Prolonged social distancing stipulated by the government with some easing of restrictions during the pandemic, and Brexit, will hold the UK economy’s recovery from coronavirus, according to S&P credit rating agency. The agency disagrees with the Bank of England’s (BoE) optimistic view about a sharp rebound.
S&P Global Ratings said it expects the UK economy to shrink by an enormous 8.1 per cent this year. And it said the economic rebound would take longer than expected, with growth next year of 6.5 per cent.
Recent figures showed that UK GDP suffered a 2.2 per cent drop in the first quarter of 2020 – the worst fall since 1979. The BoE chief economist Andy Haldane had previously said UK economic outlook looked less grim but “considerable” risks remained.
This pessimistic view stands in contrast to the much rosier picture painted by him. In an online talk he said: “Both the UK and the global economies are already well into the recovery phase. The UK’s recovery is more than two months old.”
He said the UK’s recovery could well be ‘V-shaped’ – a rapid fall in GDP followed by a quick bounce back. “It is early days, but my reading of the evidence is so far, so V”. He said the UK and global economies were “already well into the recovery phase”, but said both economies were recovering “from an exceptionally low starting point” following an unprecedented drop in GDP in the first quarter.
However, S&P were clearly not convinced by Haldane’s argument. In a report, S&P senior economist Boris Glass said the company is “now more pessimistic” about “the pace at which the economy, and society, will return to a semblance of normal”.
In particular, S&P said Brexit would act as a drag on growth. The ratings agency said it now thinks the UK will not extend the Brexit negotiations deadline after the end of this year. It said the UK is now likely to switch to a limited free trade regime at the end of December, causing problems for the economy.
“The switch to the new regime will come at an inopportune time, when the recovery is still fragile. It will dampen the rebound in 2021 and also slow growth in the following years,” S&P said. The agency has long been wary of Brexit, handing the UK a double-notch credit rating downgrade after the referendum of 2016.
The report predicted the recovery will also take longer than initially expected because businesses and consumers must adjust to the “new normal”. It said that some degree of social distancing may persist, even if it is not imposed for long.
“We now forecast the economy will still be around three per cent smaller by 2023 than we had expected prior to the pandemic and under the assumption of an extension of the transition period,” Glass said.