GDP Growth and inflation (Y/Y, %) The population of the United Kingdom and its economy are faring no better than elsewhere in the face of the coronavirus pandemic. Its relatively late arrival in Britain – on 29 February 2020 there were 23 confirmed cases, compared to a hundred or so in France and more than a thousand in Italy – did not trigger immediate protective measures. Boris Johnson’s government initially adopted a ‘herd immunity’ strategy, before pivoting to a national lockdown from 24 March. At the time of writing (2 April 2020) most public places (schools, restaurants, pubs, sports clubs, etc.) and non-essential shops had been ordered to close, and restrictions had been placed on the population’s movements.
Hospital bedsThe disease, meanwhile, has rapidly taken hold with around 6,000 new cases per day and the loss of 4,300 lives due to Covid-19.
The economy is now showing the initial effects of the crisis. The March PMI fell to 37.1, a level never before seen, not even during the financial crisis of 2008. Back then, UK GDP showed a sharper drop than in France or in Europe as a whole[1], which could be explained both by the limited scale of the automatic stabilisers (public transfers) and the significance of wealth effects, in a country that remains a leading financial services centre.
Fiscal support measures (GBP billion) A substantial fiscal commitment, mainly in the form of loan guarantees
Viewed as of high quality and considered a ‘national treasure’, the UK’s National Health Service (NHS) has nevertheless gone into the pandemic crisis in a weakened state. Although free care has been maintained to date, government spending on the service, and in particular capital spending, has been tightly constrained over the last decade. As a share of GDP spending fell regularly up until 2017, when Theresa May changed course[2]. Today the country is far from being well placed in terms of healthcare staff and capacity (2.57 hospital beds per 1,000 inhabitants, a level at the bottom end of the OECD range, Figure 2).
Fiscal measures to tackle the effects of the pandemic presented on 11 March by Rishi Sunak, Chancellor of the Exchequer, included an additional GBP5 billion for the NHS (4% of its annual budget) which might look puny given the scale of the crisis.
The BoE has deployed substantial resourcesIn reality, the bulk of the government’s commitments relate to guaranteed cash flow loans to companies suffering from a loss of business (Table 3). On 17 March, Mr Sunak announced that their total value could reach GBP330 billion, or 15% of GDP. Although the precise split has not been spelt out (it will depend on the scale and spread of the crisis), the bulk of the allocation will go to large companies through the Covid Corporate Financing Facility (CCFF), a programme of buying commercial paper that will be open for 12 months and run by the Bank of England (BoE). Eligible securities (for a minimum amount of GBP1 million and for maturities ranging from 1 week to 12 months) must be issued by companies “making a significant contribution to the economy” with an investment grade credit rating on 1 March 2020[3].
Small and medium-sized companies, with annual revenue of up to GBP41 million, will be covered by the Business Interruption Loan Scheme (BILS), a system of loans made by banks for an amount of up to GBP5 million. The UK Treasury will guarantee 80% of the loan value and cover the first six months of interest payments.
To complete the picture, the government is planning direct cash grants to companies and offering deferral of contribution payments for a total of at least GBP 20 billion (GBP 27 bn on the IMF’s reckoning).
Substantial monetary support
As is the case around the world, the fiscal effort has been backed by an unprecedented monetary stimulus. Since 11 March, the BoE’s policy rates have been close to zero, the financial system has received exceptional injections of liquidity, in both sterling and dollars, and the pace of quantitative easing has increased (see box). At the latest regular meeting of its Monetary Policy Committee (MPC), on 25 March 2020, the BoE did not take any new measures but indicated its readiness to increase asset purchases if necessary and emphasised its vigilance over the application of the measures introduced, to guarantee their correct transmission into the real economy.
