Our focus remains with our existing clients’ investments and our thoughts are with those most affected by the pandemic.
How is the economy responding?
Private consumption, private trade and private investment have been hit hard by the virus. All are down by over 30%. This was to be expected during a time of lockdown. The public purse has been called upon to provide a counterbalance, and it is digging deep. At least 14 new government actions have been introduced since lockdown in a bid to support the economy. This has not come cheap. Government borrowing is expected to rise from £40bn in 2019/20 to beyond £300bn in 2020/21. This means that the equivalent of about half of all central government spending in 2020/21 will be funded by borrowing. And this borrowing will have to repaid over time, reducing expenditure elsewhere. Despite government action, the economy is still shrinking. It fell by a record 5.8% in March 2020, and the Bank of England’s central scenario projects a fall of 14% in 2020. This is greater than anything we saw during the financial crisis of 2008. Unemployment is projected to rise from 4% to 10% (c3 million people); and wages are expected to fall. An common outlook sees the deep drop in 2020 being followed by a strong rebound in 2021, and resolution of longer-term economic trends from 2022. This may be optimistic.
How are businesses responding?
Government intervention is helping business to keep the lights on. 80% of businesses are trading and 20% have paused trading. Very few have ceased trading permanently, so far. Regardless, trading conditions are tough. 80% of businesses are using furlough, and 1-in-4 jobs are in furlough. Sales have, on average, fallen by 45%. The hardest hit sectors have been accommodation, food services, textiles and education. The Finance/Insurance sector is down, but by only 0.5% compared to the wider economy’s 5.8%. Curiously, investment markets have seen some rebound since mid-March, despite the very challenging economic arena. It would be wrong interpret this as the markets putting coronavirus behind them. To a large extent, this reversal has been driven by the recent largesse of governments and central banks. Many will be asking what happens if this largesse stops before the economy starts.
How are households responding?
Households do not share the confidence of the investment markets. 80% are worried about the impact coronavirus is having on society, the economy and households. Consumer confidence has fallen to -33. There is evidence of households preparing for a coming storm. Spending is down, use of debt is down, and saving is up.
How are savings and retirement customers responding?
There is encouraging evidence that the call to customers to “keep calm and remember the long term” has been heard. There has been no systemic withdrawal of savings; no systemic reduction in contributions; no systemic switching of investments (beyond the most engaged customer cohort). There is, however, no room for complacency. A negative shock to household finances will inevitably have a negative impact on their ability to save for retirement. And, as the government looks to balance its books, there will inevitably be speculation about what this could mean for areas of expenditure such as the state pension triple lock, pensions tax relief and automatic enrolment.
Covid-19 pandemic boosts intergenerational planning
The coronavirus pandemic could see a rise in intergenerational planning as investors look to leave money for their family and friends, Quilter Financial Planning has found. The financial planning giant asked more than 1,000 adults in the UK whether coronavirus had encouraged them to think about supporting other relatives financially now or in the future. Nearly a fifth (17%) said they were more likely to look at leaving money to help their loved ones in the future and this figure rose to one quarter of people among those who had received financial advice. The survey also found one-in-five people have been prompted to try and help family and friends with short-term financial pressures, such as paying bills or making up income shortfalls and 15% of those surveyed were already supporting friends and family before the crisis.”
As always, we will continue to use this time to review plans and advice with our clients.
(Taken in part from Aviva and professional adviser)