Macroeconomics: The broader economy
The FTSE, like global stock markets, has fallen sharply since the outbreak first emerged in January.
It has dropped by approximately 35%, reaching levels last seen during the 2008 financial crisis. As businesses suffer worldwide, confidence declines, prompting mass selling and further reductions in share prices. Unlike the US, where the prospect of a federal rescue package slowed the fall of the Dow Jones, UK government measures have so far had limited effect on stabilising the FTSE.
Investors face difficult choices: sell now and attempt to repurchase when the market bottoms out, or hold their shares and endure the volatility.
Some traders profit during downturns through short‑selling, borrowing shares to sell immediately and repurchasing them later at a lower price. However, short‑selling contributed to the 2008 crash, and the FCA has recently banned short‑selling of certain stocks in response to current market instability.
Oil and gold prices are key indicators of economic performance.
Oil prices typically move in line with the broader economy, while gold often rises during uncertainty as a perceived safe asset. Oil prices have fallen to their lowest level since 2001, partly due to a dispute between OPEC and Russia over production limits and partly due to reduced demand from airlines. Gold prices initially rose but began falling in early March as fears of a global recession intensified.
To counter the downturn, the Bank of England has reduced interest rates to a record low of 0.1%.
Lower rates support borrowers but discourage saving, encouraging spending. However, with businesses closed and movement restricted, the impact is limited. The Bank may also support government rescue measures through quantitative easing, creating new money to purchase government bonds.
Microeconomics: Individual businesses and workers
The real‑world effects of the pandemic are visible across the UK.
The travel industry was the first to suffer as global restrictions halted movement. UK airlines have cancelled most flights and may require government support to survive.
The entertainment and leisure sector followed, with advice against social gatherings in pubs, restaurants and theatres.
The closure of all non‑essential shops has now affected the retail sector. Manufacturers are also struggling due to international supply chain disruption. Many vehicles rely on parts produced in China, where lockdowns have been in place since January.
White‑collar industries have adapted more easily through remote working, but they too will be affected by what is now almost certain to be a new recession.
One of the few positive outcomes is the environmental impact. Reduced manufacturing and air travel have led to a significant drop in carbon emissions, visible even in satellite imagery. Environmental groups are urging governments to incorporate climate considerations into rescue packages, such as requiring airlines to meet emissions targets in exchange for support.
Government rescue packages
The new Chancellor, Rishi Sunak, has faced an extraordinary challenge in his first months in office. Shortly after delivering his first budget, the pandemic forced the government to abandon planned spending increases in favour of emergency measures.
The Chancellor has pledged £350 billion in support for businesses. This includes loans to maintain cash flow, grants for smaller businesses and a freeze on business rates. Measures for individuals include mortgage holidays, a temporary ban on evictions and a job retention scheme. Under this scheme, employers may furlough staff they cannot afford to pay, with the government covering 80% of salaries up to £2,500 per month.
These measures do not yet assist the 15% of the workforce that is self‑employed, prompting calls for further support. At the time of writing, the government has not announced specific protections for self‑employed workers, though clarification is expected.
Final thoughts
The duration and full impact of this crisis remain unknown. COVID‑19 will continue to affect lives and the economy in profound ways. The Student Lawyer will continue to provide content to inform and support readers throughout the months of social distancing ahead.
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