COVID-19: An intense external shock to UK
The world entered the COVID-19 pandemic with persistent, pre-existing economic imbalances. Although the economy still coping up with the COVID-19 crisis, the external outlook is highly uncertain. The crisis has caused a steady reduction in trade of various countries and significant fluctuations in exchange rates but the limited reduction in global current account deficits and surpluses.
Economies of many countries, which are dependent on severely affected sectors, such as tourism and oil, or reliant on remittances, could see a fall in their current account balances exceeding. Such intense external shocks may have lasting effects and require significant economic adjustments.
The outlook remains a little uncertain as to the risks of new waves of epidemic, capital flow reversals, and a further decline in global trade still loom large on the horizon. Although if we forecast a slight narrowing of global imbalances in 2020, the situation varies around one country to country.
The country of the highest death toll from the virus in Europe, the United Kingdom seems to be paying for being late in imposing lockdown restrictions, as compared to its neighbors such as Spain and France. Recently, the UK released data that showed its economic output shrank by 20.4 per cent approx, in the second quarter of 2020, pushing the country into the very deep recession recorded by any major global economy so far. This slump in the numbers of GDP in the April-June period is the worst on record and comes in the wake of a 2.2 per cent contraction recorded by the British economy in the March quarter. With the record of the latest GDP print, the country has technically entered a recession.
The blow is hitting hardest in countries where COVID-19 has been the most severe and where there is a heavy reliance on global trade, commodity exports, and external financing.
In the June quarter, the economy of US too shrank by 32.9 per cent approx. which was a bigger loss than any decline on record, and projections are that the showing by America would be worse in the September quarter. The big exception seems to be China’s GDP, which jumped back sharply in the April-June quarter, driven by a bounce back in manufacturing output and a public spending boost after a negative print in the March quarter. It has helped it effectively sidesteps a technical recession.
Reason for UK’s recession!
It has been a very long known that the UK was struggling economically and was in the grips of a significant recession, and with a dramatic rise in unemployment claims due to pandemic and business closures seen since the introduction of lockdown, the country is witnessing constant steep in the economy. Its also in the recession because the total amount of goods and services produced by the UK has fallen for a total period of six months.
Various experts, including Samuel Tombs have blamed the government’s slow response to the virus as the reason for the UK’s record contraction.
“The long duration of the lockdown in the second quarter, due to the government’s slow response to Covid-19 in March, followed by its failure to prevent the virus from spreading from hospitals, was at the root of the economy’s underperformance in the second quarter,” Mr Tombs said.
Forecasts for the global economy!
According to the forecast of the World Bank, the global economy will shrink and it will represent the deepest recession since the Second World War. The IMF estimates that 40% of global current account deficits and surpluses were excessive in 2019. Policy responses in the short-term should focus on economic lifelines and the economic recovery from the pandemic. These were concentrated in advanced economies. In the medium term, policies should work to reduce excess imbalances.
By Karishma Gwalani
