Economic outlook | May 2020

  • The COVID-19 pandemic has created the biggest shock to the UK and global economies since the Second World War. The social distancing measures and forced business shutdowns introduced by the Government are highly restrictive and unprecedented. The human consequences are clearly significant and are rightly the primary concern of policy makers.
  • Unlike most previous downturns, it is occurring across virtually all major global economies simultaneously, with some parts of the UK economy coming to a juddering halt. It is also unusual, as it is impacting directly on both the demand and supply sides of the economy.
  • The impact on economic growth will be substantial, but the length and depth of the downturn is highly uncertain, as this will depend on many factors that are currently unknown, including:
  • the speed with which affected countries can bring the outbreak under control;
  • the speed with which the bioscience sector can develop and mass-produce a vaccine and / or medication to assist recovery;
  • the success of interventions by fiscal and monetary policymakers;
  • the rate at which confidence returns;
  • the ability of supply to recover in line with demand.
  • The UK has now passed the initial peak of the virus and lockdown measures will likely be eased shortly. Nevertheless, major restrictions on consumers and businesses will remain in place and can only be reduced gradually. This means that a more drawn-out downturn may result as more output is permanently lost rather than postponed and the overall productive capacity of the economy is reduced. Given the unprecedented nature of the restrictions, the psychological effects on consumer and business confidence could be quite long-lasting. 
  • However, we can say with near certainty that the fall in UK output in Q2 will be by far the largest recorded in modern economic history and that a severe recession will occur this year. Almost all sectors will be negatively impacted, although the extent will vary considerably.
  • The UK government has introduced a monumental package of fiscal measures, unprecedented in peacetime to “do whatever it takes”. Measures directed at households include a three-month mortgage holiday, additional welfare payments and funds for some unable to pay rent. 
  • Measures for businesses include paying 80% of the salaries (up to £2,500 per month) for furloughed employees; the ability for businesses to defer VAT; a targeted business rates holiday; and cash grants. 
  • The Government also announced £330bn of guarantees for bank loans to the corporate sector, which would be increased if needed. Although significant interventions, these measures will do little to alleviate the short-term impacts of the shutdown of large parts of the UK economy. Their main purpose is to ensure that the economy is able to restart when restrictions are lifted. 
  • There has also been co-ordinated action between the central banks of the major advanced economies to lower interest rates boost the money supply. The Bank of England cut interest rates to an all-time low of 0.10% and injected another £200m of quantitative easing into the economy. 
  • The labour market has been amazingly resilient in recent years, with employment at a record high and unemployment at a record low. It is encouraging that the labour market is starting from a strong position, and the Government has offered a substantial package of measures to help mitigate the adverse impacts of the crisis. It is estimated that around a quarter of UK employees are now officially furloughed, although a sharp rise in unemployment appears unavoidable.
  • The oil market has also been negatively affected, with the price of Brent Crude plummeting $22.58 per barrel at the end of March, its lowest level since November 2002. Prices have since recovered slightly to $26.48 (as at 30 April). This price drop has been driven by major oil companies slimming back production as a result of storage capacity reaching its maximum level.. On the other hand, the price of gold soared to a seven year high in early March, as investors looked to this market as a safe haven. Though the price did dip again soon after, they have since bounced back to around $1,703 per ounce at the end of April.
  • Perhaps of least concern is inflation, which is currently 1.5% (March 2020), below the Bank of England’s target rate (2.0%). The impact of the crisis could well be relatively modest, as the supply impacts will create upward pressure, whilst the demand impacts will create downward pressure, but in the short term, inflation is likely to decelerate. 


Rural

  • In an economic downturn, the counter cyclical nature of agricultural land does mean that the sector can largely withstand short-term troubles. The social distancing measures introduced by the UK Government may temporarily restrict the production side and stall transactions. However, the long-term investment nature of agricultural land, and limited transactions, means that, at present, our view is that values are unlikely to fall significantly.
  • Although Brexit is very much a secondary concern at present, this will return as an issue once the COVID-19 crisis is over, creating an additional hurdle for the rural market to overcome. While the government appears determined to adhere to its end-of-year deadline to complete trade negotiations, the prospect of a hard-Brexit is concerning for those with a vested interest in the agricultural sector, and an extension may very well be required.
  • Over the last two years pricing in the rural sector was already declining, following the market peak in 2016 before the EU referendum. The COVID-19 crisis is likely to impact on the market, at least in the short term, with viewings for buyers temporarily restricted. 
  • In terms of deals under offer before the social distancing measures were implemented, the mechanics of the transaction process are likely to slow, as banks and lending firms are less able to instruct surveyors to carry out inspections. Only those deals where there is a cash purchaser or where the bank process has already been concluded are likely to complete, albeit at a slower pace than normal.
  • Buyers may also pause on deals while these restrictive measures are in place. Those who are funding acquisitions through cash reserves invested in the broader markets are likely to have seen their personal finances affected and may result in buyers re-evaluating their current and future investment plans. For vendors, those who have either assets on the market, assets ready to launch over the coming months or have deals already agreed will feel the ramifications, at least in the short and medium term.
  • In the leisure market, the travel restrictions and social distancing measures have resulted in many cancellations for holiday-lets. The recent Easter break and bank holidays in May would normally be a busy time for these businesses however the crisis temporarily stalled activity. Should the crisis come under control and restrictive measures lifted by the summer, a spike in domestic trade is expected for September through to December, where premium prices are likely to be charged. This is largely due to an expected increase in demand, with consumers needing to use up the abundance of work annual leave as a result of cancelled trips, and also because many are unlikely to want to travel abroad for the foreseeable future.
  • In 2008 and 2009, demand to acquire rural leisure businesses increased, due to the short-term spike in trading. If the same principle were to be replicated in the current crisis, sellers will be in a strong position towards the end of the year.
  • Although the UK Government have introduced several temporary measures to support businesses, in the longer-term, taxes may be increased, and relief lowered in order to recover some of these costs. In the Spring Budget, Entrepreneur’s Relief was already significantly reduced, which has made vendors think twice before selling, and if this relief was completely abolished in a post-COVID world, the supply side of the agency market could be negatively impacted.
  • Agricultural Property Relief (APR) and Business Property Relief (BPR) may also be targeted by the Government once the crisis is under control. If either were reduced or removed, current landowners may be discouraged from buying more or indeed holding land, if the purpose of owning is for tax mitigation, particularly in a post-Brexit world where subsidy payments will also be reduced. Businesses will be under pressure to evaluate their operations if either or all support is lowered or removed. 
  • The supply chains across many farms have been put under increased pressure, as supermarkets and other food trading businesses require more produce to keep up with the high demand from consumers, and this has resulted in increased prices. The weakened value of Sterling has also affected some key imported commodities. For example, UK delivered prices for wheat increased in March, reaching about £169 per tonne at the end of the month, up from £161 per tonne in February. 
  • Food security has been brought into stark focus during the COVID-19 crisis, with supermarket shelves often sparsely stocked or empty. Although policy makers will certainly reflect on this post crisis, it would appear that the weakness in the supply chain was more notable in the “last mile” as opposed to a failing in the market at the farm gate.
  • There is also the issue of some businesses unable to resource labour for important and necessary jobs. This is not so much an issue for mechanised larger arable units, however for businesses operating in horticulture, or smaller labour-intensive operations, this will continue to be a concern over the coming months.
  • The closure of more than 2,000 garden centres and nurseries across the UK, which are classified as non-essential trading businesses, does mean that millions of greenery products, including plants, trees and shrubs, have already been discarded (as at 31 March). Given that the prime trading season for these products run from March to July, many businesses who solely trade in this sector have already had large orders cancelled. Many of these businesses will struggle to survive this year and will have to take full advantage of the relief provided by the Government.
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Tim Jones
FRICS
Partner - Head of Rural Division
01223 346609 email me about Tim
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Tim is head of the firm's Rural Division and of the Cambridge office, although he spends a considerable amount of time in London.  He has over 20 years experience in advising institutional and private clients on a very wide range of rural business issues, including sales and purchases, strategic advice and valuations.  He often works with specialists in other divisions of the firm to provide clients with a fully integrated property service.  Tim lives near Newmarket and has a keen interest in country pursuits, encouraged constantly by his two children.

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