Road to Recovery: chinks in the light of the UK economy

Covid-19 has been a global economic shock like no other. But recovery is on its way. David Sapsted examines the bigger picture for business.

David Sapsted

7 July 2020

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If a week is a long time in politics, then six months must be near to an eternity in terms of the global economy. Back in January, for instance, the IMF was cheerfully predicting a 3.3% rise in international output this year, assuming continued progress in overcoming the US-China trade war and a happy ending to the Brexit negotiations between the European Union and UK.Fast-forward to this summer and the latest World Economic Outlook from the IMF cites “a crisis like no other”. The global economy is now set to shrink by 4.9% this year and the prospect of a recovery next year deemed “uncertain”.

Covid-19 and the economic impact of lockdowns

The reason, of course, is the Covid-19 pandemic. Its effect on all sectors of national economies and international trade could be even worse than the IMF is predicting. The latest World Trade Monitor from the Netherlands Bureau for Economic Policy Analysis shows volumes in April were down 16.2% on a year earlier, having fallen 12.1% between March and April.“The severity and global reach of lockdown measures suggests that the second quarter will be the low point of 2020 for world trade volumes, but this depends on how much openness economies can sustain without needing to go into lockdown again,” commented banking and financial services group, ING. “Even if the recovery starts from July, the steep fall into April from already low volumes in the first quarter (down 3.4% on a year earlier) indicates that world trade is on track to be more than 10% lower than in 2019.”

The simple fact is that due to social distancing measures and sector lockdowns, manufacturing and service sectors across the world have temporarily shut down operations or have been operating at a much-reduced capacity amid falling consumer demand and tumbling opportunities for both imports and exports.

Foreign direct investment - some positives among the gloom

Additionally, there has been an abrupt drop in foreign direct investment (FDI) projects across the globe. In its annual World Investment Report, UNCTAD – the principal UN body dealing with trade, investment and development – forecasts a 40% drop in FDI this year.It expects further falls in 2021 because of a global slowdown and a rise in protectionism, with a growing number of countries concerned about asset stripping by Chinese companies amid the pandemic’s economic fallout.However, the report said tech start-ups could bounce back strongly. Beyond the ruptures caused by Covid-19, some researchers see plentiful opportunities in the shift towards digitalisation. The UK’s Centre for Economic and Business Research (CEBR) expects the sector to create 1.2 million jobs directly in Britain alone by 2025.

Globalisation and building resilience in supply chains

Research by global professional services firm PwC also found other potential growth spots. Pointing out that while China’s industrial production fell by 19% between last December and February, output had almost recovered to pre-coronavirus levels by the end of June. “A similar recovery is possible for countries such as Germany, the UK and Japan over the coming months, assuming that the peak impact (of Covid-19) has passed,” said the report.Jing Teow, senior economist at PwC, added, “The current crisis is likely to accelerate the current trend towards de- globalisation. The slowdown in global growth will weaken demand for traded goods and services. Businesses that are focused on securing the resilience of supply chains are likely to increase the pace of reshoring or diversifying supply chains. Businesses will want to ensure that they are not dependent on one single country or region as a source of production inputs, as many global businesses found to their cost when Hubei in China was first struck down by the pandemic in December 2019.”

UK trade deals and their impact on economic recovery

For the UK itself, the extent of economic recovery could hinge to a large extent on the outcome of the trade deals it is currently trying to negotiate with the likes of the US, Japan, Australia, New Zealand and, of course, the European Union.Adam Marshall, director-general of the British Chambers of Commerce, believes that “with the right conditions in place, UK exporters could provide a shot in the arm for the economy over the coming years” as long as there is clarity over trade with both the EU and other nations around the world. Getting a strong trade deal with the EU, backing our exporters, and taking action to cut the high cost of doing business here in the UK must all be at the top of the agenda over the coming months.”

Manufacturers' perspective: achieving net zero and a sustainable economy

Meanwhile, a recent report from the manufacturers’ organisation, Make UK, and Santander suggests it could take until 2022 for manufacturing to recover to its pre-pandemic growth levels.Yet, the report also predicts the sector will be at the forefront of helping the UK meet its net-zero carbon target by 2050 through a mix of investing in green, sustainable processes and maximising the use of digital technologies.Stephen Phipson, CEO of Make UK, said, “History has shown us that a strong industrial base provides the foundations needed to create a prosperous society. However, the UK has unfortunately become culturally tone-deaf to the idea that manufacturing matters and can provide solutions to the challenges that we face, something the sector has amply shown during this crisis. A new digital, greener and more sustainable economy will emerge from this with an opportunity to catapult manufacturing, science and engineering once again to centre stage in the UK.”Of course, so much depends on how rapidly the world gets over the virus. The World Trade Organisation (WTO) thinks the situation could have been even more desperate, despite reporting at the end of June that global merchandise trade fell by an estimated 18.5% in the second quarter of this year.“The fall in trade we are now seeing is historically large – in fact, it would be the steepest on record,” commented WTO director general Roberto Azevêdo. “But there is an important silver lining here: it could have been much worse.”