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Economy sees 20% contraction; ecosystem sees 60%

Economy sees 20% contraction; ecosystem sees 60%

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Recent official statistics have revealed that the UK economy contracted by 20.4% in April, compared to where it stood in March.  The comparison to April last year was even more marked, at 24.5%.  These are the sharpest monthly declines on record.  As COVID-19 spread, and in anticipation of the sharp economic impact we now have the evidence of, UK equity markets declined and the FTSE 100 fell a third between February and late March, before staging a partial recovery.

But the economy is not the only part of our lives to see exceptional declines.  Several environmental factors broke records this spring.  Carbon dioxide emissions, having risen globally by around 1% a year over the last decade, fell an average of 26%[1] as lockdowns reduced economic activity.  In April rainfall in the UK was some 60% below average[2], with some areas of the UK seeing their driest April on record. Unlike the financial markets, there was no immediate recovery; May 2020 was the driest on record in England. [3] [4]

While there is no direct correlation between economic growth and rainfall variation, in the long term the climate and the economy are intrinsically linked. While agriculture is a very small part of any developed economy in terms of contribution to GDP, the implications are much wider.  Though challenging, climate change leads to positive innovation that can spur growth, leading to cleaner technologies as well as slowing – or even perhaps turning back the clock – on global warming.

A headline that did not receive much press was the announcement that as of June the UK had gone two months without burning coal to produce electricity. [5]  While there has been a decline in power demand due to COVID-19, a large contribution to this has been the record investment into renewable energy.  A significant portion of this investment has come from pension schemes, including those advised by Buck.  We continue to see opportunities for schemes to continue to ‘do well by doing good,’ bringing new opportunities to clients as well as providing guidance on wider ESG matters.

While April 2020 was very dry, it was also the sunniest since 1929. Students of economic history will recollect that 1929 was the year of one of the most severe equity market collapses; falls in the autumn of 1929 marked the start of a loss of some 87% in less than three years. [6] (That autumn also included the wettest day on record in the UK, with over 210mm falling in a single day in Wales).

But despite these shocks to the system, markets – like ecosystems – can recover if properly managed.  Post-crisis in the 1930s, the USA witnessed one of the most rapid periods of productivity growth on record. [7] While we’re currently reading so much about central banks’ actions to mitigate the worst of sudden economic declines,  we must remember that ecosystems, with their high degree of interdependency, can take long-term and careful planning to be restored.  It is here that we see significant opportunity for innovation and investment that will benefit investors, the economy, and the climate for some time to come.

Peter Hill-King is Head of Investment Research at Buck Consultants (Administration & Investment) Limited, which is authorised and regulated by the Financial Conduct Authority.

Important notice: This article is for Professional investors only and was written as at 15th June 2020. The article is generic in nature and should not be regarded as providing specific advice or a recommendation of suitability. No action should be taken without seeking appropriate advice, taking account of how the market environment has changed since the date of this article. There can be no guarantee that the opinions expressed in this document will prove correct.

The value of investments and the income from them may fall as well as rise and will be affected by changes in financial conditions. Past performance should not be relied upon as a guide to future returns.

[1] https://www.nature.com/articles/s41558-020-0797-x#Sec4

[2] https://www.metoffice.gov.uk/about-us/press-office/news/weather-and-climate/2020/2020-april-stats

[3] https://www.metoffice.gov.uk/about-us/press-office/news/weather-and-climate/2020/2020-spring-and-may-stats

[4] https://www.ceh.ac.uk/news-and-media/blogs/uk-hydrological-status-update-may-2020

[5] https://www.bbc.co.uk/news/science-environment-52973089

[6] Federal Reserve Bank of St Louis, https://fred.stlouisfed.org/graph/?g=qj2m

[7] Alexander J. Field, A Great Leap Forward: 1930s Depression and U.S. Economic Growth. New Haven, CT: Yale University Press, 2011, ISBN: 978-0-300-15109-1.