Opinion: How bad will the COVID-19 recession be?

The question on everyone’s minds is not whether the UK is headed for a recession but how bad will it be? Richard Dawson takes a look at the evidence and finds that the early indicators are not good

March 25, 2020

It is often said that financial markets are a forward-looking indicator and therefore the fact that, across the world, major indices have lost upwards of 30 per cent of their value since February should provide all the indication one needs to see that there will be a global recession in 2020.

The oncoming downturn has been caused almost exclusively by the global public health emergency that is the COVID-19 pandemic.

As Governments around the world have tried to slow down the transmission of the deadly coronavirus, they’ve effectively had to close down their economies – something without precedent in modern history.

The last recession this country faced was the one that followed the 2008 financial crisis, which was triggered by the depreciation of the subprime mortgage market in the US, a market that many of the world’s largest banking institutions were heavily leveraged in.

One such institution was the investment bank Lehman Brothers, which collapsed on September 15, 2008.

After Lehman, banks all over the world began to realise that they did not have access to the necessary liquidity to fulfil their obligations.

Here in the UK, we remember the run on Northern Rock as people rushed to withdraw their savings, causing the 150-year old bank to fail.

The 2008 financial crisis and recession that followed is widely regarded as the most economically severe since the Great Depression in the 1930s.

As the economic impact of the COVID-19 pandemic begins to manifest itself in steep stock market declines, many are wondering if the 2020 recession will be as bad as the last one.

The early indicators are not good.

A major purchasing managers’ index (PMI) released today (March 24) by IHS Markit signals a record slump in business activity as a result of public health measures to halt the spread of the virus, which at the time of writing has killed more than 17,000 people globally.

March PMI data shows that the Flash UK Composite Output Index has fallen from 53.0 to 37.1 since February. This is the fastest downturn in private sector business activity since the series began in January 1998.

The report claims that the combined monthly decline in output across manufacturing and services exceeded that seen even at the height of the 2008 financial crisis.

The previous record low composite PMI was 38.1, recorded in November 2008 two months after Lehman brothers collapsed.

Chris Williamson, chief business economist at HIS Markit, said: “The surveys highlight how the COVID-19 outbreak has already dealt the UK economy an initial blow even greater than that seen at the height of the global financial crisis.

“With additional measures to contain the spread of the virus set to further paralyse large parts of the economy in coming months, a recession of a scale we have not seen in modern history is looking increasingly likely.

“Historical comparisons indicate that the March survey reading is consistent with GDP falling at a quarterly rate of 1.5-2.0 per cent, a decline which is sufficiently large to push the economy into a contraction in the first quarter.

“However, this decline will likely be the tip of the iceberg and dwarfed by what we will see in the second quarter as further virus containment measures take their toll and the downturn escalates.”

It is worth remembering that the effect of the COVID-19 pandemic on the economy will be unlike anything we’ve ever seen before.

This PMI stresses the potential downsides, of which there are many. But it is hardly surprising what we’re seeing given that whole industries have been closed down by the Government.

The best hope we have of avoiding the worst-case scenario is if we can get the public health crisis under control and get the economy moving again.

In the same way we are predicting a very severe contraction in GDP for the first two quarters of 2020, it is also widely expected that once businesses reopen their doors, there will be a massive surge in activity.

In the meantime, we have to hope that Government measures to support businesses and the people who work in them will be enough.