However, the UK is also rushing towards a self-imposed deadline for concluding a post-Brexit trade agreement with the European Union, its largest export market, by the end of the year. Talks are not going well, suggesting the possibility of another major shock as the expected economic recovery gains momentum.
"The whole advanced world is in recession because of the coronavirus," said Kallum Pickering, senior economist at Berenberg Bank. "But the United Kingdom has an additional problem with the negotiations between the United Kingdom and the EU in the second half."
Even without considering the implications of Brexit, the British economy is in a critical situation.
The Bank of England said earlier this month that the economy could contract by 14% this year. This would be the largest annual contraction since a 15% drop in 1706, according to the best estimate from the historical data bank. GDP could drop by 25% in the three months to the end of June.
The data published by the British government in recent days is heartbreaking. Unemployment benefit claims climbed 69% to nearly 2.1 million last month. Inflation in April, for its third consecutive month, fell to 0.8%, raising fears that prices will go into a damaging downward spiral.
Non-essential restaurants and stores remain closed, and economists are not convinced that activity will resume immediately after they reopen.
The dark mood was reflected on Wednesday when the British government sold its first bond with a negative yield. This indicated that demand was so high that investors were essentially willing to pay the British government to lend it money.
Gilts, as they are called, are considered a safe haven asset, alongside US, Japanese and German government bonds; high demand indicates that investors are concerned that economic growth will remain depressed.
"The markets reflect the economic reality that the economy has collapsed," said Robert Wood, UK chief economist at Bank of America.
The pound has fallen more than 8% since the start of the year to less than $ 1.22, and has also fallen more than 5% against the euro. the FTSE 100 in London, the index has lost more than 21% since the start of the year, compared to almost 9% for the S&P 500, while the FTSE 250 index for medium-sized British companies is down by more than 26%.
In an attempt to stem the vast economic damage, the British government borrowed £ 62.1 billion ($ 75.7 billion) in April, the highest level since record highs began in 1993. The government now predicts that 'He will have to borrow £ 298.4 billion ($ 363.3 billion) until March 2021., almost twice as much as at the height of the global financial crisis.
And Bank of England Governor Andrew Bailey even hinted this week that official interest rates - currently 0.1% - could turn negative for the first time in British history. His comments encouraged speculation that the bank could opt for negative rates in 2021, if the economy needed another boost then.
"What the Bank of England has done is remove the floor on key rates, so you can't assume they certainly won't go below zero," said Wood. "That said, clearly negative rates are one of the last resort here."
Brexit clock ticking
The risk they may need increases, as Prime Minister Boris Johnson has pledged to fix the terms of the UK's new relationship with the European Union by the end of 2020, after leaving the bloc. in January.
Failure to reach an agreement could subject UK companies to new high tariffs, threaten their supply chains andtheir more expensive products and services at the worst possible time. The UK has until June 30 to request an extension, but the Johnson government has always said it does not want to do it.
However, the talks are not going well. Michel Barnier, the EU's chief Brexit negotiator, said last week that he was "not optimistic" about reaching an agreement with the UK, adding that the EU would step up preparations for the end of the year with no new terms of trade in place.
Britain's chief Brexit negotiator David Frost said in a letter to Barnier on Tuesday that the EU was proposing "a relatively low-quality trade deal".
Without an agreement, industries that have already been hit hard by the pandemic would be even more battered.
David Henig, former trade negotiator and director of the UK Trade Policy Project at the European Center for International Political Economy, said on Twitter Thursday that a 10% tariff on cars shipped to the European Union would go into effect if no agreement is reached. was not concluded. , threatening at least £ 15 billion ($ 18.3 billion) in exports.
Pickering of Berenberg Bank fears that the clock in Brexit negotiations will create problems for the UK in the second half, when economic growth is expected to resume.
Household spending, which accounts for around 70% of UK GDP, will determine the trajectory of the UK recovery, he said. At the end of locking, the concern is thatThe British will continue to save their money due to job anxiety or a second wave of infections, limiting the impact of government and central bank relief efforts.
Uncertainty over Brexit will only encourageeconomy, according to Pickering.
Even if the United Kingdom reaches a new trade agreement with the European Union, itwill not be as favorable as the old regime. Johnson is pushing for an agreement that would allow the UK to also sign a deal with trading partners such as the United States.
In the draft proposal published by the British government this week, Britain has reaffirmed that it does not want to be part of the EU single market, and is instead seeking an agreement in line with what the bloc has put in place with Canada or Japan.
"The worsening of your trading conditions with the destination for almost half of your exports will be an economic disadvantage," said Bank of America's Wood. "[It's] another reason to expect the recovery from this crisis to be a very elongated U [shape], not a V. "
Irish Prime Minister Leo Varadkar echoed this view on Thursday.
"Brexit will further complicate matters," said Varadkar. "As I said a few months ago, Brexit is not over. It is only half time."
