no tariffs no quotas" trade deal with the European Union. It is still early days to determine what impact this will have and implementation will take time.
Janus Henderson Investors offers some insights about Brexit impact on UK markets from Job Curtis, portfolio manager of the UK-focused City of London Investment Trust. He discusses the challenges faced by businesses, the outlook for 2021, and other aspects relevant to investors focused on UK markets.
Stock markets dip and then rally
Global financial markets were in turmoil due to the pandemic. On Wall Street, the Dow Jones fell faster than during the infamous 1929 Wall Street crash. The FTSE 100 had its worst day since Black Monday in 1987. Global central banks cut interest rates and put billions into financial systems to stabilize the situation.
Since then, several big indices have recorded highs. Shares in US tech firms have skyrocketed with more online activity. However, the FTSE 100 is still at about 1,000 points below where it was pre-pandemic.
Inflation drops but is expected to rise
Lack of demand for goods and services led to depressed inflation rates. The consumer prices index (CPI) fell with dropping energy costs and businesses dropping prices to entice buyers.
With support from governments and world central banks, economists are expecting inflation to rise again as consumers go on spending sprees thanks to relaxed lockdown measures.
The government has a large deficit
The government put over £400bn into the emergency coronavirus response and tax revenues collapsed. The national debt has reached its highest level since the 1960s, when every deficit is combined.
The cost of servicing debts is at a historic low and chancellor, Rishi Sunak, plans to raise taxes and cut public spending. If the economy recovers quickly, there may be no need for this and some economists believe efforts to cut the deficit too quickly could prevent growth.
GDP shrinks
The figures confirm that the UK economy had its largest annual decline in 300 years in 2020 but it managed to avoid a double-dip recession at year-end. People have adapted to restrictions and there was less reduction in economic activity during the second and third lockdowns.
The vaccine has been administered quickly and economic recovery may happen more rapidly than expected. However, it is inevitable that some scars are likely to remain.
House prices increase
In a recession, house prices usually fall but the pandemic has been accompanied by higher property prices. This has been fuelled by the stamp duty holiday and people reassessing where they want to live while working remotely.
Some are moving away from the large city centers and looking for more space. More affluent households have been able to save during the pandemic while working from home, which has also supported the housing market.