Perspectives

Put to the test

EcoPerspectives // 2nd quarter 2020  
21  
economic-research.bnpparibas.com  
United Kingdom  
Put to the test  
Now a global phenomenon, the Covid-19 pandemic reached the United Kingdom relatively late and did not give rise to immediate  
protective measures. Having initially opted for a ‘herd immunity’ strategy, Boris Johnson’s government finally decided, on 24 March,  
to introduce a national lockdown. As in Italy, France and indeed generally across continental Europe, people’s movements and  
interactions are now limited in the UK. The disease, meanwhile, has spread rapidly, on a trajectory similar to that seen in the worst  
affected countries. Faced with the health and economic threats created by the pandemic, the government and the monetary policy  
authorities have introduced an exceptional package of support.  
The population of the United Kingdom and its economy are faring no  
1
- GDP Growth and inflation  
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  
(Y/Y, %)  
GDP Growth  
Inflation  
Forecast  
Forecast  
5
4
3
2
4.3  
2.5  
1.8  
1.7  
1.3  
1.1  
1
0
1
2
3
4
5
0.7  
(
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. The 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.  
-4.1  
2
018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
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  
Source: BNPP, Interim Forecasts (Before Global Markets updated scenario)  
1
2- Hospital beds  
drop than in France or in Europe as a whole , which could be  
explained both by the limited scale of the automatic stabilisers  
Per 1000 inhabitants, in 2016  
(
public transfers) and the significance of wealth effects, in a country  
1
1
1
4
2
0
8
6
4
2
0
that remains a leading financial services centre.  
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,  
JPN DEU FRA BEL CHE FIN NLD PRT ITA ESP USA UK MEX  
Source: OECD  
2
when Theresa May changed course . 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).  
3- Fiscal support measures (GBP billion)  
Loan guarantees  
330  
n.s.  
n.s.  
39  
27  
12  
Fiscal measures to tackle the effects of the pandemic presented on  
-
-
To major companies (CCFF*)  
To SMEs (BILS**)  
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. In reality, the bulk of  
the government’s commitments relate to guaranteed cash flow loans  
Direct transfers, contribution reductions and deferrals  
-
-
To companies  
To social organisations (including NHS)  
TOTAL  
370  
1Between the first quarter of 2008 and the second quarter of 2009, UK GDP  
fell by 6%, compared to 3.9% in France and an average of 5.6% in the  
European Union. Source: Eurostat.  
*
Covid Corporate Financing Facility **Business Interruption Loan  
Scheme  
Source: Government, IMF, Press  
2
See Office for Budget Responsibility, Fiscal sustainability and public  
spending on health, September 2016.  
EcoPerspectives // 2nd quarter 2020  
22  
economic-research.bnpparibas.com  
to companies suffering from a loss of business (Table 3). On  
4- The BoE has deployed substantial resources  
1
7 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  
Mark Carney’s term as the Governor of the Bank of England ended on 16  
March, having been extended to help deal with possible Brexit-related  
complications. At the time of his departure, the BoE had pursued a more  
or less unchanged monetary policy for several months with an asset  
purchasing programme, launched in 2009, capped at GBP445 billion, and  
a policy rate that was raised to 0.75% in August 2018 and held at that  
level despite the repeated votes, since November 2019, by two MPC  
members to cut it to 0.5%.  
Faced with the Covid-19 crisis, the BoE reacted relatively quickly and  
strongly at the extraordinary MPC meetings on 11 and 19 March. The  
policy rate was cut first to 0.25%, then to 0.10%. The asset purchasing  
programme was increased by GBP200 billion, including GBP10 billion in  
private securities. The long-term refinancing programme was relaunched  
as the Term Funding Scheme Small and Medium Enterprises (TFSME),  
which as its name suggests has a particular focus on SMEs. Planned to  
last 12 months, the TFSME is designed to make available 4-year funding  
equivalent to 10% of participants’ real economy lending at preferential  
rates. The counter-cyclical buffer applicable to UK lending was cut from  
1% to 0% for 12 months with immediate effect, freeing up the equivalent  
of up to GBP190 billion of potential financing according to BoE estimates.  
the economy” with an investment grade credit rating on 1 March  
3
2
020 .  
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).  
An agreement was also reached with the Fed to improve liquidity supply  
through US dollar liquidity swaps. In practice, the effective rate on this  
type of financing fell by 25 basis points on 16 March. On 18 March, the  
BoE announced that it had already allocated GBP12 billion of this type of  
funding. On 24 March, it also triggered the Contingent Term Repo Facility  
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  
(CTRF), temporarily enhances its capacity to provide sterling liquidity.  
Lastly, the BoE plans to adjust the timetable and application of certain  
prudential measures. The stress tests due to be carried out in 2020 have  
been cancelled  the 2019 round of tests having been judged satisfactory  
by the BoE and the Biennial Exploratory Scenario looking at liquidity  
and climate change delayed. The BoE has also expressed its support for  
a flexible application of the rules for classifying loans under IFRS 9 such  
that, should the authorities impose or encourage repayment holidays, this  
does not automatically feed through into the recognition of cases under  
Stage 2  which would require an increase in bank provisions. The BoE  
has also decided to delay by one year the implementation of proposals  
relating to the definition of default, probability of default and loss given  
default and the move to ‘hybrid IRB’ models as part of the finalisation of  
Basel III measures. Since this decision, the Basel Committee has made a  
similar recommendation.  
(
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.  
Laure Baquero  
3
It is worth noting that the BoE will have some flexibility on these criteria,  
particularly if they prove to be too selective. See: Financial Times, Loan  
guarantees: what funding will be available to UK businesses? March 20,  
2020.  
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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