Perspectives

Out of the frying pan into the fire?

Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
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UNITED KINGDOM  
OUT OF THE FRYING PAN INTO THE FIRE?  
While UK GDP has bounced back since May and has made up half of lost ground caused by the Covid-19 pandemic,  
the economic crisis is still far from being over. In particular, concerns are mounting over the labour market, as the  
government’s furlough scheme will be terminated in the next few weeks. Meanwhile, the end of the transition period  
that maintains the UK in the EU’s single market and customs union is coming up fast. Disagreements during the  
negotiations raise fears about the UK leaving without a trade agreement, which could have an even bigger impact on  
the economy in the long term than the current crisis.  
According to data from the Office for National Statistics (ONS), UK GDP  
dropped by nearly 20% in the second quarter, which was the biggest fall  
GROWTH AND INFLATION (%)  
in Europe. Over the first half as a whole, only Spain did worse than the  
UK (see chart 2). The ONS monthly GDP index rebounded in May and  
then has continued to rise in June and July (last available data).  
GDP Growth  
Forecast  
Inflation  
Forecast  
1
Nevertheless, GDP is still close to 12% below its pre-pandemic level ,  
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4
2
0
2
4
6
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which mainly owes to the services and construction sectors (chart 3). In  
particular, the index for the accommodation and food sector is still 60%  
below where it was in February – in April it was 90% below that level.  
2.5  
1
.8  
1
.3  
1.5  
1.3  
0.7  
-
-
-
-
THE PROTRACTED EFFECTS OF THE ECONOMIC CRISIS  
After slumping earlier this year, economic activity is now on the path to  
recovery. However, the economic crisis will be felt for some time, as the  
authorities’ response delayed some of its adverse effects. One example  
is conditions in the labour market, where more than twelve million  
individuals have benefited from the government’s furlough scheme  
-
-
10  
12  
-9.7  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
(
Coronavirus Job Retention Scheme, CJRS) and its support programme  
for the self-employed (Self-employed Income Support Scheme, SEISS).  
However, the government is planning to replace these programmes in  
October and withdraw some of its support to businesses. As a result,  
fears are rising about a surge in the unemployment rate, as some firms  
will not be able to pay the full wages of their employees.  
GDP GROWTH (%)  
0
Admittedly, thanks in part to these programmes, the unemployment  
rate has only marginally increased since the Covid-19 crisis started,  
reaching 4.1% in July. However, advanced indicators suggest that  
UK payrolls already dropped by about 700 000 between March and  
August. The Bank of England forecasts that the unemployment rate  
will reach 7.5% at the end of the year – with the young and low-skilled  
workers likely to be the most affected. Nevertheless, Chancellor Rishi  
Sunak, who thinks that “indefinitely keeping people out of work is not  
the answer”, has pledged to continue to be “creative” to find ways to  
support the labour market.  
-
5
-
10  
-15  
2020Q2  
2020H1  
-
-
20  
25  
Another consequence of the crisis, inflation will probably remain weak  
in the coming months, which could push the Bank of England to loosen  
monetary policy further if economic conditions were to deteriorate  
CHART 2  
SOURCE: EUROSTAT  
2
again. CPI inflation dropped back to 0.5% in August , owing to the  
impact of the crisis on demand, the drop in oil prices earlier this year,  
the temporary cut to the VAT rate for the hospitality sector, and the Eat  
Out to Help Out scheme – which provides 50% discount up to GBP 10 for  
the clients of participating restaurants. The Bank of England forecasts  
that inflation will remain under 1% at least until the start of 2021,  
which is much below its medium-term target of 2%.  
(
EU), is coming up fast. If the period is not extended, which is very li-  
kely, the UK will leave the EU’s single market and customs union on 31  
December 2020. However, the negotiations for a free-trade agreement  
between the two parties are making little headway. After eight rounds,  
there are two key stumbling blocks to an agreement.  
The first obstacle is about ensuring a level playing field, which means  
setting up a framework to keep competition between the two parties  
open and fair in the long term. While this had been agreed to in the  
BREXIT, THE OTHER MAJOR THREAT  
Meanwhile, the end of the transition period, established in the Wit- Political Declaration that laid the foundations of the ongoing talks,  
hdrawal Agreement signed between the UK and the European Union  
British negotiators are now refusing both to commit to maintaining  
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https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/july2020  
https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/august2020  
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Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
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high standards and to put in place appropriate mechanisms to prevent  
distortions of trade and unfair competitive advantages.  
BREAKDOWN OF GDP AND ITS COMPONENTS  
Fisheries is the second source of dispute. While the UK would like to  
take back control of its waters, the EU negotiators want to maintain  
access for EU fishermen on terms similar to those that applied while  
the UK was in the EU.  
Based 100 = Feb. 2020  
100  
90  
What’s more, the UK seems to have hardened its negotiating stance  
in recent days. Prime Minister Boris Johnson has announced at the  
start of September that the UK would “move on” if no deal was found  
before 15 October. The government has also presented draft legislation  
80  
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6
5
4
0
0
0
0
the Internal Market Bill – that would break with some aspects of the  
Withdrawal Agreement, even though the text is legally constraining.  
GDP  
Index of Services  
Manufacturing  
Agriculture  
Index of Production  
Construction  
While the aim could be to win concessions from the EU, the possibility  
of an exit without a trade deal is real. According to most economists,  
that could have a big bearing on economic growth in the UK in the long  
run (see chart 4). Given the share of their production they export to the  
EU, some sectors, such as electronics, would particularly suffer from  
this kind of divorce (see chart 5).  
Feb-20  
Mar-20  
Apr-20  
May-20  
Jun-20  
Jul-20  
SOURCE: ONS  
CHART 3  
In the meantime, the UK seeks to replicate the free-trade agreements  
the EU has signed with the rest of the world. The aim is to prevent a  
return to basic WTO rules, as these would put many tariff and non-  
tariff barriers to trade.  
LONG-TERM IMPACT ON UK GDP OF RETURN TO WTO RULES  
Change relative to no-Brexit scenario (%)  
UK government (2018)  
So far, the UK has signed roughly twenty trade deals with a total of  
Latorre et al. (2018)  
Ortiz and Latorre (2018)  
Jafari and Britz (2017)  
Minford et al. (2016)  
HM Treasury (2016)  
OECD (2016)  
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fifty countries . The most important is the one signed with Japan in  
September. However, except on certain aspects – such as financial  
services, digital technologies or e-commerce – the deal does not go  
much further than the one that ties Japan with the EU. What’s more,  
according to the British government’s own estimations, the deal that  
was just signed will only boost UK GDP by GBP 1.5 bn in the long term,  
NIESR (2016)  
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which is equivalent to 0.07% of 2018 GDP .  
PwC/CBI (2016)  
Overall, the countries with which the UK has signed trade deals so far  
represent only 10% of the country’s total trade (imports and exports).  
By comparison, EU countries represent nearly 50% of the UK’s total  
trade. This underlines how important a trade deal with the EU would  
be for the UK economy.  
CEP (2016)  
Ciuriak et al. (2015)  
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9
-8  
-7  
-6  
-5  
-4  
-3  
-2  
-1  
0
CHART 4  
SOURCE: VARIOUS  
SHARE OF UK PRODUCTION BY SECTOR EXPORTED TO EU (%)  
Electronics  
Other primary  
Motor vehicles  
Chemicals  
Other machinery  
Air transportation  
Metals  
Other transport  
Textiles  
*
All manufactures  
Finance  
*
*
Total  
All services  
0
5
10  
15  
20  
25  
30  
35  
CHART 5  
SOURCE: PIIE  
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4
https://www.gov.uk/guidance/uk-trade-agreements-with-non-eu-countries  
https://www.gov.uk/government/publications/uks-approach-to-negotiating-a-free-trade-agreement-with-japan/uk-japan-free-trade-agreement-the-uks-strategic-ap-  
proach  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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