This morning the UK April GDP figure showed the economy contracted 20.4% mom which was worse than expectations of a 18.7% contraction and the worst monthly contraction on record. This follows the Institute of Directors survey earlier in the week which showed company directors’ confidence improved in May, off the April low, but is at the second lowest reading on record, while investment and hiring intentions remained at all-time lows. Hence, the Covid lockdown is also creating a high degree of uncertainty about the UK outlook and recovery.
The OECD individual country forecasts, released earlier this week, forecast the UK facing a greater GDP decline in 2020 than many of its peers: they forecast the UK economy would contract by 11.5% in its single hit scenario (no second covid outbreak) but as much as -14% in the event of a second virus outbreak. That said, the OECD forecast a recovery of 9% in 2021 in the single hit scenario and 5% in the case of a second wave. While the OECD acknowledged the ‘swift’ and ‘comprehensive’ support from the government for the economy, and the BoE’s policy responses, they also warn: “risks around the future relationship with the European Union compound COVID-19-related uncertainty, including whether a free trade agreement can be negotiated before the end of 2020. The failure to conclude a trade deal with the European Union by the end of 2020 or put in place alternative arrangements would have a strongly negative effect on trade and jobs.”
Moody’s rate the UK sovereign Aa2 (negative outlook), and their base case assumes that the UK and EU would reach an agreement by year-end. But they highlight the credit risks of a no-deal outcome in conjunction with the pandemic in a report this week: “By the end of 2020, when a no-deal Brexit would occur, the size of the UK economy would still be significantly below the level expected in our pre-virus forecasts. Its resilience would also be diminished, with higher public debt and unemployment, and lower investment than expected prior to the pandemic.” They note that a no deal Brexit risks damaging any “nascent economic recovery” as “it may slow down the recovery in trade and private investment.”