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Reasons to be cheerful during ‘not normal’ recession

The industry could recover rapidly from the current financial turmoil caused by the Covid-19 outbreak, according to one of the industry’s leading economic commentators.

Noble Francis, economics director at the Construction Products Association (CPA), said this was “not a normal recession” so the usual financial rules did not apply.

He told a webinar hosted by the Building Engineering Services Association (BESA) that most forecasters were working on the assumption that the UK economy would go through a sharp fall in GDP followed by a rapid recovery in the second half of this year – in other words a ‘V-shaped’ recession.

Many see the economy contracting by 15% to 20% in the first half of 2020, but this would be followed by a speedy resurgence in the second half leaving us just 2% to 3% down for the whole year. They also predict that this would be followed by growth of between 3% and 4% in 2021.

However, Professor Francis told BESA’s daily Covid-19 update broadcast that it was also possible we would experience a ‘U-shaped’ dip as we did after the financial crash of 2008/9, which involved a longer, slower period of recovery. Even a ‘W-shaped’ episode was possible. This would see the economy bouncing back in the third quarter of this year, but falling again in the winter if the virus returns.

Volatile

Construction tends to be more volatile than the economy as a whole, but because this was such an unusual period that rule might also not apply, according to Professor Francis.

He also pointed out that essential maintenance and repair work, particularly for public sector buildings, would continue – and government ministers remained determined that key construction sites would also keep operating through the outbreak. This would, however, depend on them being able to ensure work could continue safely.

The normal rules for stimulating the economy in a downturn also do not apply this time, according to Professor Francis. “Usually, the government will look for ways to stimulate activity via mechanisms like quantitative easing (QE), but this time it is trying to stimulate non-activity and invest in the NHS.”

He explained that, with large swathes of industry shut down, financial institutions would be reluctant to lend to businesses with no order books. “Therefore, rather than printing money and pumping into the financial system – it is better to give money directly to companies.”

That is why the government is making loans and payment deferrals available to businesses, which will have to be paid for by tax rises, but only in the medium term, Professor Francis added.

For all the latest guidance, support and previous webinars on COVID-19 visit thebesa.com/covid19.

31 March 2020

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