How has COVID impacted the economy?
How has the COVID pandemic impacted key areas of the economy, from interest rates to the stock market to property prices, and how might things play out from here?
The past 18 months have seen unprecedented financial upheaval as the global economy has toiled with the impact of COVID. In this article, we explore three ways in which COVID has impacted the economy and take a look at what the near-term future might hold.
Interest rates
Central banks around the world have slashed interest rates or kept them at very low levels in order to make the cost of borrowing as cheap as possible. This means that people can borrow money more easily and keep spending in order to get the economy going.
Although the furlough scheme and extended work from home policies have resulted in some UK households increasing their cash savings during the pandemic, many people are undoubtedly financially stretched. The UK government itself has borrowed hundreds of billions of pounds in order to fund public services and COVID-related programmes and will be keen on low interest rates so that national interest payments remain (relatively) low.
On the flipside, as economies around the world are gradually opening up and people are spending more, the prices of consumer goods and staples are increasing at a rather fast rate. If this current period of inflation continues beyond the reopening of economies, then central banks may decide to raise interest rates in order to make the cost of borrowing more expensive, which means people spend less and inflation is kept in check.
Stock prices
During COVID, central banks around the world have supported their local economies through monetary stimulus (this essentially means increasing the amount of money circulating in an economy to stimulate growth), which has led to significant increases in the stock market despite the economic damage caused by the pandemic.
At a high-level, quantitative easing is when central banks release money into the economy by buying government or corporate debt (bonds to be precise). The effect of this is that the financial institutions, such as pension funds, that typically own this type of debt receive an injection of cash, which they can then deploy in their own lending and investing activities. This increased buying causes stock prices to increase, meaning that people who hold stocks may have seen their portfolios rise in value since COVID began.
However, quantitative easing policies around the world will eventually come to an end, meaning that stocks could stop their current upward trajectory. On the other hand, continued low interest rates will mean that investors may continue to put cash into the stock market because they will not get a good return on savings in a bank account.
Although the market remains uncertain, the performance of the stock market during the pandemic is an important reminder of why investing in stocks is a great way to grow one’s savings.
House prices
The housing market has been all over the UK news during COVID. Initially, there were fears that the property market would drop as people lost their jobs and were forced to sell their homes. In the end, the UK government opted to reduce stamp duty (a tax that is paid when buying property over a certain value) on property purchases. This has fueled housing market growth and now UK property prices are now at an all-time high.
In addition to the stamp duty holiday, remote working has changed people’s perception of the home: many workers who wish to continue working remotely have decided that they want more spacious homes. As a result, there has been a boom in property prices in rural and suburban areas, where homebuyers can get more bang for their buck, while price rises for urban homes have been more muted.
It’s too early to say whether property prices will keep increasing. However, the economic recovery combined with persistent low interest rates (enabling people to take out cheaper mortgages) will likely maintain momentum in the market.
In short, there is still a huge amount of economic uncertainty in the UK and across the globe. Much depends on whether the vaccine rollout continues to be successful against combatting new COVID variants. In the next article in this series, we will discuss the likely impact of COVID on our personal finances in the near-term.