Coronavirus predicted to further weaken UK economic growth together with Brexit

Lianna Brinded
Head of Yahoo Finance UK
Photo: Getty

The British Chambers of Commerce (BCC) has warned that the coronavirus pandemic is going to further weaken UK economic growth this year, in combination with Brexit.

The lobby group, which represents 75,000 businesses in all sectors, said in a statement that it expects UK economic growth to “slow sharply” in 2020 and has therefore downgraded its UK GDP growth expectations for the year to 0.8%, from the previous forecast of 1.0%. 

It says that would be the weakest full-year growth outturn since 1992 — not including the 2008/09 financial crisis — and a steep downturn from UK GDP growth of 1.4% in 2019.  

"Coronavirus could further weaken an already stagnant UK economy, as many businesses are starting to report an impact on their cashflow and growth prospects,” said Adam Marshall, director general of the BCC.

READ MORE: Mark Carney: Coronavirus won't be as bad as 2008 financial crisis

 “The Chancellor and the Bank of England (BOE) have responded to the immediate challenge with measures to help firms hit by Coronavirus, and they must now ensure this support gets to businesses as quickly as possible.  

“More will need to be done later in the year to boost business confidence and tackle prolonged economic stagnation. Securing new trading arrangements, taking real action to reduce the high upfront costs of doing business and putting spades in the ground on long-overdue infrastructure projects must be prioritised in order to secure our long-term economic prospects.” 

How Brexit will also hurt the UK economy

The BCC says that after the sharp slowdown in growth in 2020, growth is expected to pick up to 1.4% in 2021 and 1.6% in 2022.

But it points out that “a lack of clarity on the UK’s future trading relationship with the European Union (EU) and other partners around the world and a struggling global economy is also predicted to limit UK’s near-term growth prospects.”

It said that in 2020, it expects:

  • UK export growth: To be its weakest since 2009 

  • Business investment: To contract by 0.7% because the “cost of doing business in the UK and a lack of clarity on the future trading conditions limit investment intentions.”

  • Household spending growth: Predicted to be at its slowest since 2011, as the coronavirus impact will temporarily weaken consumer demand, despite historically low unemployment. 

“It is increasingly likely that the boost from higher government spending and more political certainty, will be surpassed over the near-term by the negative impact of coronavirus on the UK economy,” said Suren Thiru, head of economics at the BCC.

“Although the scale and impact of coronavirus remains highly uncertain, early evidence of disruption to supply chains and weakening in consumer demand and business activity could mean that even in the case of a temporary shock to the economy, there may be some long-term impact on economic output – particularly if significant action is needed to combat its spread.  

“Failure to achieve a UK-EU arrangement conducive to trade is also a key risk to the outlook for the UK economy as disruption in early 2021 could adversely affect economic conditions.” 

What the UK government and BOE are doing

Over the last few days, the BOE announced emergency measures in response to the economic impact of novel coronavirus, including an unexpected interest rate cut.

The central bank said it would lower the interest rate by 50 basis points from 0.75% to 0.25%.

It also announced:

  • A new £100bn ($129bn) funding scheme aimed at maintaining bank and building society lending to small and medium-sized businesses.

  • Cutting the “counter cyclical buffer” for UK banks, which will unlock £190bn they can use to lend to people and businesses that need it.

  • A warning to banks not to increase dividends or bonuses in the face of the newly unlocked cash

READ MORE: Budget 2020: Here's everything that you need to know

Later that day, UK chancellor Rishi Sunak announced a £30bn coronavirus spending package. This included:

  • The government will spend “whatever it takes” on the National Health Service, and announced a £5bn emergency response package

  • Statutory sick pay will be paid to all those who self-isolate, even if they do not have coronavirus symptoms

  • Some £2bn has been set aside to cover up to 14 days of sick pay for employees at businesses with fewer that 250 employees

  • £500m will be provided to local authorities to directly support vulnerable people

  • The abolition of business rates for retail, leisure, and hospitality firms that have a rateable value of less than £51,000

  • A new coronavirus loan scheme will see the government part-guarantee “business interruption” loans of up to £1.2m to small and medium-sized businesses

  • Around 700,000 of the country’s smallest businesses will be eligible for a £3,000 cash grant