The world is an unrecognisable place from just five months ago. Lockdowns have paralysed economies across the globe and there is no clear path back to normalcy. As the UK eases itself out of lockdown against a backdrop of fear, confusion and uncertainty, it’s clear the economy won’t be bouncing back within the year. So, what will the financial health of the country likely look like in a year’s time and how can your assets be protected?
Housing and Property Market
The lockdown required all property transactions to be put on hold for around seven weeks. This put pressure on the market as many sales that had been in the process were pushed back or even abandoned. Since the housing market restarted in May there has been a lot of uncertainty. After a complete stop, and a juddering restart, house prices rose 1.7% in July.
Nationwide, the UK’s second-largest mortgage lender warned that this could be a false dawn, as the market reacted to pent up demand and a reassessment of housing needs post lockdown. Robert Gardner, Nationwide’s chief economist said: “Most forecasters expect labour market conditions to weaken significantly in the quarters ahead as a result of the aftereffects of the pandemic and as government support schemes wind down. If this comes to pass, it would likely dampen housing activity once again in the quarters ahead.”
At the height of the crisis, the Bank of England issued an interim Financial Stability report that suggested the UK property market could decline by up to 16%. The slump won’t be uniformly distributed, with some areas harder hit by unemployment declining further than more resilient areas. There might also be a shift in patterns of house buying as companies and individuals retain the work-from-home opportunities created by the lockdown.
The UK government’s financial stability measures to help businesses remain viable during the lockdown have been successful in encouraging employers to retain staff on the furlough scheme. But the reopening of the economy as lockdown is lifted will lay bare the true extent of the devastation.
The leisure and tourism industry has already shown how deep the job losses will go. BA plans 12,000 job cuts, TUI has warned 8,000 jobs may go, Airbus expects to axe 10,000 jobs, and a further 3,000 each will go at Ryanair and Virgin Atlantic. Unexpected travel restrictions, imposed with little or no warning, has hampered any signs of a tourism recovery, even as the strictures of lockdown looked likely to be eased.
The countless smaller firms that fail to resurrect customer demand as lockdown is eased will add to already bleak employment prospects. The youth are particularly hard hit. The Institute for Fiscal Studies showed that workers under the age of 25 are two and half times more likely than those over 25 to have been working in sectors such as hospitality and (non-food) retail that closed entirely during lockdown. Added to these newly unemployed are the recent graduates who will be entering the labour market at a time of recession and shrinking prospects.
Unemployment has a severe effect on the economy, from declining house sales to stunted consumer spending, falling tax receipts and higher benefit spending.
Job losses and the employment market
The job losses described in the media predominantly reflect large consumer-facing companies. But many small and medium-sized businesses are still unsure of their fate once the various government support packages run out. Many have very flimsy financial buffers for the future.
The Office for National Statistics business indicator published at the end of July showed that 40% of companies responding to their survey had fewer than six months of cash reserves. After VAT payment holidays and business grants run out, and the job retention scheme is no longer propping up hard-pressed businesses, the number of failures will invariably rise, with the concomitant decline in job availability.
Financial Outlook for Banks
Business failures will be one of many stresses the banking industry will have to endure in the next year. The big four UK banks – RBS, HSBC, Barclays and Lloyds – have already set aside £6.7 billion to cover expected defaults. That said, the stringent stress tests the banks were forced to undertake in response to the financial crisis have provided the industry with a measure of resilience in the face of this unprecedented situation.
Still, the impact on banks will be hard felt. Although ratings agency S&P Global ultimately expects a sustained economic recovery in 2021 to limit bank rating downgrades, it still expects the outlook to be revised downwards as a result of the poor economic outlook and the impact of this on many banks’ profitability.
Any recession will impact on consumers and businesses’ ability to repay debt, and a deep and long one will invariably be damaging to financial institutions.
Taxes in 2020
The bailout of vast swathes of the economy after the financial crisis of 2008 led to years of austerity, with cuts in government spending that are still being felt 12 years on. But even this pales in comparison to the billions being spent now to prop up the economy while many parts of it have been forced to close. The Office for Budget Responsibility estimates the final cost of the government intervention could be as high as £298 billion just for the 2020/2021 tax year.
In July the OBR said the UK is on track to record the largest decline in annual GDP for 300 years, with output falling by more than 10 per cent in 2020.
Once borrowed the government will need to pay these billions back, which means either more borrowing, making cuts to spending or raising taxes. With so much of the ‘easy’ spending cuts already undertaken in the last decade, it will be harder to find new savings which makes tax increases more likely. This means pinched consumers will be less likely to spend profligately and will look for ways to maximise their assets with smart investments.
Declining Appetite for Investment Risk
Against this understandably bleak outlook, most people’s appetite for any type of risk will diminish. Even before the real costs of the Covid 19 pandemic have been counted, prudent investors will be looking to hedge their risk to avoid as much of the expected fallout as possible. Safe-haven investments like gold thrive in such environments because for centuries the precious metal has held its value amidst innumerable crises.
Gold – A safe investment in uncertain times?
During the more recent pressures of the last century, from the great depression to world war, global economic shocks to the oil crisis, gold has often risen in value, but always at least retained its value over the long term even as inflation erodes cash.
With interest rates so close to zero and no clear idea of when savings will ever be able to deliver reasonable inflation-beating returns, physical gold investments offer safety and security over the long-term. In addition, investment grade gold is VAT exempt and gold coins including Sovereigns and Britannias are not subject to capital gains tax for UK nationals.
The gold price has been rising steadily since the reality of the pandemic became clear in late March. It has gained 25% in the last six months in sterling terms, and dollar-denominated gold rallied to its highest ever price in late July 2020 and has continued to rise.
The pandemic has plunged the world into a state of uncertainty, and in all likelihood, there will be a global recession worse than any in recent history. In these unpredictable times, the certainty of physical gold can reduce risk and protect assets until the world rights itself again.