City calls for deeper tax relief as UK sinks into recession
Business groups have called on the government to take “bold action” after the UK economy plunged into recession last quarter as GDP contracted by 20.4 per cent between April and June, the biggest single quarter decline on record.
With vast swathes of the economy closed due to the coronavirus lockdowns, activity flatlined in April, before bouncing back 8.7 per cent in June as restrictions were eased.
Against this backdrop, said Suren Thiru, head of economics at the British Chambers of Commerce, the government needs to “immediately inject confidence back into the UK economy”.
Specifically, he said, it should support businesses “to retain staff through a cut in employer national insurance contributions and targeted support to help businesses placed under local lockdowns”.
The IoD’s chief economist Tej Parikh echoed calls for a cut in national insurance contributions, as well as taking further steps to protect small businesses.
“The Treasury should also explore options for restructuring business loans, while targeted grants to help SMEs adjust to the new normal would bolster the Government’s aim of reopening the economy”, he said.
Economic pain of UK recession ‘numbed’ by furlough scheme
That the UK was headed for a recession was a given for economists, given the extent of the shutdowns, with most now looking ahead to the autumn, when the government will wind down its business support schemes.
These have been largely responsible for propping up the remnants of the economy and keeping over 9m people in work, but could now lead to further pain as the UK heads into the winter.
Guy Foster, head of research at wealth manager, Brewin Dolphin said that the schemes had “numbed the pain” of the downturn thus far.
“With most recessions, by the time they are announced the pain has almost peaked. In 2020 that pain has been numbed by the anaesthetic of the job retention scheme”, he said.
“That dose is being reduced over the coming months and that seems likely to impact retail sales and housing notwithstanding offsetting measures.”
Pent-up demand to drive rebound?
Some are confident that the rebound in June will continue into the third quarter, as Shamik Dhar, chief economist at BNY Mellon Investment Management, explains.
“Despite negative growth figures for the UK announced today, a recession is old news and many economists have known it was coming for a while.
“It’s true to say that we are past the worst – the economy probably troughed in April or early May. June saw a strong bounce back and, based on high frequency data such as Google’s mobility data, I expect strong growth in the third quarter of over 10 per cent – stronger than most other economies which shrank less in Q2.
“There’s significant pent-up demand – the UK household saving ratio reached approximately 20 per cent in the second quarter.”
Dean Turner of UBS Global Wealth Management agreed, though added that the pace of the bounceback would fade as it goes on.
“We expect pent-up consumer demand to drive a strong recovery in the third quarter, although this momentum will gradually fade as the outlook for the labour market deteriorates. The UK economy is unlikely to return to its pre-crisis level before the end of next year”, he said.
Second wave doubts plague recovery
Others, however, were less convinced. The CBI’s lead economist Alpesh Paleja said that although initial signs were positive, a sustained recovery was by no means assured.
“Encouragingly, the economy grew in May and June, indicating that the early stages of a recovery are underway. Yet cashflow constraints are still biting hard for businesses, and with the pandemic not going away anytime soon, a sustained recovery is by no means assured.
“The dual threats of a second wave and slow progress over Brexit negotiations are also particularly concerning, underlining the need for maximum agility from Government on both these issues, allowing a greater focus on the economy’s long-term future.”
Helal Miah, investment research analyst at The Share Centre, warned that fears over rising unemployment when the furlough scheme ends in October could also dent the recovery.
“The bounce in June GDP (along with Industrial and Manufacturing production rising by 9.3 per cent and 11 [per cent respectively) may just prove to be temporary relief”, he said.
“We saw yesterday’s jobs data, which wasn’t encouraging with the expectation that the unemployment rate will in time rise as job retention schemes comes closer to an end.
“With such uncertainty around job security it is hard to see consumers splashing the money around. While we will bounce out of the trough, I can’t see a rapid rebound and take the Bank of England’s view that the recovery will be slower and take longer to get back to pre-crisis level activities.”