Chief Economist’s Weekly Brief – Break out

COVID-19 is now in 69 countries and the hopes that it will be mainly contained within China are gone. After a large increase in reported cases in Italy and Iran, the stock market experienced the worst week since the financial crisis. Yields on ten-year Treasury bonds (viewed as a safe asset) reached all-time low of 1.13%.

Plummet. Last week’s precipitous fall in equities reflected a belated realisation that COVID-19 is going to have wider implications than first thought, including the rising risk of a more lengthy hit to activity. Central banks signalled their willingness to step in with policy support – the words markets want to hear – but how that can help the real economy isn’t immediately clear. And at this stage the scale and the duration of the economic impact is a huge unknown. But the signs are already building…

..with China’s PMI a flashing red. The manufacturing survey plummeted from 50 to 35.7 in February. The services version registered a shocking 29.6. Both those readings are a record low. Even taking into account that surveys can overstate the ultimate effects, it’s clear that China has been hit hard. The channels are numerous and self-reinforcing. Virus control measures have made it hard for workers to travel back after Lunar New Year celebrations. Raw material inputs are harder to come by. Reduced work means reduced spend. And so the economic impacts build.

Spreading. As of 25 February China estimates that work has resumed at 80% of mid-sized and large firms. But that doesn’t mean they’re at full capacity. At the moment there is no consensus whether it’s a short, sharp shock, a more protracted recovery or indeed a longer-term slump. But it has already rippled out into the wider region, with the often complex web of supply-chain relationships a clear and obvious channel. South Korea, Vietnam, Japan, Thailand and Malaysia PMIs all declined. We’ll get more indications of the knock-on effects to the wider global economy this week.

Taking a pounding. Sterling’s performance on the currency markets has resembled something of a mini-rollercoaster in recent months. Last week marked a major downward move with the pound dropping from €1.195 at the start of the week to sub-€1.15 today. Just over a fortnight ago the pound was changing hands at €1.207 – a multi-year high. Sterling’s depreciation against the US dollar has been less marked – down around two cents in a week to sub-$1.28. Speculation of interest rate cuts have weighed on both currencies. Both the dollar and the pound have lost ground against the euro as they have more room to cut rates than the ECB. Expect more currency twists and turns in the weeks ahead.   

The Way. Out of a population just shy of seven million, 763,000 young people in the UK aged 16-24 are neither in education, employment or training. ‘Affectionately’ known as NEETs, they comprise 11.1% of the cohort; i.e., more than one in ten. Surprising perhaps, especially with jobs allegedly plentiful. Although down on the 1.3 million 2011 high, falls have stalled recently. The same trend holds true for Northern Ireland with 1 in 10 16-24 year olds classed as NEETS. This equates to 21,000 – around 14,000 fewer than in 2015.  Some NEETs will be mid-flow between college and work. But many risk becoming permanently left outside the labour market.

The Migrant Worker. As UK policymakers carve out future migration rules, let us turn to the data. Different patterns emerge for EU and Non-EU migrants. EU net migration has fallen since 2016, primarily because fewer people are coming for work: currently the least since 2004. Meanwhile, Non-EU net migration has gradually increased since 2013 and is at the highest level since 2004. The most cited non-EU migration reason is to study, not work. The new migration policy sets a salary threshold, which, in theory, drastically limits low-skilled workers. How the future of labour market looks will depend on how everyone adapts to it.

Old news. Economic sentiment within the Eurozone has been going one way in recent months…Up. February marked the fifth successive monthly rise with confidence climbing to a nine-month high. During normal times, high frequency indicators such as the monthly PMIs or sentiment indices are very closely watched. These leading indicators are the first to reveal turning points. But these are not normal times. Last week’s news surrounding the accelerating spread of the COVID-19 beyond China (notably into Italy) makes these leading indicators out of date in record time. Next month’s surveys will undoubtedly show the improvements of recent months wiped out.

Budding success.  Forests and other woodland cover 15% of the UK.  New estimates put the benefit of woodlands at a staggering £5.3bn.  That’s 18x more than the direct economic contribution from timber production in 2017 (itself £280m).  In addition to recreational visits worth over £500m, woodlands save £940m in health costs by scrubbing the air clean of pollution and add £1.4bn in value by removing 18m tonnes of CO2 equivalent from the atmosphere (4% of the UK total).  So embrace calls to double the area of woodland being planted, even if you won’t actually hug a tree.

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