GDP decline
The inability of people to spend what they have is, according to Peter Toogood, chief investment officer at Embark Group, what makes this crisis particularly acute as “GDP has effectively stopped, which is something that no one who is alive today has ever seen”.
He anticipates that GDP in the UK will decline by at least 0.5 per cent a quarter for each of the next two quarters, indicating a severe recession, with GDP declines continuing into next year.
Stagflation
A major dilemma for policy makers is that if the demand side measure of injecting cash into the system happens without the supply side reform, this would likely lead to much higher inflation, but with economic growth being much lower, this leads to a phenomenon known as stagflation.
A practical way this could happen in the UK is if the government’s demand side measures mean people have more cash, but the goods cannot get to market (shops are closed) then the prices of the goods that are there will rise, reducing the impact of the demand side measures.
This phenomenon of stagflation happened in very different circumstances and for a prolonged period of time in the UK in the 1970s, and it took a series of prolonged recessions before the problem was eliminated.
Richard Flax, chief investment officer at Moneyfarm says that while supply side measures tend to have an effect quite quickly, measures to fix the demand side of the economy take time.
Paul Johnson, director at the Institute for Fiscal Studies (IFS) says the problem with the government increasing spending is it may not go to the areas where it is most needed, as governments are not always the most effective at allocating capital.
Edward Park, deputy chief investment officer at discretionary fund management firm Brooks Macdonald, says even if the present set of emergency measures work and the UK economy bounces out of recession and the Coronavirus pandemic is controlled, it is unlikely that the economy will experience a sudden and swift uptick in growth rates.
This is because the debt created now will have to be repaid, both by the government and by the individual companies.
He adds: “The UK government has announced fiscal stimulus targeting the economic impacts of the Coronavirus outbreak.
"The highest profile part of this is the promise of £330bn of government guarantees to finance bridging loans for UK businesses struggling with cash flow pressures.
"While this headline grabbing number, equivalent to 15 per cent of GDP, will help it will still need to be repaid which will be easier said than done for businesses that need to provide financial support to staff, pay rent and honour contracts with suppliers.
