Economic update - Third quarter 2020

Key points

• Economic activity has started to recover in most countries as lockdown restrictions are eased. At a global level, however, the Coronavirus pandemic is still not under control. Getting economies back to a semblance of pre-Covid normality will therefore require a difficult balancing act between keeping a lid on the number of infections without resorting to full national lockdowns.

• Financial markets have remained calm in recent months, although the rise in the price of gold points to ongoing risk-aversion among investors. The oil price has rallied as the supply/demand imbalances have been corrected, while the success of the EU in agreeing a co-ordinated recovery package has propelled the euro higher against the dollar.

• The UK economy is now recovering after a relatively long period of lockdown restrictions. Yet GDP for the whole of 2020 is expected to be more than 10% smaller than in 2019, with the government’s budget deficit forecast to balloon to over 17% of GDP.

• The past few weeks have brought a welter of redundancy announcements from the UK’s retail, hospitality, and travel sectors. As the Jobs Retention Scheme (JRS) winds down, conditions in the labour market are likely to deteriorate, with the unemployment rate still expected to climb to over 7%. Meanwhile, UK businesses have so far raised around £70 billion of net finance to tide them through the crisis, with the Bounce-Back Loans Scheme (BBLS) being especially important for SMEs.

• The UK’s recovery process will be further complicated by the final stage of Brexit. Irrespective of whether a Free Trade Agreement (FTA) can be concluded, businesses which trade with EU countries will likely face increased trade ‘frictions’, and hence costs, from the start of 2021. The success, or otherwise, of the trade negotiations will also have an impact on sterling.