AXA IM: Chancellor announces next steps in "whatever it takes" strategy

March 18, 2020

David Page, Head of Macro Research at AXA Investment Managers, comments on the UK’s emergency fiscal stimulus during the COVID-19 coronavirus crisis:

• Chancellor Sunak outlined the next steps for fiscal policy, including £20bn of additional fiscal stimulus and a £330bn loan guarantee package.
• Stimulus included grants to smaller businesses to help them meet rent and labour fixed costs as well as deferring business rates.
• Large guaranteed loan scheme to ease firms access to bank lending.
• Chancellor made clear that these were next and not final steps, additional measures are likely to be announced over the coming weeks.
• Yet economy faces exceptional shock as anti-virus measure enacted.

Prime Minister Boris Johnson and Chancellor Rishi Sunak held a joint press conference where a further package of economic support was announced for the economy. Chancellor Sunak announced the following measures:

• A £330bn (15% of GDP) government-backed guaranteed loan scheme to help business access loans. The Chancellor stated that if demand for such loans exceeded this figure he would provide additional capacity.
• In conjunction with the BoE, the Chancellor announced a low-cost, easily accessible commercial paper lending scheme to help large corporations.
• For small firms, a Business Interruption Loan Scheme was announced to provide loans of up to £5m, with no interest payable for the first 3-months.
• The Leisure sector will across the board see business rates suspended for a year, while smaller businesses will have additional access to £25k government grants.
• The Chancellor increased last week’s offer of £3k in grants to small business, up to £10k.  
• The Chancellor stated that agreement had been reached with insurers to support firms that had forms of insurance
• A 3-month mortgage payment relief scheme was introduced for those affected by the virus.

The Chancellor announced that the package of measures represented a further £20bn (0.9% of GDP) of fiscal stimulus , on top of the £30bn announced at last week’s Budget. This does not include the £330bn loan guarantee scheme which counts as contingent funding, only a cost to government if any firm fails to repay the loans in the future. While this package is extraordinary in scale and breadth it is also in keeping with similar stimulus starting to be rolled out in other economies – with France yesterday announcing a similar scale of measures. The package is designed to offer a combination of social and private means to bridge the significant drop in demand expected over the coming months. The aim is to help companies afford and maintain capacity so that as demand recovers beyond the impending virus-induced drop, firms are well placed to benefit from the rise in demand. This is hoped to mitigate job losses, which would otherwise exacerbate and prolong a period of subdued demand.

The Chancellor added that these were the next, but not final steps. He said there were additional measures underway to provide support for airlines and airports and for other areas of the economy that may require support from access to funding, loans or regulatory forbearance. He also said that the Treasury was looking into additional ways to ease pressures related to wage payments. We fully expect to see additional measures enacted by the Treasury, as well as additional monetary policy easing by the Bank of England at next Thursday’s meeting to help support the economy. That said, the scale of demand shock faced by the UK is exceptional. The government and monetary authority are providing appropriate policy measures to mitigate the impact. However, at this stage, falling GDP over two successive quarters to meet the definition of recession appears unavoidable. These measures should limit any such recession’s depth and persistence.