Chief Economist’s Weekly Brief – More of the same

The easing of lockdown restrictions, and with it the economic recovery, looks set to be taken tentative step by tentative step. Witness South Korea having to reintroduce some distancing measures. Meanwhile data is putting more colour on the enormous scale of the economic damage. No surprise that the Bank of England is envisaging the worst downturn since 1706. Even worse than the “Great Frost” of 1709.

1st attempt. The Bank of England’s “illustrative scenario”, setting out the potential impacts from covid-19, envisages a GDP decline of close to 30% in the first half of this year (it was 6% in the financial crisis). Activity then picks up rapidly in the second half before rising 15% in 2021. Unemployment rises to over 9% this year and inflation remains subdued. The Bank sees little by way of long-term damage – unemployment returns to 4% by 2022. But uncertainty is higher than usual (little is known about the initial damage, never mind the recovery) and in the Bank’s own words risks are tilted to the downside. 

Stressful. The BoE’s Financial Stability Report shows the preliminary financial results of their covid-19 scenario, generating losses that are roughly half the size of the 2019  stress test. This leaves the UK banking sector well capitalised and able to support businesses and households. A good start therefore, and worth recognising that these results that are helped by unprecedented government policies and a low for longer interest rate environment.

On hold, for now. Alongside its outlook the Bank opted to keep policy on hold with rates held at 0.1% and the quantitative easing programme unchanged (£200bn was pledged in March). That wasn’t unanimous. Two members Committee wanted to increase QE by £100bn immediately. But all members agreed more stimulus might be needed in future.

Herbal remedies. The Scientific Advisory Group for Emergencies or SAGE is an apt name. We have ‘sage’ advice, while the etymology of the herb ‘sage’ means “to save”. Let’s hope the acronym lives up to its names, as newly released SAGE reports hint at possible UK “exit strategies”. Clue: be patient. Easing too quickly only to reverse would rapidly drain public confidence and be practically ‘challenging’. Imagine having to re-furlough staff! And benefits need to be balanced; i.e., not just economic, but also social and psychological too, with risks graded by a ‘traffic light system’. We’ve only taken the first steps in a long journey.

Disruption or destruction? According to the ONS Business Impact of Coronavirus Survey, 23% of UK businesses had temporarily closed or paused trading for the period 6 – 19 April (27% in N.Ireland). The two sectors to have reported the largest disruption (c. 80%) were Accommodation and Food services and Arts, Entertainment and Recreation. The Coronavirus Job Retention Scheme (CJRS) is the most popular type of government support with 67% of firms applying for it. 28% of the workforce had been furloughed under the CJRS. Less than 1% of the workforce were made redundant. So it seems to work… for now.

Tailing-off.  By 28 April almost 2.2 million people had applied to receive Universal Credit, the UK’s main income-contingent benefit, since social distancing measures were introduced in mid-March.  That’s 1.5x as many as the total number who were unemployed before the crisis struck; potentially enough to push the unemployment rate into double figures.  Thankfully there may be light at the end of the tunnel.  The flow of new claimants has slowed recently: the weekly number of applicants fell from a peak of over 700k in March to 190k at end April. Next week we will get an idea of how Northern Ireland is faring with the claimant count unemployment figures up to 9th April.

Emergency stop. New car sales in the UK fell a staggering 97% compared to the same month last year. That was still better than the 99.4% decline in Northern Ireland. Given that showrooms were closed for the entire month the collapse in sales came as no surprise. The sales that did occur would have bypassed dealerships and been purchased from wholesalers or manufacturers directly. Tesla is one manufacturer still delivering directly to the public. This explains why the Tesla Model 3 was the best UK seller in a wafer thin month of sales.

Site closed. The UK construction PMI plunged to a record low of 8.2 in April, down from 39.3 in March. This was the weakest of the three sectoral PMIs as 86% of construction firms reported a drop in activity. No part of construction was spared from the shutdown, though civil engineering fared slightly better than the housing and commercial sub-sectors. A gradual reopening of sites with social distancing could see some modest improvement in May.  But ongoing supply chain disruption, lack of new orders and cash flow concerns will make for a very long and challenging recovery.

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