Covid-19 and the UK economy: A long road to recovery?

Those hoping for a V-shaped recession and recovery may well be disappointed. That is the view of RICS chief economist Simon Rubinsohn, who believes that, on the balance of probabilities, UK economic activity is unlikely to return to pre-pandemic levels until early 2022. “The support measures taken by the government and the Bank of England have been impressive and unprecedented, but they can only cushion the blow. There will inevitably be some corporate failures and a legacy of job losses.”

Rubinsohn acknowledged as encouraging what he described as “tentative signs of recovery” in China but cautioned more generally against attempts at bogus quantification. “Crude economic forecasts are of questionable value in such extraordinary times.”

Central bank interventions are likely to bloat the balance sheet, but he is “fairly sanguine” about this eventuality. “While we are going to see a significant uplift in money supply, I think that will help facilitate recovery over the medium term, rather than lead to an upsurge in inflationary pressures.”

Walter Boettcher, Colliers International’s Head of Research and Economics for the UK and EMEA adds: “There has been a closer integration of monetary policy with fiscal policy. There’s even talk about the government’s fiscal deeds being financed directly by so called ‘monetary financing’, though the Governor is not too pleased about the concept, as it has a terrible historic reference to the Weimar Republic. But there is a countervailing view that, for a short duration, and if targeted extremely carefully, it should be okay.”

The £330 billion in loan guarantees and £65 billion in salary supports announced by Chancellor Rishi Sunak in March equate to roughly 17% of GDP. Boettcher notes that this broadly aligns the UK response with those of most comparable economies in the Eurozone; France and Spain, for instance, have respectively committed 15% and 17% of GDP. It is Germany, though, that has announced the most extensive package, committing roughly a third of GDP to emergency relief measures.

Overall, Boettcher sees more cause for optimism than Rubinsohn: “I think what the market is really waiting for is some positive virus news. When the number of new cases begin to fall, that will bring a huge amount of confidence, because it will make real the expectation that this initial impact will be of limited duration.”

One upshot of this waiting game is that he is yet to see evidence of widespread deal cancellations – an observation echoed by Kathleen Fontana, Managing Director of Public Sector, Critical Infrastructure and Projects at MITIE. “Deals are on hold, but not cancelled. And the construction world is continuing in an almost business as usual fashion. Different parts of the market are affected differently, but there is still a lot of business going on, which is encouraging.”

Peter Cosmetatos, CEO of the Commercial Real Estate Finance Council (CREFC) Europe believes one particular element of the government’s intervention may have unforeseen consequences for credit markets. “The three-month moratorium on evictions for commercial tenants seems to have encouraged rather more organisations to assume it was okay not to pay rent this quarter than the government perhaps intended.” While acknowledging that the moratorium “was not necessarily the wrong thing to do”, Cosmatatos is concerned it may set in motion a chain of events that ultimately damages SMEs. “The figures from the Cass Commercial Property Lending Survey show that roughly 40-45% of the debt in the system is provided by UK banks; another 35% is provided by other banks; 15% is provided by insurance firms; and 10-12% provided by other non-bank lenders – private equity firms, hedge funds and others.

“Whereas banks can afford to be flexible, for the debt fund lenders the position is very different. They might find it harder to show the flexibility they would like. The reason that this matters is that their 10-12% share of UK commercial real estate debt is the 10-12% that nobody else wanted to provide: SME’s; regional assets; smaller ticket assets; complicated portfolios; and transitional, Cap Ex heavy assets. The right intervention for regulators to make is to ensure that rents are paid. Otherwise, credit challenges for debt funds might come back to bite us.”

Howard Meaney, UK Managing Director and Head of Real Estate at UBS Asset Management points to the fact that around two-thirds of UK retailers have exercised the option to forego rent payments – a small measure of reprieve for an already embattled sector. He can find little in the way of similar respite for the hospitality sector which has been “decimated” by the complete closure of hotels, pubs, restaurants, gyms and cinemas. “It employs something like 9% of the workforce and is the third highest contributor to the UK economy, so it’s very important that we get it back running as soon as we possibly can. I would mention that a number of these operators are offering meals and accommodation to health service workers through these difficult times.”