Coronavirus could prompt 'worst recession in a century' in UK

Oscar Williams-GrutSenior City Correspondent, Yahoo Finance UK
Yahoo Finance UK
Gathering storm clouds: Deutsche Bank said on Friday the UK could be heading for the 'worst recession in a century'. (Richard Baker/In Pictures via Getty Images)
Gathering storm clouds: Deutsche Bank said on Friday the UK could be heading for the 'worst recession in a century'. (Richard Baker/In Pictures via Getty Images)

The UK could experience “potentially the worst recession for a century” this year as a result of Covid-19 and efforts to contain its spread.

Deutsche Bank (DB) economists Sanjay Raja and Oliver Harvey on Friday warned that, in a worst case scenario, the UK economy could shrink by 5.5% this year. That would be the worst performance since 1920.

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“Relative to Italy and China, it's clear that the spread of the virus remains merely at its nascent stage,” Raja and Harvey wrote. “With the UK government moving closer to enforcing self-quarantine measures, disruptions to the economy will hurt households and businesses severely.”

Even if the worst case is not realised, Raja and Harvey said their “base case” — what they believe is most likely to happen — is a 4.2% contraction in UK GDP. That would make it the worst year since the global financial crisis in 2009.

“The growth impact from the coronavirus looks likely be to be deeper and more protracted than we previously expected,” the pair wrote in a note sent to clients on Friday.

Raja and Harvey said efforts to contain the spread of novel coronavirus would likely lead to “the biggest drop in quarterly growth on record” in the second quarter of 2020. The economy is predicted to shrink by 7.5%, as people stay home, businesses shut, international trade slows, and supply chains are disrupted.

Unemployment is forecast to peak at over 8% later this year, over the double the current rate.

Most economists are now expecting the world to fall into recession in 2020, with the UK one of the most exposed nations to any downturn.

Some are less pessimistic than Deutsche Bank. Goldman Sachs (GS) expects the economy to shrink by just 1.1% this year, while Bank of America (BAC) on Friday cut its forecast for UK GDP growth this year from 0.3% to only -2%.

However, others are more pessimistic. Morgan Stanley (MS) this week said the UK economy could shrink by 7.9% in a worse case scenario. The only worse economic contraction recorded in modern times was in 1921, when the economy shrank by 9.7%.

Samuel Tombs, chief UK economist at economics consultancy Pantheon Macroeconomics, said on Thursday a “sharp recession” was now “unavoidable” as “emergency measures to slow the Covid-19 outbreak impede households’ spending.”

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