Another Lockdown. Another day in UK and Europe

November 6, 2020

We are all rightly concerned about Lockdowns and their effect on us and the economy. And it can be unclear whether we are doing the ‘right thing’ or not. We can put things in context if we take a look at our Continental European neighbours.

Understandably people question Lockdowns, yet it isn’t just the UK. France, Italy, Spain and even Germany – which has proved to be efficient in its Test-and-Trace programme, are imposing similar lockdowns and restrictions.

By mid-October 240,000 people lost lives in Europe with an estimated 7m infections, so many countries have felt the need to act.

The European economies, as measured by Real Gross Domestic Product (GDP), fell 40% in 2nd quarter of 2020 and more developed nations have felt the worst effects. 54m workers have been supported by some job retention scheme or another.

Projections are for European economic activity to suffer a 7% GDP decline in 2020 – the biggest since World War II, followed by a rebound of +4.7% in 2021

Economic activity would have been 3-4% lower in 2020 with none of this support according to the International Monetary Fund (IMF) .

European Impact of a 2nd round of the pandemic?

Addressing the concern about the amount of government spending, the (IMF) takes the view that Governments can’t afford not to spend, given it keeps people in jobs and businesses going. It is avoiding ‘Economic scarring’.

And it will be a very long ascent for most countries to get back to pre-2019 economic levels, possibly by 2022-2023. Governments will need to work at shrinking the debt and create stronger financial buffers, in a similar way to how banks addressed the 1997 Credit Crunch. Banks have remained resilient given their levels of capital, which have withstood a liquidity crisis this time around.

EU Countries have access to the European Recovery Fund. On average these funds will supply 3% of GDP and can help enhance growth by 0.75-1.5%. Some countries are suffering more than others.

Spain a big holiday home destination

Spain’s economy is affected more than others owing to the structure of the economy. For example hospitality and tourism are large economic sectors. It also has lots of small and medium sized companies which lack the resources of larger companies, as well as lots of temporary employment contracts.

Portugal a lifestyle choice for home buyers

Portugal too has a large Tourism industry, which is creating a big domestic effect, given all the travel restrictions.

UK – a favourite for expat property investors

The economy is forecast to decline by slightly more than Germany and France.

As for the property market, comparisons have been drawn with the Credit crunch of 2008. During the credit crisis UK property prices declined 19% from a peak in Sept 2007 to a trough in March 2009 (Land Registry). But the UK government stimulus now is far more than the stimulus package in 2008 and it is this which will help determine how quickly and by how much the economy recovers by.

The UK property market is currently buoyed by a flurry of buyers. Both homebuyers seeking to enhance their living space and investors rushing to beat the Stamp Duty holiday deadline of the end of March 2021.

At what stage will property market buying peter out?

We will see this activity slow once the reality of unemployment hits the market. London has already been affected as many migrant workers return home because jobs are hard to come by, leaving a larger than usual supply of rental properties. And as some residents migrate out to the suburbs and Home Counties where they get more living space.

The longer term impact on prices is likely to depend heavily on economic factors; growth, earnings and unemployment. 

The UK has long had a supply: demand imbalance and the building industry has been trying to keep up with the annual supply of houses. That remains the case and is now exacerbated by supply chain issues, slower conveyancing processes and a lack of resources at Local Authority level hampering local searches and causing delays in the buying process.

Expats who are still considering their investment plans given the introduction of the 2% stamp duty land tax surcharge for non-UK residents from April 2021, please get in touch.

Source: * IMF (annualised Quarter vs Quarter)

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