Is the UK’s economy recent contraction an opportunity?

The UK economy is currently going through one of its darkest moments in the past centuries, after an economic contraction that started in the past year and has extended into the present. Of course the reason of the huge contraction of the economy lies upon the Covid-19 outbreak, that continues to rattle the UK’s but also many other economies around the world. Even so the situation in the UK has worsened lately, giving us the opportunity to investigate further the current economic conditions and what we can expect in the future.

First we must make a start with the fact that the virus outbreak in the UK was harsh back in 2020, yet the new variant of the virus has taken the negative health circumstances to the next level according to very recent reports. An official report by GOV.UK, stated the variant has increased the severity of symptoms of the virus and is forcing more hospitalizations and more critical health circumstances that could lead to death. Practically a comparison between the normal Covid-19 virus and the new variant has been performed which confirms the new variant is much more dangerous. Even though the research is eye opening and creates awareness, it also creates a stronger urge and commitment for the stay home stay safe philosophy to prevail. As more people stay home with the government basically forcing them to stay indoor by law, the economy continues to weaken.

According to UK economic data released on Friday the 12th of February, the Preliminary GDP figure for 2020 Q4 was at -7.8% year on year. The Preliminary GDP figure remained in negative territory since May 13th 2020 with its peak being in August 12th reaching the staggering -21.7%. Based on the projections that the Bank of England (BoE) had made in its February 2021 Report, even though the current strong restrictions are currently expected to lower economic activity, possibly more than those in 2020 Q4, they do not expect to worsen to levels seen back in the Q2 of 2020 which were terrible. The bank also claimed GDP is expected to fall by around 4% in 2021 Q1, changing its view of a possible rise back in the November Report. The fact that BoE changed its forecast from its previous reports, is in our opinion evidence that the virus effects and the impact on the economy is unknown territory for economists. Even at the moment when vaccination continues to be carried out extensively, the outcome and performance of the economy cannot be confirmed despite some optimism prevailing. Vaccinations are seen as the path to easing lockdown measures.

As per the bank’s outlook on the crucial employment sector, forecasts remain unsatisfying. According to the banks report unemployment is expected to worsen in the following months. However some hopes that the government’s employment support are expected to keep unemployment from rising substantially and abruptly are also in play. Furthermore, on Friday the 12th of February the UK Manufacturing figures for December were released. On a month on month basis Manufacturing dropped from 0.7% to 0.3% while the Yearly figure improved somewhat but remained in negative territory at -2.5% compared to previous -3.8%.

Manufacturing in the UK is one of the strongest vessels for the UK economy and has supported it in growth for decades. On yearly basis, Manufacturing Output in the UK has been in continuous negative territory since June 2019. Yet the pandemic has made the sector suffer even more when it peaked at -22.8% in May 2020. The results could have been better if the U.K. was not forced to impose extended lockdown measures and restrictions that held consumers and workers back from daily routines and work. These measures greatly impacted the economy sending it even lower. The measures were also prolonged due to a steep rise in covid-19 cases, which the government fought to bring lower and pinned down the economy as we can see now.

The UK economy is also going through its first stages after its divorce with Europe and this seems to be interfering with its performance also. Changes in the way banks used to operate under EU laws may be brought forward which could be a sign of further turbulence ahead for the UK economy. However, this could also be an opportunity for the BoE to setup its own strategy and regain its independence from EU banking laws, step by step. Despite the uncertainty that could follow, this can also be an opportunity to rebuild the UK banking system from scratch.

As a conclusion, one of the latest headlines from the UK that received considerable attention in the previous week, was that the UK Banks may need 6 months to prepare for a negative interest rate which is the equivalent of saying such a scenario is quite unlikely for the time being. Also despite the adverse economic circumstances detailed in this report, the GBP has been on the rise and has lately been lifted to a new multi-year high level against some of its major counterparts. However, the question remains if the strong pound is in favor of a weakening economy or not.

If the country manages to control new virus cases in the short term while easing measures gradually, then the economy can rebound faster than expected. The idea that the UK economy is currently at its lowest level in years, is in our view an opportunity for investment. Investors on the lookout could find opportunities of purchasing new businesses or property at remarkably low prices with consumer confidence being on the low currently. Buying or investing in an undervalued project can be used as an instrument to gain profits in the next years where the pandemic is most probably to weaken and health and economic circumstances will improve.

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