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Deloitte reflects on “biggest contraction in 100 years”

17 April 2020: UK economic activity could see a peak-to-trough drop of 14%, worse than anything seen in the last century, according to Deloitte’s latest webinar. However, the speed of a potential recovery gives cause for optimism.

 Ian Stewart, Deloitte’s chief economist, kicked off the Big Four firm’s weekly COVID-19 webinar with a reflection on the impact of “the unleashing of what some called a big bazooka of massive physical and monetary easing” in March.

The huge financial intervention has had “a clear effect with a rise in equities”, with US equities up 11% since last week and enjoying a 23% uptick from their low on 23 March, while the US S&P index was “back to where it was last June”.

Equity market volatility was “still at global financial crisis levels – down 40% from its March peak” while in the corporate bond market, sovereign bonds enjoyed “slightly less stress than there was three weeks ago”.

Stewart pointed out that the process of stimulating the economy and supporting activity is “ongoing” and “experimental”.

Two of the big schemes were seen by the government as “not getting the money out quick enough to as many businesses as was wanted”, which had prompted the Chancellor to announce a new scheme, the Coronavirus Large Business Interruption Loan Scheme, for businesses with a turnover between £45- £500m. Deloitte calculated that this latest scheme should help around 8,000 businesses afflicted by the pandemic.

Decline ‘much greater’ than the financial crisis

On looking at economic activity, Stewart dubbed it a “very different story compared to financial markets”. 

France and Germany now looked like they were both in recession, he continued, with French GDP in the first quarter contracting by 6%, the biggest decline since 1945. Meanwhile, the German economy was expected to shrink by around 10% between April and June this year. 

The World Trade Organisation was “talking about a contraction of global trade of maybe one third – much greater than the decline seen in the financial crisis”. 

Stewart said the firm’s own forecasts for the forthcoming slump would eclipse every UK downturn since 1925, with a peak-to-trough drop of 14%. To put that in perspective, the last financial crisis in 2008/9 saw a 6.3% contraction, the Great Depression of 1930-32 hit 6.9%, while the 1926 recession slumped by 8.9% 
“We are assuming a 14% peak-to-trough contraction in GDP lasting one quarter and it will take seven quarters to get back to where we started”, said Stewart. “That’s a bigger contraction than any we’ve seen in the last 100 years”.

But there was a kernel of optimism, in his view, that it would also be the shortest contraction, and “a relatively quick recovery”.

Such a rebound in GDP, would, he said, be “predicated by an easing of restrictions” which was “not a return to normal by any means”.

‘Growth crushing’ restrictions on movement

The current restrictions on movement imposed by many governments worldwide in response to the crisis, including in the UK, are a clear drag on the economy. 

Stewart said there are “a host of ways in which it might be possible to ease the current restrictions on movement. 

“Interventions such as tracking and testing might enable us to achieve a high degree of suppression with a lower reading in terms of the effects on movement, so the secret is to come up with alternatives to growth-crushing restrictions on movement.”

“Our rationale is that if you go from the level of restrictions that we have at the moment, which we characterise as a nine, to say a six or seven which is one where there is greater ability for people to get to work, then having had such an enormous fall in GDP it's quite difficult to do anything other than generate a rise in GDP.”

This would partly be “driven by suppressed demand and increasing the size of the labour force” but also because of “an awful lot of stimulus hitting the economy”.

Deloitte’s current assumption is of a 15% decline in GDP and “only a 4% recovery in Q3, so the climb out of this is long and slow”.

His downside contraction scenario could be as big as 20% of GDP – “so really quite significant” with an upside of minus 10.