- The COVID-19 pandemic has created the biggest shock to the UK and global economies since the Second World War. This is an external shock, the severity of which has accelerated with immense speed. Unlike most previous downturns, it is occurring across virtually all major global economies both severely and simultaneously.
- The social distancing measures and forced business shutdowns introduced by the Government have been highly restrictive and unprecedented, severely impacting the supply side as well as the demand side of the economy. The hit to economic growth has inevitably been substantial and the UK’s output has plummeted by a quarter since the start of the COVID-19 crisis. To put this into context, the lowest drop of any quarter over the last years has been 2.7%, and output in now back to its level of two decades ago.
- Almost all sectors of the economy have seen output contract sharply, although the extent has varied considerably. Those areas most heavily impacted include hospitality (-50%), construction (-45%), private administration/support services (-36%), and wholesale/retail (-34%). The manufacturing sector has seen a fall more in line with the UK average (-28%).
- Falling tax receipts and the massive government support package have combined to increase government borrowing to a colossal £55 billion during May. As a result, public sector net debt has risen to 100.9% of GDP, the first time it has exceeded 100% since the 1960s. The Government has indicated that it will not follow the “austerity” policies adopted after the financial crisis and will be focusing on investment, particularly housing and infrastructure. Public sector debt is therefore likely to remain high into the medium term, although debt should be manageable at this level given the ongoing low interest rate environment.
- The length and depth of the downturn is highly uncertain, and is largely dependent on external factors, including the path of the virus globally; the extent to which it can continue to be suppressed in the UK; and the success of ongoing policy interventions on social distancing, fiscal and monetary policy and other stimulus measures. The path to normality will not be straightforward; further local lockdowns are almost inevitable, and the risk of a broader-based second wave of the outbreak is very real. Looking further ahead, the speed with which the bioscience sector can develop and mass-produce a vaccine and / or medication to assist recovery is a key unknown.
- The June Consensus forecasts suggest a fall in UK output of -9.2% for this year, followed by +6.5% next year. Any forecasts are highly speculative at present, but this suggests a return to pre-COVID-19 output in 2022. Business confidence surveys have significantly improved. The IHS Markit/CIPS UK Services PMI rose to 47.1 in June 2020 compared with a low of 13.4 in April and not far below the 50 mark (above which indicates expansion). Manufacturing is now into expansion territory (just) at 50.1. Much will depend on the level of economic "scarring”, where output is permanently lost through rising unemployment and business insolvencies, limiting the speed with which recovery can occur. The global context is also important – in June the IMF reduced its forecast for global growth this year to -5%, compared with the -3% it expected in April.
- Prior to crisis, UK employment was at a record high and unemployment at a record low. The COVID-19 crisis has been a huge disruptor, with over 9 million employees furloughed (over a quarter of the workforce) and 2.6 million claims have been made under the Self-Employed Income Support Scheme. In addition, millions of employees are working at home rather than their usual workplace. There is a significant lag between the official unemployment statistics, which only cover the period up to the three-months to April, with the unemployment rate still reading 3.9%. However, the total number of hours worked fell by 8.7% compared with previous three months. In the period March-May, job vacancies saw a record fall of 342,000 compared with the previous three months.
- The furlough scheme is due to wind down in stages, with employers required to contribute a rising share of wages until the scheme ends in October. Further Government support measures were announced in July, most notably the Job Retention Bonus (a one-off payment of £1,000 to employers for every furloughed employee continuously employed until the end of January 2021), but there is a limit to what these can achieve. A recent YouGov survey found that 51% of businesses intend to make redundancies within three months of Furlough expiry, and only a third felt confident that all their staff would be kept on.
- Unemployment will rise significantly despite Government support, and a wave of recent corporate announcements on job losses are a sign of things to come. The current consensus forecasts suggest the unemployment rate will reach 7.9% by the end of the year.
- Public sector employment is largely unaffected, a key difference to the austerity of the Global Financial Crisis. Indeed, the public sector has been hugely stretched in dealing with COVID-19, and will probably be considerably larger after the crisis, as some industries will require long-term government support. However, many parts of the public sector are now under severe financial pressure. This includes local councils, and the Government has announced a package of support measures.
- As restrictions are eased, the Government has the unenviable task of balancing public health risks with the need to stimulate the economy. In England, most hospitality venues and some personal care outlets were able to reopen from 4th of July. However, the need to be “COVID-19-secure” and continued social distancing means this will be far from business as usual. Some businesses may simply not be able to operate at profitable levels and therefore may not re-open. Government support announced in July is designed to entice customers back to restaurants and bars. The “Eat Out to Help Out” scheme which will entitle diners to a 50% discount of up to £10 per head at participating venues on certain weekdays during August; and a reduced rate of VAT (5%) will apply until 12 January next year.
- The UK’s corporate sector was in robust health prior to the crisis, and emergency Government measures such as the ability for businesses to defer VAT, a targeted business rates holiday and cash grants have been designed to ensure that as many businesses as possible survive the crisis. However, the severity of the downturn is likely to hasten the demise of businesses that were already struggling (most notably in the retail and hospitality sectors).
- Co-ordinated action between the central banks of the major advanced economies to lower interest rates and boost the money supply has been a key part of the global response. This has been in sharp contrast to a highly disjointed global political response. The Bank of England cut interest rates to an all-time low of 0.10% and has injected £310m of quantitative easing into the economy since the start of the crisis, with more likely to follow.
- Inflation has fallen sharply, with CPI now at 0.5% (May 2020), well below the Bank of England’s target rate (2.0%). It is likely to fall a little further and could record a figure close to zero (with some very mild deflation possible) in the coming months before rising again. The Consensus forecast suggests it will be 0.7% at the end of this year, and 1.6% by the end of 2021.
- With confirmation that there will be no extension to the transition period, Brexit has significant potential to hold back UK recovery, although there will probably be an interim solution if a deal is not agreed by this autumn. There will also be a host of other long-term implications from COVID-19, which are unknowable at this stage, although the following sections suggest some areas to consider across the commercial sectors.
- The UK and global economies are experiencing an unprecedented shock, not only in the speed and scale of the downturn, but also the amount of change it is generating as we have adapted the way we live, work and shop. Much of the change now under way will be a permanent shift, and will reverberate across the commercial property sectors long after the COVID-19 crisis has receded.
- The Government has announced that it will introduce legislation to permit greater change of use of commercial property without the need for planning consent, for example allowing redundant retail property to be converted into residential or offices. This should be in place by September. Adding additional space above existing buildings will also have a fast-track approval process. Furthermore, proposals for comprehensive reform of the entire planning system will be set out later this month. This has the potential to be an important tool in responding to the immense structural change now under way.
Note: Consensus forecasts refer to the comparison of independent forecasts for the UK economy, compiled by HM Treasury.
If you would like to find out about how the current economic changes may impact on your property needs, please contact us.