Chief Economist’s Weekly Brief – Record breaking

Amid new rules limiting people’s movement and closing non-essential businesses, data has begun to emerge highlighting the severity of the downturn. PMI indices in the UK, US and EU have all recorded historical lows. Unemployment applications are breaking all records. Fitch, a ratings agency, downgraded the UK sovereign debt, citing the impact on the public finances and the economy.

Take a deep breath. As the scale of the pressures on health systems becomes more apparent, so too does the economy’s response to policies designed to slow the spread of infection.  The first in a series of indicators came out last week as the flash PMI survey was published, showing a record low of 37.1 for the UK (a number below 50 indicates the economy is contracting). The speed of the turnaround from February’s upbeat 53.0 is matched by the huge falls in equity markets.  The economy clearly shrank substantially in March but by how much remains unclear. The Northern Ireland March PMI is due 14th April.

Record low. The Euro area composite PMI plunged 20.1 points to 31.4 in March 2020, and also reached a record low. Weakness was most evident in the services sector: the headline index plummeted to 28.4 in March (52.6 Feb). The details of the latest composite PMI herald a collapse in domestic demand. Witness a cratering in new orders and export orders in March, the employment index dropped to its lowest level since the global financial crisis. All this suggests the Euro area entered a recession in late Q1 2020 with the contraction in growth rising in Q2.

Catastrophe.  Just days after quarantine forced the shutdown of large swathes of the economy, workers are losing their jobs on a never-before-seen scale. A staggering 477,000 new claims for Universal Credit were made in only nine days to March 24th. That’s 1.4% of the entire workforce. Many thousands more are yet to register, as the DWP struggles to process the 8-fold increase in applications. The situation in the US is equally dire: initial jobless claims surged by more than 1000%, to 3.28 million, in the week to March 21st. That’s by far the biggest increase ever recorded, in over 60 years.

Selfie help. Another week, another multi-billion pound support package and another new acronym. Under the Self-Employed Income Support Scheme (SISS) self-employed will be entitled to up to £2,500 per month, for at least three months if they were working in 2018/19. Support will be based on 80% of average profits for the last three years, up to £50,000. Those a penny above this threshold get nothing. The majority of the UK’s 5 million self-employed – including the 136k in Northern Ireland (15% of workforce) – will benefit with payment due in two months’ time. But many are excluded.

Double whammy. The Covid-19 outbreak will stretch the UK public finances in two ways. First, tax revenues are going to be lower due to a substantial hit to the economy. Second, the government has committed to substantial amounts of support for affected companies and households. According to the Institute of Fiscal Studies, an independent think tank, a deficit of over £200bn or 9% of national income in the coming financial year is well within the bounds of possibility. The response to the global financial crisis in 2009/10 resulted in a deficit of 10% of national income. The fact that contingency fund was increased from £10.6bn to £266bn suggests the Government may be prepared to go even further.

We CARES. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) came in at a whopping $2 trillion (10% of GDP), dwarfing the stimulus during the global financial crisis ($800bn). Support for households and companies is focused on incentivising businesses to hoard workers and providing support for employees made redundant. Unemployment insurance has been extended by 13 weeks to 39 weeks, and tops up payments by $600 per week. Lower and middle income workers receive a cheque for up to $1200. Families will receive an extra $500 per child. SMEs benefit from a $350bn loan guarantee. 

Relief rally. Financial markets had another rollercoaster week. Multi-trillion dollar stimulus plans in the US and G-20 provided a booster rocket for equities. On Tuesday, S&P 500 posted its biggest one-day gain (+9.4%) since October 2008. This marked the start of the strongest three-day rally since the 1930s before a sell-off on Friday. European exchanges followed a similar trajectory with the FTSE 100 surging 16% in three days before closing over 5% lower on Friday. Sterling slumped to a record low against a basket of currencies before staging a recovery with a four and 10 cent rise against the euro and US dollar. The pound was recently testing €1.12 and $1.25.

Stop. Domestic infections have slowed to a trickle in China in recent weeks while the economy and society have been inching back toward normal. Even in Wuhan (the epicentre of the outbreak) some shops are set to open on Monday. But with cases spiking worldwide China has recorded over 600 imported cases. So last week the government temporarily suspended entry by foreign nationals holding visas or residency permits, while airlines have been ordered to sharply cut international flights. One thing that will be imported is collapsing demand as Western nations endure harsh recession.

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