BlackRock Investment Institute

Macro insights

Zooming in on the UK

The UK has been one of the developed market (DM) economies hardest hit by the Covid-19 pandemic, with output shrinking sharply from pre Covid-19 levels. Activity has restarted slowly and mobility lags other DM countries because the lockdown was lifted later. The UK’s edition of the policy revolution saw comprehensive and coordinated monetary and fiscal easing, providing a bridge for disrupted cash flows. A key risk: The labor market furlough program is set to expire at the end of October. The Bank of England forecasts unemployment could nearly double by the year end, and the official Office for Budget Responsibility points to more severe scenarios. See the chart below.

UK unemployment rate and official forecasts, Sept. 2020

Source: BlackRock Investment Institute, Bank of England, Office for Budget Responsibility (OBR) and the Office for National Statistics, with data from Haver Analytics. Notes: The orange line shows the three-month trailing average unemployment rate. The yellow line shows the Bank of England’s August 2020 forecast, assuming policy rates follow the path implied by financial markets. The green line shows the OBR’s central scenario for unemployment published in the July 2020 Fiscal Sustainability Report. The pink line shows the OBR's downside scenario. Forecasts may not come to pass.

Brexit trade talks will come into focus as the Dec. 31 deadline looms – potentially denting confidence in the restart. Additional policy support – most likely more asset purchases – may be called for if the activity data weaken again and the important services sector continues to struggle. Further fiscal support may also be necessary.

 

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