However, the UK is also running towards a self-imposed deadline to build a post-Brexit trade deal with the European Union, its largest single export market, later this year. Talks are not going well, increasing the possibility of another serious shock just as the expected economic recovery is gaining momentum.
“The whole advanced world is in recession because of the coronavirus,” said Kallum Pickering, senior economist at Berenberg Bank. “But the UK has an additional problem with UK-EU negotiations in the second half of the year.”
Even without considering the implications of Brexit, the UK economy is in dire straits.
The Bank of England said earlier this month that the economy could decline by 14% this year. It would be the largest annual contraction after a 15% drop in 1706, based on the best estimate from the historical database. GDP could drop by 25% in the three months until the end of June.
The figures released by the British government in the past few days have been harrowing. Unemployment insurance claims rose 69% to nearly 2.1 million last month. Inflation for April, meanwhile, declined to 0.8% for the third consecutive month, raising concerns that prices may enter a negative downward spiral.
Non-essential restaurants and shops remain closed, and economists are unsure whether business will resume immediately after reopening.
Gilts, as they are known, are considered a safe haven asset, along with US, Japanese and German government bonds; high demand indicates that investors are concerned that economic growth will remain depressed.
“Markets are reflecting the economic reality, which is that the economy has collapsed,” said Robert Wood, UK chief economist at Bank of America.
Attempting to stem the vast economic damage, the UK government borrowed £ 62.1 billion ($ 75.7 billion) in April, the highest level since records began in 1993. The government now predicts that will have to borrow £ 298.4 billion ($ 363.3 billion) until March 2021, almost double the height of the global financial crisis.
“What the Bank of England has done is remove the official rate threshold, so it cannot be assumed that they will definitely not cut” below zero, Wood said. “Having said that, the clearly negative rates are one of the last resorts here.”
The risk that may be needed is increasing because British Prime Minister Boris Johnson has pledged to define the terms of the new UK relations with the European Union by the end of 2020, following his exit from the blockade in January.
Failure to reach an agreement could subject UK companies to new high tariffs, threaten their supply chains and render them their products and services are more expensive at the worst possible time. The UK has until June 30 to request an extension of the deadline, but the Johnson government has consistently said it does not want to.
Talks are not going well, however. Michel Barnier, the EU’s main Brexit negotiator, said last week that he was not “optimistic” in reaching an agreement with the UK, adding that the EU will step up preparations for the end of the year without being in act new commercial conditions.
The UK’s main Brexit negotiator, David Frost, said in a letter to Barnier on Tuesday that the EU was offering “a relatively low quality trade deal”.
Berenberg Bank’s Pickering fears that the timing of Brexit talks could create problems for the UK in the second half of the year, when economic growth is expected to recover.
Household spending, which makes up around 70% of UK GDP, will determine the trajectory of the UK recovery, he said. At the end of the blockade, the concern is that The British will continue to save money because of anxiety about their job or a second wave of infections, limiting the impact of government and central bank relief efforts.
Although the United Kingdom reaches a new trade agreement with the European Union, it does it will not be as favorable as the old regime. Johnson is pushing for an agreement that would allow the United Kingdom to reach an agreement with trade partners such as the United States.
In the draft proposal published by the United Kingdom government this week, Britain reiterated that it does not want to be part of the EU single market and is instead seeking an agreement in line with what the blockade has in place with Canada or the Japan.
“The worsening of trade conditions with the destination of almost half of exports will be economically negative,” said Bank of America’s Wood. “[It’s] another reason to expect the recovery from this crisis to be a very elongated U [shape]and not a V. “
Irish Prime Minister Leo Varadkar echoed this view on Thursday.
“Brexit will complicate matters further,” said Varadkar. “As I said a few months ago, Brexit isn’t over. It’s just the break.”
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