Chancellor Rishi Sunak has warned that the ‘economic emergency’ facing the UK economy is only just beginning, following a cut down and alarming spending review yesterday.

The warning comes as the Office for Budget Responsibility forecasts the UK economy will contract by 11.3% in 2020 and will take two years to return to pre-pandemic levels. The Institute for Fiscal studies however says the OBR’s growth forecast is too optimistic, and that recovery will take longer.

The Chancellor’s spending review usually acts as a mini budget, laying out the economic framework for the government in the next three years. With the economic outlook still uncertain due to the ongoing Covid-19 pandemic however, this year’s review was restricted to just a 12-month outlook instead.

Spending Review

The spending review announced further funding to help ailing sectors of the UK economy, but also pointed towards the potential austerity facing the economy in the coming years to try and balance the billions being borrowed in 2020. Some public sector workers faced a pay-freeze, while overseas aid will also be cut, with warnings that further savings will have to be made in the years ahead.

Addressing the House of Commons, the Chancellor warned that unemployment is expected to continue rising, hitting roughly 2.6 million by mid-2021. While positive results in vaccine trials have given some hope of lifting restrictions in Easter, many companies still face months of further restrictions that could push them into collapse.

Today the government have announced the plan for the return of the tiered local system, and much of the UK will find itself in the highest third tier; meaning restrictions remain high, and keeping recovery subdued in the run up to Christmas. Hospitality industries have been quick to warn that they cannot remain viable while forced to close over their busiest period.

The OBR also qualified that the recovery forecast was dependent on a Brexit deal being agreed in the coming weeks, and that a no-deal result could see the economy fall by another 2% in 2021. There has been no news of progress for several days now after the EU’s deadline came and went, with talks even suspended temporarily due to a member of the EU negotiating team testing positive for Covid. The UK economy then is seemingly faced with a bad or worse situation for the next few years.

Gold and silver have seen selling pressure this week, with both metals falling on Monday as vaccine optimism, and news that the transition of the US presidency to Joe Biden has officially started, buoyed stock markets. Reaching a new all-time high on Tuesday, many analysts have continued to warn of the stark disconnect between stock markets and the real global economy. Stocks have since dipped back as traders are faced with the reality of months of further lockdowns, and years of recovery.

While prices have dipped for now, the outlook for gold remains strong in the years ahead, with interest rates at all-time lows and inflation expected to rise on the back of significant government money printing. The 12-month nature of this year’s spending review reflects the unprecedented impact on the economy Covid has had, and how quickly things continue to change, proving once more how important wealth diversification is for investors.