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The effect of COVID-19 on the economy - Cobalt HR

July 9, 20200

As expected, COVID-19 has significantly impacted economies around the world. In fact, one quarter of companies in the UK have temporarily closed due to lockdown measures. As for the business still operating, 21% of the workforce has been furloughed.

The first major issue experienced by world economies is the high and constantly rising level of unemployment. Since the introduction of the furlough scheme however, many people have received 80% of their normal pay to a maximum of £2,500 a month. This unfortunately has had a damaging impact on the UK economy, showing that economic activity in April shrunk by 20.4%, the biggest monthly fall recorded. With huge declines like this, it is hard to see a way of avoiding a recession.

But what does a recession look like?

A recession is classed as an economic decline over 2 quarters. The important thing to remember in this case is that generally there is less money going around. People will be earning less which leads to less disposable income which means less spending and a weaker economy. This of course goes hand in hand with low interest rates. Currently, interest rates are at 0.1% in order to encourage borrowing and spending from the government. House prices are linked to confidence in the economy: people will only offer what they think a property is worth, so if unemployment is rising and economic indicators are falling, prices will drop with them. For reference, during the 2008 financial crisis, property value fell by 20% in just 16 months.

The OECD thinks the economy will contract by 11.5% in the event of a single hit and by 14% if the virus returns later in the year. Despite this, if forecasts are anything to go by, the UK is expected to bounce back most successfully out of the major world economies. If it is any consolation, the OECD predicts the strongest growth in the UK at 9% for 2021.

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