I have been looking at the Office for Budget Responsibility’s (OBR) scenario forecast on the impacts of Covid-19 on the UK economy – a very important piece of work for all those involved in giving financial advice.
However, given we have never been here before, how can anyone predict the future, you might ask?
The economy is the sum of all our activities. This means we are all powerless. Some commentators talk about the urgent need to end the lockdown. Their view is the cost to the economy and therefore public health is greater than the impact of the virus on the health of the nation.
What they overlook is that we are free. Many people began personal lockdowns long before the official government announcement. If the government says, as those commentators want, we should all go back to work, go to the pub, will those people do so? They may, but we’ve heard much about a natural caution that might not take effect.
In that sense, individuals will do their own risk analysis and decide what is best for them and their families. Recent opinion polls indicate many will stay at home even if the government tried to persuade them to go back ‘out there’.
Then there is the overseas aspect. The crisis has shown that although geographically we are an island, economically we are not. Other countries actions and transportation problems will affect our supply chains.
The OBR scenario suggests that in Q2 2020 there will be close to a 35% reduction in GDP compared with Q1. This will be followed by an increase in GDP of around 25% in the following quarter. That figure is based on certain assumptions as to how the lockdown is lifted and the economy will recover.
If GDP was 100 in Q1 2020; on this scenario it would be 65 in Q2 and 81.25 in Q3. The OBR scenario anticipates a rapid pick-up of GDP over the following two quarters with a return to normal in the second-half of 2021. And by normal I mean in line with the OBR forecast that accompanied the March 2020 Budget which did not exactly predict boom times ahead.
However, as we know the economy is not just about GDP. Our customers are affected most by issues that affect them personally and their reactions affect our businesses.
The three main factors going forward are therefore going to be employment levels, earnings and inflation. The OBR is not surprisingly assuming a large increase in unemployment. A near doubling this year to 2.5 million. It will not be until 2023 that unemployment levels revert to the Budget forecast of 1.4 million, slightly higher than in 2019.
Behind every statistic is a personal story. What will these statistics do for the person who becomes unemployed some five years or so before their planned retirement? We know that those aged over 50 find it more difficult to find employment. As in previous recessions will many in that age group be forcibly early retired? How much is outstanding on their mortgage? How will they finance a longer retirement with smaller retirement savings?
One thing is certain, they’ll need a good later life adviser to guide them through the rest of their life.
Since the publication of the OBR scenario, the government has announced further stimulus measures to keep the economy ticking over during lockdown.
The biggest unknown at this time is the duration of the lockdown and how we extract ourselves from it. The most important factor is how quickly we get to a post-viral world either through a vaccine or other means.
From an economic point of view, the ideal situation is for the lockdown to be removed quickly so that the need for economic stimulus measures evaporate. The worse situation would be that the overwhelming risk to health means escape from the lockdown is slow and government support measures are withdrawn at a faster rate than the economy recovers.
The OBR report is important because it sets out what could happen to the economy in general. Hopefully, actual events will not be as bad as the OBR anticipate. Even then those in the later life lending market will see an increase in demand for their products and services.
There will be an increase in those approaching retirement with mortgages outstanding, those who depend on investments for retirement income may have to reduce their drawings, and more children and grandchildren will need to call on the family ‘banker’ for assistance.
It might seem some way distant at present, but the future is likely to mean many more individuals need later life advice, and those firms that can survive this period are likely to thrive again.
Bob Champion is chairman of the Air Later Life Academy