The UK economy shrank by a record 9.9% last year but narrowly avoided a much-feared double-dip recession. The shrinking economy is thought to be largely due to coronavirus restrictions according to figures from the Office for National Statistics (ONS).
The latest report shows that the UK’s economic contraction was more than twice as much as the previous largest annual fall on record.
There was some good news even though the overall annual report looked bleak as the economy recovered to grow by 1.2% in December, after shrinking by 2.3% in November.
This is thought to be due to the relaxation of lockdowns during the run-up to Christmas, but many industries which had started to recover lost ground were hit again and suffered further losses such as automotive, hospitality, the beauty sector such as hairdressers.
The slight growth in December confirmed economists’ hope, that the UK economy looks set to avoid what could have been its first double-dip recession in over 40 years. However, with the lockdown currently in full force, there is some trepidation as to what the figures for January and February bring.
What is a Double-Dip Recession?
A recession is defined as a period of two consecutive months where a country’s economy shrinks. A double-dip recession is when the economy recovers for a short period of time into growth only to fall back into shrinkage once more.
Speaking about the news, Chancellor Rishi Sunak said: "Today's figures show that the economy has experienced a serious shock as a result of the pandemic, which has been felt by countries around the world.
"While there are some positive signs of the economy's resilience over the winter, we know that the current lockdown continues to have a significant impact on many people and businesses.
"That's why my focus remains fixed on doing everything we can to protect jobs, businesses and livelihoods."
Britain has suffered a torrid time during the coronavirus pandemic, as it reported Europe's highest death toll and also sits near the top of the world's highest death tolls per capita. This has led to long periods of lockdowns and continuous restrictions, which it seems have had a record-breaking negative impact on what was a thriving economy a year ago.
The blow suffered by the large service sector, on which the UK is very dependant, much of which has been closed for the best part of the last year has been cited by many as one of the largest contributing factors to the damage suffered by the UK economy.
However, there is hope with Britain boasting the highest vaccination rate of most European countries so far, raising the prospect of a faster overall rebound for its economy, although experts are cautioning that this may not occur until later this year.
Mat Megans, CEO at Hyperjar, examines current patterns of debt and spending and discusses how the status quo might be changed.
COVID-19 has impacted everyone in different ways. On an economic level, it was the tipping point that burst the bubble of expansion that started after the Great Recession ended in 2009. Now we are in a new recession caused by deliberate, but necessary, actions to try and prevent the rapid spread of the virus. Actions which have hammered the economy. Central banks around the world had to drop interest rates, often to as close to zero as makes no odds, to try and stimulate demand. The average UK consumer is facing this grim situation whilst sitting on a pile of debt even larger than the previous peak in 2008.
So, what about The Great Recession?
The Great Recession was a crisis of our own making that almost took down the global financial system. It caused such a scare that governments around the world implemented various regulations to try and prevent a repeat ever happening again. In the UK, one such regulation was ring-fencing, the set of rules that apply only to UK banks with more than £25 billion of core deposits. The main objective is to separate essential banking services from riskier lending activities – to try and avoid key banks dabbling in esoteric products like CDO-squareds and sub-prime mortgage securitisations. These indirectly led to people lining up in the street outside Northern Rock asking for their deposits back. Ring-fencing has definitely succeeded in making these deposits safer, but has also made it more difficult for many banks to earn attractive returns on capital.
This creates two side effects:
- There is less desire for aggregation of consumer deposits by many large banks;
- The big banks have increased levels of unsecured consumer lending compared to less profitable secured products such as mortgages.
Ring-fencing has definitely succeeded in making these deposits safer, but has also made it more difficult for many banks to earn attractive returns on capital.
What does this mean for the UK consumer?
I believe these conditions contribute to a number of trends seen over the past decade. Unsecured consumer debt has risen to all-time highs. Consumers are bombarded with offers for credit to buy almost anything, in almost every way imaginable – on social media, at the checkout till or online basket, in the post, at the ATM, on television. Fintech has also participated in driving innovation to make accessing credit easier and more prevalent with a strong increase in Buy Now Pay Later services at checkout.
The net result of this mountain of unsecured debt? Many people find themselves in very difficult situations as the expansion ends and recession sets in, leading to higher unemployment and increased personal financial difficulty.
Good debt and bad debt
Yes, we have a heavily indebted consumer. But debt isn’t always bad. In fact, some debt is a tool that creates significant happiness and wealth, for example: mortgages. A small deposit can help buy a house, and even modest levels of price appreciation over the long term can net attractive returns, or allow for mortgage repayments which are lower than the rent for an equivalent property. I call this good debt, debt used to generate positive returns and outcomes. Then you have other forms of good debt which arise through unplanned necessity, for example debt used to buy a car that’s essential for work, or a broken boiler that needs to be repaired.
Bad debt is none of this. It’s debt used to buy depreciating assets such as a nice pair of shoes or the latest gadgets that do not generate real, absolute or relative financial returns. Problems can often arise as bad debt accumulates, sometimes on top of necessary good debt. What inevitably happens is those with the smallest financial buffer have the worst debt, and this means they suffer more in a recession.
What can we do?
It’s not all dark and gloomy. We can do a lot. It has become a cliché, but in this case, we really can build back better, and not just as a political slogan. Perhaps we can rewire society’s relationship with spending and debt:
- Lockdown has made many appreciate the simple things in life. A ‘gratitude attitude’. Time with family, friends, relationships and nature are increasingly valued personal ambitions – maybe this may make us a little less susceptible to buying material objects for instant gratification, and a little more cautious about taking on debt to buy things that we cannot really afford.
- Economic uncertainty has led many people, who have the ability to do so, paying down debt and increasing savings at unprecedented rates. To play on the infamous words of ex-Citibank CEO Chuck Prince, many people recognise the music has stopped playing and it’s time to stop dancing. They’re building buffers.
- A younger generation is growing up and joining the workforce in extremely difficult times and they have different attitudes to debt and excess conspicuous consumption. Sustainability is one of their driving forces and this applies not just to carbon footprint but also to their finances.
- Near 0% interest rates on current and savings accounts is becoming front page news and a topic people are thinking about and discussing. It offers the opportunity for other stakeholders besides banks to step in and help give savers attractive options. The topic of financial literacy is becoming more prominent and there now exist many popular Instagram influencers who talk about personal finance. Being responsible with your money is becoming cool.
[ymal]
These factors set up an opportunity to reset and to think about fintech business models which are designed around savings, not around debt. At HyperJar we are working with a group of forward-thinking retailers to offer attractive rewards to consumers who can commit funds that will be spent with them in the future. The funds are safely held at the Bank of England until our customers are ready to spend it. On top of the rewards, which grow dynamically over time when money is allocated, you’re less tempted to spend on things you don’t need. A win-win between shoppers and the places where they shop. That’s a future we think is possible and worth trying to build.
Paul Naha-Biswas, founder and CEO of Sixley, shares some of the outcomes of the 2008 recession and how a similar economic downturn could lead to greater innovation and success in UK businesses.
On 12 August, the worst-kept secret in the country came out, and the UK entered a recession for the first time in eleven years.
Few were surprised by the news. In the months preceding the announcement, the economy went through a period of unprecedented disruption due to the COVID-19 pandemic and the subsequent lockdown, culminating in GDP plummeting by 20.4% within the first three months of the year.
But, while the ‘R’ word might send a shiver down the spine of most businesses, it may surprise you to learn that many of the household brands we use today were formed in the last global financial crisis (GFC). Uber and Airbnb were just two businesses founded during the 2008 crash and used the recession as an opportunity to innovate within their sector.
So, with this in mind, what lessons can businesses learn from the last financial crash and where are the opportunities for innovation this time around?
Lessons from the 2008 financial crash
In the last recession, the consumer businesses that did well were those that offered services or goods at a far lower cost than pre-GFC.
As budgets tightened, people were increasingly prepared to change their consumer behaviour and explore new digital-first businesses to save money. As a result, we saw a significant rise in casual dining and low-cost retail – such as Boohoo – and also a spike in digital businesses, such as Airbnb and Uber that, through their use of lateral business models, brought quality services to people at a much lower price than competitors. Who could have imagined before 2008 that you could book a whole apartment for less than a hotel room or get driven around town for half the cost of a black cab?
In the last recession, the consumer businesses that did well were those that offered services or goods at a far lower cost than pre-GFC.
How COVID-19 is changing consumer behaviour
A similar trend is emerging during the COVID-19 recession, with Britons cutting back hard on their spending – both out of worry and due to a lack of spending opportunities.
Consumer spending fell by 36.5% in April compared with the same month last year, which followed a 6% drop in March. During the same period, spending on travel nearly halved, and outlay on pubs, clubs, and bars dropped by 97%.
However, the unique circumstances of COVID-19 have created a new trend in consumer behaviour that wasn’t apparent in the GFC. The Government lockdowns actioned around the world has shown businesses how much of our economy can shift online. And the longer restrictions go on for, the less likely it is that businesses will return completely to their post-COVID-19 setup.
With more people staying at home, there will be increased demand for digital, online services and more opportunities for businesses to innovate. Take Hopin, a virtual events company, for example, the brand spotted a gap in the market created by everyone staying inside during the pandemic and raised over $170 million from investors and built up a $2 billion+ valuation since lockdown began, despite only being founded in 2019.
Hopin isn’t the only business success story from COVID-19 and with the pandemic likely to bring about permanent changes in consumer behaviour, there are plenty of opportunities for entrepreneurs to establish businesses that will disrupt their sector in a similar way to how Uber and Airbnb did in 2008.
The availability of excellent talent
However, increased consumer demand for digital services, isn’t the only reason why now is an opportune moment for innovation.
In the GFC, labour turnover fell significantly – from 18% of the workforce in 2006 to a low of 10% in 2013 – as workers looked to hold onto secure jobs and employers put a pause on recruitment.
[ymal]
Once again, a similar trend is emerging, with employment opportunities falling by 62% across the UK in the three months to June compared to the same quarter last year.
While this isn’t the ideal situation for jobseekers, businesses now have a huge and diverse talent pool to choose from. For example, start-up founders can bring in highly experienced, motivated employees without having to poach or hire on full-time contracts, something that many start-ups may otherwise struggle to afford.
And there’s promising signs that current prospects for jobseekers will change soon. Following news that two potentially effective vaccines will be rolled out in the new year, shares in businesses skyrocketed on newfound optimism suggesting they will bounce back. Similarly, in the aftermath of the GFC, spend on recruitment agencies bottomed out at 75% of pre-2008 levels before eventually exceeding pre-recession levels by 2013/14.
The great American writer Mark Twain once said that history doesn’t repeat itself, but it often rhymes, and, in this instance, the saying rings true. Although the circumstances may be different, the COVID-19 recession, like the GFC, has opened new markets that businesses, if they are fast enough, can take advantage of. With a swell of excellent, experienced candidates available and changing consumer behaviour, the environment is perfect for new start-ups to emerge and become this decade’s Airbnb and Uber.
MasterPlan Retirement Consultants start by asking the right questions and then listening. And not just financial questions, but dreams about what their clients’ retirement should look like, and what concerns keep them awake at night. They then begin “stress testing” their retirement income and assets to see what could cause their retirement journey to get off track. Then they build a plan that targets those weaknesses, building a strategy for every “what if”. We hear more about it below.
Tell us about the foundations of MasterPlan Retirement Consultants.
I decided to found this firm in 2008 during the Great Recession. I was working for another firm, and basically, our story was: “Yes Mrs Smith, you are 73 years old, and you did lose over 35% in your investment account, but hang in there, because the market lost 56%, so we did beat the market.”
With our firm, we invest some, we protect some, and we hedge some, providing opportunities in every type of market and economic situation.
But it doesn’t end with money, income and investing. We truly believe that more money will be lost during retirement through taxes than anywhere else, so we include tax planning strategies as part of our holistic approach. We also include income planning, social security maximisation, estate planning, healthcare planning, pension maximisation, long-term care strategies, premature death planning, special needs situations, and more, bringing all of these disciplines together in a one-stop-shop approach.
We are built on three pillars:
- We are fiduciaries. Our licenses require us to act in the very best interest of our clients, regardless of whether we make money or not.
- We are holistic.
- And we are boutique-style, meaning that we take on a limited number of clients each year to assure that we are able to provide what we have promised to each client.
What should people be cautious of when planning their retirement, considering the current financial environment?
People need to understand that this is no longer their parents’ or grandparents’ retirement. No longer are people retiring with a paid-off house, a healthy pension, a nice social security check, and a savings account that pays 5-7%.
No, the world has changed. Money, like information, moves in nanoseconds. The markets are more volatile than ever. Some new tools and products have been developed over the past 20 years that are powerful in today’s fluid world. We live in a world economy, and other countries and economies can and do affect our financial world.
Social media has also affected retirement planning. Everyone has an opinion or a story of a “friend”, yet most opinions are wrong. Then there is the development of computer-driven financial planning. That may be fine for a 25-year-old, but when it comes to those age 50 and over, someone needs to be able to look them in the eye and understand their real concerns, their real fears. Someone needs to be there when a wife loses her husband and doesn’t have a clue as to what to do next.
That, my friend, is where the rubber meets the road.
What are the benefits of a well-prepared retirement plan?
Peace of mind. How can one enjoy retirement when they don’t have a roadmap to guide them? It’s like being so busy watching your gas gauge, fearful that you don’t have enough gas to make it to your destination, that you miss the scenery, you miss the experience.
We live in a world economy, and other countries and economies can and do affect our financial world.
How has your work been impacted by the current COVID-19 crisis?
Our firm has been busier than ever. People are scared and need somewhere to turn. Our referrals are up and our online classes are well attended. More people are listening to our radio show and responding.
Most healthy people don’t go to the doctor, but once a person develops symptoms, fear and uncertainty creep in and an appointment is made. That is what has been happening with us.
What do you think the next 12-24 months hold for the retirement planning sector?
I see clients moving away from the “big box” advisory and brokerage firms. They are tired of being a number, or getting a new adviser every few years. We know each and every one of our clients personally, we know their families, their joys and their concerns. They also know that we will continue being here. My son, Evan Fricks is also an up and coming adviser with our firm, and we have multiple contingency plans to continue serving our clients, their children and their grandchildren.
Also, I think that the firms that anticipated the deep impact of COVID-19 will thrive, while others will suffer and perhaps die. We were blessed by the fact that we did envision what could happen, and we immediately upgraded all of our technology and the way we conducted business. Before COVID-19, I was doing two online client meetings a year. Now, 97% of all meetings are done via the web. In addition, every class that I taught was in-person – now I have not taught an in-person class since early March. I am teaching approximately 10 classes each month at half the cost via the internet. I see this continuing somewhat after COVID. I enjoy meeting face-to-face with my clients - they are like family to me. But as they age or move away, there will be comfort in knowing that we can still be their financial adviser. I also hope to go back to live, in-person classes because of the connection that can be made with the class but will still do many via the web.
Twelve years ago, the UK was in the grips of the ‘Great Recession’ following the credit crunch, which was felt across the globe. In the UK alone, a staggering 50 small businesses closed down each day, with mass unemployment peaking at around 4.9%, according to the Office for National Statistics (ONS).
Almost overnight, leaders and business owners found themselves faced with critical decisions to make in order to keep their companies and businesses from going under. With budgets under severe pressure, this was thought to be the end for the corporate responsibility budget. Yet despite the financial turmoil caused by the financial crisis, sustainability quickly found itself rising in importance as a business priority.
In a 2010 study by Accenture, 93% of CEOs said that they believed sustainability had become a crucial part of their company’s future success. The study marked a major shift among senior decision-makers in relation to sustainability during the recession years. It seemed the sustainable agenda was destined to not only survive the financial crisis but thrive because of it.
Over the next decade, sustainability managed to find a growing momentum in both government and the boardroom, culminating in the landmark passing of legislation in 2019 requiring the UK Government to reduce its carbon emissions to net-zero by 2050.
But now, as the UK edges closer to what the Bank of England has predicted to be the worst recession in 300 years, we find ourselves asking the question: is sustainability resilient enough to survive another economic crash?
The answer to this is yes – because public mood says that it must. Never before has the public been so restless for change. The coronavirus has provided a vital shift in perspective. We’re now seeing widespread support for a Green Recovery model from the UK Government, with businesses prepared to play their part in reinventing ourselves as a more sustainable nation.
Shoppers are now buying locally sourced food, minimising plastic waste and cooking from scratch. Out on the roads, an unprecedented number of us are now choosing to cycle or walk, while many more of us now planning to switch to an EV in the new few years.
Like the Great Recession, the social and economic fallout from coronavirus has challenged us to reassess our values and consider how our daily decisions impact the future world we are building. 45% of consumers say they are making more sustainable choices when shopping and are likely to continue to do so. And according to digital consumer intelligence company Brandwatch, March mentions of purchases made for personal ethical reasons were up 132% compared to December.
Shoppers are now buying locally sourced food, minimising plastic waste and cooking from scratch. Out on the roads, an unprecedented number of us are now choosing to cycle or walk, while many more of us now planning to switch to an EV in the new few years.
This has naturally had a profound effect on boardroom decision-making. In a recent survey by Opus Energy and Haven Power, part of Drax Group, over half (59%) of SME owners agreed that the pandemic has increased the importance of sustainability for their businesses, while two thirds (68%) say that it has made them more environmentally conscious.
Sustainability became so important during the Great Recession because of cost-cutting and finding operational efficiencies. However, business owners also understood the urgent need to regain trust among the public and their customers – trust that was deeply shaken by the failure of the economic system. Many consumers started to vote with their money, choosing to spend with businesses that aligned with their values – much like we’re seeing today.
The need for businesses to openly commit to sustainability is greater now than it was during the last financial crisis. Business owners know that despite the need to stabilise their business, to abandon their sustainable development goals would be highly damaging. They would risk losing any goodwill they’ve created with their customers and wider stakeholders.
Finding the right balance between financial necessities and environmental responsibilities will be crucial to a business’ success. Key to this will be the adoption of a different kind of corporate mindset.
We need to change the narrative away from sustainability as a cost, towards sustainability as a cost saver. When businesses realise that lowering their energy costs can help save money during a time when cash flow is more crucial than ever, energy efficiency and ESG strategies present themselves as obvious short- and long-term solutions, rather than a burden.
It seems an absolute denial of common sense – how can markets thrive in a time of economic mayhem? Conventional wisdom – as I recently read in a US Investment Bank’s equity strategy note - tries to explain the gains in terms of: “Markets anticipate better days ahead. Although the timing is uncertain, the stock market is expressing confidence the pandemic will end with a vaccine and better treatments in the interim.”
Really? Markets are supposed to be rational. A vaccine tomorrow will not undo the damage already done and at best could only accelerate a recovery back to where we were. Corporate earnings may take years to recover. Betting big on the hope of a vaccine sounds like an irrational toss of the dice. And…hope is never a good investment strategy.
To understand why markets are so strong you need to follow the implications and consequences of government, and particularly, Central Bank action. Markets follow the money – and that requires you forget everything you thought you knew about stocks, bonds, prices and future valuations. Concepts such as the ability of a firm to generate future growth, or earnings before tax and interest, or even its likely ability to repay its borrowings, are no longer relevant in today’s markets. Put away that copy of Benjamin Graham’s ‘The Intelligent Investor’, it will not be needed these next 30 years, and dispense with notions like fundamentals or value.
Today there are new themes to consider.
Markets are no longer setting prices. The “invisible hand” of markets efficiently allocates capital based on demand and supply representing the summation of what every market participant believes. It ensured companies were disciplined to perform strongly. Failing companies were punished by stock price falls and wider bond spreads.
But that price-setting function has been replaced by an implicit understanding that Central Banks will do “whatever it takes” to avoid a market meltdown. It no longer matters what investors really think about the economy – if they are certain Central Banks will bail them out, then that dictates their investment behaviour.
What matters most in today’s hyperbolic market are the consequences of Zero Interest Rate Policy (“ZIRP”) and QE Infinity. ZIRP absolutely distorts the assessment of risks vs returns. QE is the process by which Central banks have flooded markets with liquidity since the Pandemic erupted to stave off an immediate recession, corporate insolvencies, and a catastrophic market crash. They have succeeded but at an enormous cost.
It’s been the limitless Central Bank liquidity and the promise they will do, even more, that has caused Financial Assets (Bonds and Equity) to soar. The investors who understand the process are simply following the money – arbitraging the implied Central Bank “put”. They know the economic damage that’s been done, how corporates are closer to bankruptcy than ever, and that global demand and supply remains absolutely stressed. They aren’t investing on the basis of recovery – they are simply investing on the basis that Central Banks have no option but to continue bailing them out.
Markets follow the money – and that requires you forget everything you thought you knew about stocks, bonds, prices and future valuations.
It’s been a wild and improbable ride. At times it felt like markets were out of control. Although there are stories like a hybrid truck-maker being worth more than Ford despite not having delivered a single vehicle, this rally started with less of the “Irrational Exuberance” that has characterised other historical stock market price bubbles. What we have this time is a bubble and price distortion deliberately created by Central Banks.
The smart money knows the Central Bankers have little choice but to sustain it. Not everyone is smart money. Most investors are followers and are all too easily persuaded of the merits of a snake oil that promises enormous returns. Who wants to listen to sage market professionals warning of the dangers of Central Bankers setting market prices when stocks are going ever higher?
Most investors aren’t particularly aware of the Central Banking shenanigans going on under the surface – what they see is a market going up and up. FOMO (the fear of missing out) is one of the most powerful forces in finance. That’s particularly relevant in terms of the funds management industry – where complacent investment managers are far more concerned about career-risk rather than market-risk. Missing a rally like the one we’ve seen since March would be a career-limiting mistake. Career risk explains why most investment managers do a little more than benchmark themselves to indices.
The rally has developed a momentum all of its own - sucking in buyers who fail to see the dangers implicit in herd mentality and the triumph (in many cases) of hope over common sense. The rise of “Robin Hood” retail day-traders unburdened by conventional market wisdom says it all – they genuinely believe the most dangerous four words in the market lexicon: “this time it’s different”.
The rally has developed a momentum all of its own - sucking in buyers who fail to see the dangers implicit in herd mentality and the triumph (in many cases) of hope over common sense.
Long-term… It’s never different.
In the short-term, QE Infinity is working. Cash-strapped corporates have been able to borrow the money they need to see them through lockdown at ultralow interest rates. Widespread insolvency and default has been avoided. Investment banks are all advising their clients to buy corporate debt and finding reasons to promote stocks. That’s their business model - to sell financial assets.
But there will be consequences.
As prices head stratospheric, it’s caused returns to plummet. The result is Financial Asset Stagnation – bonds and stocks cost more but are worth less. That’s triggered a desperate search for meaningful returns in an increasingly repressed market where yields are trending towards zero. Pension funds are dipping into their capital to meet their liabilities. The only way to improve returns is to take more risk – hence normally staid bond investors find themselves sucked into equity markets as “yield tourists” in order to squeeze some returns from their portfolios.
This is going to prove a massive long-term problem. Ultra-low interest rates and unlimited liquidity are boosting markets but make long-term investment planning impossible. The value of a typical pension fund has increased, but the size of pension it can fund has dramatically lessened.
It’s hard to see how Central Banks can now exit their role of handing out free cash to markets. More and more companies are now dependent on cheap debt. Sovereign nations are running up borrowing to pay for it all. At some point, can the money that’s bailing out markets run out? Not necessarily – interest rates are effectively zero, and the money creation by Central Banks costs nothing. (Unless it causes a crisis of confidence in the underlying currency, which cause devaluation and inflation - but if every country is doing the same thing… why would that matter.)
The devil is in the detail. The market is no longer disciplining bad companies or forcing them to invest, plan and develop sensibly. Terminally stupid and financial challenged companies, like Boeing, have been able to borrow billions at record low-interest rates despite manifest corporate failings. If the market doesn’t discipline companies – who does? Hence the rise of the dangerous ESG (Environment, Social and Governance) approach to investment – only buy companies that pass unquantified tests on what is good and bad. It’s a form of financial woke – and makes even less sense. A company that is well managed and led (Governance) will always do better.
And what do companies do with all that money they’ve borrowed? Up until the coronavirus, a significant amount of debt was raised to finance stock buybacks – doing nothing in terms of financing value-added productive assets, but simply pushing up the firm’s stock price and inflating executive bonuses! The first half of 2020 has seen record volumes of new corporate debt issued on the markets, mainly to finance the costs of the virus shutdown. None of the debt is creating new jobs or new factories – it’s increased leverage simply to stay still.
There is no doubt Central Bank action has created an enormous financial asset price bubble. The question is – will it pop? Can Central Banks risk it? It is probably worth reminding readers of my number one market mantra: “The market has but one objective: to inflict the maximum amount of pain on the maximum number of participants”.
Figures released by the Cabinet Office on Monday revealed that the Japanese economy shrank at its fastest rate in history between April and June, owing to the impact of the COVID-19 pandemic.
Japan’s GDP fell by 7.8%, or 27.8% on an annualised basis. This marks Japan’s third successive quarter of economic contraction – its worst performance since 1955 – having slipped into recession earlier this year. The fall also wiped out the gains brought by Prime Minister Shinzo Abe’s “Abenomics” stimulus policies, which were rolled out in 2012.
The previous worst contraction in Japanese history was an annualised 17.8% drop in the first quarter of 2009 as the global financial crisis took hold.
Takeshi Minami, chief economist at Norinchukin Research Institute, noted the COVID-19 pandemic and resultant lockdown measures’ impact on sales as the prime cause for the contraction. “The big decline can be explained by the decrease in consumption and exports,” he said.
“I expect growth to turn positive in the July-September quarter. But globally, the rebound is sluggish everywhere except for China,” he added.
The struggle to weather the impact of COVID-19 has compounded Japan’s economic worries, with 2019 seeing sales tax rise to 10% as well as widespread damage caused by Typhoon Hagibis in October.
Japan’s severe economic downturn mirrors that of other nations. US GDP declined at a rate of 32.1% in the last quarter, while the UK fell by 20.1%.
New figures from the Office for National Statistics (ONS) have shown that UK GDP fell by more than 20% between April and June. Following on from a drop of 2.2% between January and March, this means that the UK has now officially entered a recession.
The 20.1% drop in quarterly GDP exceeded that of all other G7 nations; France’s GDP fell by 13.8%, followed by Italy at 12.4%, Canada at 12%, Germany at 10.1%, the US at 9.5% and Japan at 7.6%. It is also the steepest recorded contraction since the ONS began collecting data in 1955.
In an interview with Sky News on Wednesday morning, Chancellor Rishi Sunak attributed the contraction to the “composition” of the service-based UK economy, which was heavily affected by the COVID-19 pandemic and resultant lockdown measures.
“Social activities, for example going out for a meal, going to the cinema, shopping, those kinds of things comprise a much larger share of our economy than they do for most of our European comparative countries,” he said.
“So in a situation where you have literally shut down all those industries for almost three months, a long period of time, it is unfortunately going to have an outsized impact on our economy.”
[ymal]
Commercial data and analytics firm Dun & Bradstreet have updated their predictions for the UK economy in 2020 following the new figures’ release. Their updated forecasts now predict a 9.8% drop in real GDP for the year.
“Dun & Bradstreet’s latest proprietary data for Q2 shows that payment performance has deteriorated across all 14 sectors tracked during the pandemic, despite several quarters of continuous improvement prior to lockdown,” wrote the firm’s chief analyst, Markus Kuger. “During the coming quarters, it will be more important than ever for businesses to assess potential credit risk across their existing and future business relationships.”
The basic definition for a recession is a decline in GDP over two consecutive quarters. The UK has not experienced a recession since the 2008-2009 financial crisis, which saw a peak quarterly dip of 2.2% in GDP – just over a tenth of the plunge recorded for Q2 2020.
Figures released by the US Bureau of Economic Analysis on Thursday have shown that real gross domestic product declined at a rate of 32.9% in the second quarter of 2020, the worst economic contraction in US history.
Analysis of Q1 revealed a 5% fall in GDP from January through to March as the COVID-19 pandemic was first reported in America. Prior to the new figures, GDP in the US has never fallen by more than 10% on an annualised basis since records began shortly after the Second World War.
Stocks were shaken by the report, with the Dow Jones, S&P 500 and Nasdaq falling by 1.5%, 1% and 0.56% respectively. International markets fared more poorly; the FTSE 100, DAX and CAC fell by 2.6%, 3.2% and 1.9%.
However, the reported economic contraction was not quite as precipitous as analysts predicted. Economists surveyed by Dow Jones reportedly expected to see GDP fall by 34.7%, and those polled by MarketWatch predicted a drop as great as 35%.
Mark Zandi, chief economist at Moody’s Analytics, remarked that the latest report “just highlights how deep and dark the hole is that the economy cratered into in Q2”.
“It’s a very deep and dark hole and we’re coming out of it, but it’s going to take a long time to get out,” he said.
Real GDP is the broadest measure of a country’s economic activity, with downturns reflecting significant disruption in spending. In the US’s case, the numbers reflect the closure of restaurants, retailers and other non-essential services in response to the COVID-19 pandemic that continues to spread throughout the country.
Unfortunately, it appears that an oncoming recession is unavoidable. Recent figures have shown that the UK economy shrunk by 19% between March and May. Given that the UK went into lockdown in mid-March, this result is not exactly unexpected, but the personal finances of many consumers will still feel painfully strained – recent research from KnowYourMoney.co.uk shows that almost a third (31%) of UK adults have seen their income decline as a consequence of the coronavirus pandemic.
However, it is possible for consumers to regain control over their finances. What’s more, it is actually simpler than many assume. John Ellmore, Director of KnowYourMoney.co.uk, outlines the necessary steps below.
A review of financial health
To gain a comprehensive understanding of one’s financial health, a thorough audit of finances is vital.
The best place to start is by reviewing bank statements and making a note of all incomings and outgoings. Though it may seem simplistic, it is a crucial tactic in identifying and eliminating problematic spending. For example, more than a fifth (23%) of UK adults were guilty of overspending during the lockdown period, but many might not realise they are spending so much. Taking note of such spending will help consumers to acknowledge such overspending and cut it out.
A financial audit could also encourage consumers to shop around for better deals on a variety of products, from groceries to home insurance. So many consumers fail to shop around for a better deal – 12.9 million consumers automatically renew their home insurance without investigating alternative suppliers, for instance – and consequently miss out on savings. Comparison sites are a great place to start; they save consumers time by searching the internet for numerous providers and present them clearly to consumers. All they need to do is choose an option that best suits their needs.
To gain a comprehensive understanding of one’s financial health, a thorough audit of finances is vital.
Protecting credit scores
Credit markets tighten during recessions, which means it can be harder for consumers with a less than desirable credit score to successfully apply for a mortgage, loan or credit card.
However, it is possible to strengthen your score even in a tough economic climate. The best method to improve credit scores is to keep up with regular debt repayments, such as credit cards and utility bills.
That said, there may be times where finances are particularly tight and with larger repayments, such as mortgages, it can be difficult to keep up with regular repayments. If this is the case, consumers should consider speaking to their provider about a mortgage holiday, or temporarily making interest-only repayments. These options could reduce monthly household bills and offer consumers some financial breathing space. However, consumers should always consult with their provider before choosing these options, as they could negatively impact their credit score. These options can also result in people paying more in the long-term.
Start an emergency fund
Perhaps the most important course of action is to start an emergency fund. Usually containing between three to six months' salary, this fund can offer a financial cushion should consumers suddenly find themselves being made redundant.
The best type of accounts for these funds are usually easy access savings accounts. They enable savers to instantly access their money when they need it, without any charges or losing interest. These accounts don’t usually offer competitive interest rates, but some can offer over 1%, so consumers should conduct thorough research before they choose an account.
[ymal]
An important element of building an emergency fund is consistently saving – after all, 28% of consumers were guilty of not saving enough money during lockdown, according to our research. So, consumers should try to set up a direct debit between their current account and savings account, making it easier to keep money to one side.
Additionally, some banks give customers the option to round up on purchases, and place the difference in their savings account; for example, if a customer bought a T-shirt for £14.20, they have the option to round the price up to £15, and place the extra 80p into their savings.
Ask for help
Consumers must always remember that help is available if they find the financial burden too much. If it’s financial help they need, there are various schemes, such as mortgage help schemes, that can off assistance. Alternatively, debt charities such as StepChange can offer invaluable emotional support and help consumers get their lives back on track.
Financial management can seem overwhelming at the best of times; however financial anxiety has been amplified in the wake of the coronavirus. However, it is vital that consumers don’t panic. By taking simple steps, consumers can work to protect their finances against recession, and give themselves some much-needed peace of mind.
Leonardo Brummas Carvalho, CEO of Wealth Management at ITI Capital, explains why the social responsibility of finance is coming to the fore.
The COVID-19 crisis has not just posed a huge threat to human life on a global scale, it has caused mass devastation for thousands of businesses and all but crippled the economy. As a society, the extent of disruption caused by this pandemic has not been seen since the world was shook by war in the 1940s, and the financial impact has completely overshadowed the recession in 2008.
However, the comparisons to 2008 stop there. Over a decade ago, banks and financial services organisations were embracing high risk decisions as a matter of routine, where all the risk eventually fell in the hands of the consumers and working people, millions of whom were left unemployed and facing financial turmoil. The banks, on the other hand, walked away comparatively unharmed, having been bailed out by taxpayers.
As a result, the already questionable reputation of bankers, financial services and investment specialists plummeted further. Even today, business owners, consumers and mortgage owners do not feel that traditional financial service providers have their best interests at heart.
But, due to COVID-19, many consumers have no choice but to turn to banking services: taking out important investments to keep businesses afloat, to manage personal finances and to meet credit debt payments.
Thus, financial institutions have not just the opportunity, but the responsibility to win back the trust of the general public with deep pockets and generous investment – helping to boost the economy and support independent businesses and struggling individuals at a time when they need it most.
[ymal]
Whilst it must be acknowledged that central and consumer banks in the UK have already introduced unprecedented emergency measures, such as mortgage and credit holidays, and cut interest rates on loans to 0%, they still could do more to fulfil the social responsibility they are now liable for and redeem themselves in the eyes of the public for actions in the early and mid-2000s.
Banks in general play a fundamental role in society, as they act as an intermediary in regulating credit and loans to the public – throughout history, banks have operated by awarding loans almost exclusively to large corporations and high net worth individuals who can guarantee repayment.
Today, the opposite can also be true and many institutions have the option to help communities, vulnerable individuals and propose social impact investments.
Now, in these challenging times, SMEs and workers are more vulnerable than ever, and would be deemed high-risk assets by numbers on a computer screen. Thus, bankers and financial experts must prioritise vulnerable communities, and not just look at the interests of their holders and senior managers, but also customers, employees and more broadly, the entire society.
The good news is that, over the last decade, digital platforms, fintech and cloud and software capabilities have evolved to the point where traditional financial service providers can overhaul operations, and cater to not just the high-paying clients, but to millions of consumers at the same time.
Unfortunately, many big banks are still running slow legacy IT systems, and therefore new technology and app services remain a priority for consumer banks.
Banks in general play a fundamental role in society, as they act as an intermediary in regulating credit and loans to the public.
On the other hand, fintech companies and financial start-ups have spent years dedicating themselves to transparency and high-quality services. At ITI Capital, we have identified the disparity that exists in advisory and investment services provided to high-net worth individuals, compared to the general public. Thus, we have dedicated ourselves to democratising the financial market, ensuring normal, hard-working people on all sorts of different wage brackets, are catered to with professional financial services.
This has all been facilitated by cutting edge technology such as artificial intelligence, which allows us to provide a huge amount of consumers with top-tier, fully regulated financial services which would otherwise only be reserved for high-paying clients.
If the entire financial sector had this mindset in the UK, consumers would be trusting again and businesses and individuals could be comfortable optimistic towards the near future.
So will the attitude from the major banks change from now until the end of COVID-19, whenever that may be?
Of course, government legislation and schemes have, in the short-term, enforced significant social change. The furlough scheme in the UK, for example, has provided millions of workers with financial support at a time when they would have otherwise been laid off by their employers. In the short-term we should hope that shortfalls in government schemes to combat COVID-19 are covered by the financial institutions, providing preferential interest loans to companies who can’t front the cash to pay salaries.
However, as previously mentioned, fintech start-ups and market disruptors are on the rise, and it appears as though the financial sector is naturally transitioning to processes facilitated by automation and artificial intelligence. Thus, within the next decade, we could expect to see fintechs, such as Monzo and Starling, become the new normal for consumer banking. Alternatively, we might see traditional banks embrace the new wave of technology, and self-democratise the financial sector by offering affordable and remote online services.
Regardless, if traditional banks are looking to excel in the new normal, or if fintech start-ups are looking to flourish, they should each prioritise one thing: serving vulnerable communities and society as a whole during the remainder of the COVID-19 crisis and beyond.
New figures released by the Office for National Statistics (ONS) found that the UK economy shrank by an unprecedented 20.4%, its largest monthly downturn in history.
The contraction was more than three times greater than March 2020’s shrinkage of 5.8%, the previous record-holder. Analysts had expected April’s figures to be the bleakest of the crisis, as UK-wide lockdown measures were imposed in late March and began to be eased in May.
Jonathan Athow, Deputy National Statistician at the ONS, outlined the scope of the contraction. “In April the economy was around 25% smaller than in February,” he said. “Virtually all areas of the economy were hit, with pubs, education, health and car sales all giving the biggest contributions to this historic fall.”
Some of the most significant falls were observed in the manufacturing and construction sectors, which declined by 24.3% and 40.1% respectively. The UK’s services sector, which makes up around 80% of the country’s economic output, plunged by 19% in April, while industrial output fell by 20.3%.
Morten Lund, an economist at Nordea Markets, remarked: “We've gotten used to really bad numbers, but this is breathtaking.” He also noted that the UK was “looking worse” when compared to its peers in the G7.
The new release follows predictions by OECD that the UK will be among the nations hardest hit by the economic impacts of COVID-19, with an estimated decline of 11.5% in GDP provided that a “second wave” of contagion does not occur.
