The pandemic could push the UK into its deepest recession ever, according to a stark warning from the Bank of England.
Deciding to leave interest rates unchanged at a record low of 0.1%, the Bank described the outlook for the economy as "unusually uncertain" and said the severity of the economic impact will be determined by exactly how households and businesses respond as we go forwards.
Yesterday’s forecast is just that though, a forecast, and one of many possible scenarios. However, it sets out the potential downturn that could be ahead. And signals the challenges for us all, especially as investors.
Most importantly perhaps, the message from the Bank of England is that the damaging effects won’t be permanent; with the economy, employment and earnings eventually returning to pre-virus growth rates.
Until then though, the outlook is admittedly grim. For the year as a whole, the economy is expected to contract by 14%. This would be the biggest annual decline on record, according to the Office for National Statistics (ONS) which has been keeping records of such data since 1949.
So how long will the effects last and when will we start to see those all-important green shoots of recovery?
The forecast assumes job losses and shrinking pay packets will continue to weigh on the recovery, with British families remaining cautious about shopping and socialising for at least another year. That won’t be helped by the predicted 2% fall in average weekly earnings this year, reflecting the fall in wages for furloughed workers.
And the Bank said sharp increases in benefit claims are "consistent with a pronounced rise in the unemployment rate", which is expected to climb above 9% this year, from the current rate of 4%.
This means the economy is not expected to get back to its pre-virus peak until the middle of next year, with UK growth expected to rebound in 2021 to 15%.
There is no doubt now that as investors we will have to reconcile ourselves with an environment of continued low and even negative interest rates. Company and government debt has surged and will not go away overnight, neither will the after-effects of the fiscal spending that we have seen take place on a scale we have never seen before. But these challenges also create potential opportunities for investors, amid all the chaos.
No one can have missed the almost overnight shift to online solutions. Technology has been forced to quickly advance, as Microsoft noted, pushing digital transformation that would normally take two years into rapid change that has had to take place instead within two months.
The pandemic has accelerated that change and the companies that will do best are those that are prepared to rapidly adjust.
So many companies in so many sectors and right across the globe are looking for and adapting to find new ways to navigate these changes. That adaptability and willingness to change will be crucial when it comes to generating robust, risk-adjusted returns over the longer term.
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