Cash & Liquidity ManagementLiquidityBoE and budget to ease liquidity fears

BoE and budget to ease liquidity fears

Budget appropriations and rate cut will provide short term relief to UK businesses

Ian Stewart, Chief Economist at Deloitte says that the Bank of England’s emergency rate cut and the UK’s budget – both announced yesterday – will provide the needed liquidity for UK businesses to continue operating in the short term.

“What it can’t do of course, is it can’t fully offset the effects or people not going to work or a fall in in demand. There are no measures which would have that effect,” says Stewart.

The UK government announced £30bn in new spending with £12bn specifically earmarked for alleviating the economic pressures the coronavirus (COVID-19) is expected to have on the UK economy. Before the budget speech, the Bank of England also made an emergency rate cut, dropping the UK’s interest rate 50 basis points from 0.75 percent to 0.25 percent.

“What they have done is combined a general easing of fiscal and monetary policy,” says Stewart. “Rate cuts and more government spending in general with a set of very carefully targeted measures focused on areas where or greatest potential risks, particularly the liquidity and cash flow of smaller businesses.

Specific measures targeted towards businesses include government assistance for small and medium sized businesses in the form of refunding Statutory Sick Pay, business rate relief and a small businesses grant.

The government is also guaranteeing loans of up to £1.2m for small and medium sized businesses that are affected by the virus.

Stewart expects the £12bn in additional spending to help soften both the demand and supply side shocks that will occur as both consumer and businesses hunker down.

“The pattern from all external shocks, so shocks which originate outside the economic system, which include things like natural disasters or epidemics. The history of those and their effects on economies, can be very severe on output in the short term,” he says.

“What tends to happen is that economies are actually quite resilient. Some activity continues, quite a lot is displaced, but it’s made up later in the year. [External shocks] tend not to change the underlying path of the economic cycle. I think the big focus for the government is whilst there will inevitably be a shock to activity in the short term, that this [shock] doesn’t generate via stress in the financial system, a wider and more profound economic slowdown.”

Contraction expected

With the UK already reporting zero percent growth in January, Stewart expects the UK economy to contract slightly in the first quarter. However, he also sees a rebound in the second half of the year if the outbreak can be brought under control, “My estimate is that what you’re going to see is a rebound in activity in the second half of the year. But that’s clearly highly contingent on the exact pattern of the virus and how organisations and how government and how individuals all respond.

“What we know is that in China people are going back work. At the moment, it looks as though they’re probably past the worst of it. In the space of around 12 weeks or less than 12 weeks, the economic effects of COVID-19 have reduced.”

While £30bn in additional spending this year may seem like a lot, Stewart says signs were already there, prior to the COVID-19 outbreak that the government was planning on increasing government expenditures. “The public sector was seeing very significant increases in public spending before the virus kicked off. In the fourth quarter of last year, government day to day spending, not including infrastructure spending was up 4.4 percent on the year whereas the economy grew by around one percent. That’s pre-coronavirus.”

“The public sector has also been hiring at its fastest pace in 14 years. The government already made the decision to ease fiscal policy last year. What they’re now doing is they are turbo charging that with this packet £12bn of extra spending on coronavirus related activities.”

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