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March 06, 2020

On the greater sense of urgency in the UK

We noted yesterday a French report according to which the peak of Covid-19 infections would be in April. The UK is now implementing a plan that would push that peak towards May and June, because the virus may be less virulent during the summer and to manage capacities in the health service. We ourselves note an increasing tendency for events in the UK to be cancelled as companies and individuals take containment measures.

The policy to delay the peak means that the economic impact is thus likely to be extended. The lock-down measures and supply-chain disturbances are likely to remain in place past the peak, and well into the summer. So, we are definitely not in a short V-shaped scenario. As we keep reporting, some of the shifts in work patterns - less travel, more tele-conferencing, home working, reluctance to attend large crowds - may persist. This will not impact the recovery on a macroeconomic scale, but will have important implications for specific sectors. Tourism is probably not going to recover quickly. Flybe won’t be the only airline to crash.

The general response in the UK may well turn out to be stronger than in most European countries, both in terms of measures taken by individuals, logistical readiness by the health services, and the economic policy response. Boris Johnson yesterday met with Rishi Sunak, his new chancellor, and Mark Carney to discuss next week’s budget measures. No firm details have leaked but Covid-19 will give cover for a generalised fiscal expansion Johnson was seeking in any case. That fiscal expansion will be stronger than whatever will eventually be agreed by eurozone finance ministers. The Bank of England seems to be getting ready for a rate cut at its March 26 meeting. Given the expected virus expansion timeline, we believe that it is essential for the fiscal and monetary response to be prepared at this point.

It is also too early to speculate on the impact of Covid-19 on the Brexit talks. We heard a suggestion that Covid-19 might be the ideal excuse for Johnson to agree an extension of the talks. If our scenario of a more robust policy response in the UK comes to pass, the effect may well be the opposite. It might reaffirm a desire to implement a more distant relationship. This could cut either way.

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