Chief Economist’s Weekly Brief – Bottoming out?

Last week, several economies reopened without a material evidence of a spike in infection rates, well, so far.  That said, the northern-southern hemisphere divide in the number of cases continues to widen, leading some (incl. the Fed) to believe that there might be a second wave. Two risks resurfaced – escalation of US-China trade tensions and disruptive Brexit. On the activity front, data for May suggests that the worst might be behind us.

Onwards & (perhaps) upwards.  UK private sector output continued its rapid descent in May albeit at a slower pace relative to April’s record collapse. The composite output index rose from 13.8 in April to 28.9 in May. Around 55% of services firms reported a fall in activity with 12% posting a rise. The resulting business activity index of 27.8, together with March & April’s readings, have been weaker than anything seen previously. Manufacturers fared slightly better. A similar proportion of firms posted a decline in output but 1 in 4 firms reported growth.

Slow recovery. One of the worst hit sectors, accommodation and food services, has started to open up. It makes up 19% of all restarting businesses. But how many businesses that temporarily ceased trade are restarting? A mere 6%. Not a bounce back but a good start. 76% of ONS survey‘s business respondents have applied for the Coronavirus Job Retention Scheme, with a third of the workforce of these businesses being furloughed. New declarations for Universal Credit and new claim advances have both gradually declined since March and April peaks.

On a sombre note. The damage to the UK labour market of the crisis is becoming increasingly apparent. The number of people claiming unemployment-related benefits rose by a record 850k between March 12 and April 9, that’s 5.8% of the UK’s labour force! While the Q1 headlines were largely spared due to the timing of lockdown, average working hours fell by 25% between the start and end of March. Job vacancies fell off a cliff, declining 50% between March and April. Tough times ahead.

Spike! Unemployment benefit claimants in Northern Ireland also surged by a record amount in April. The number claiming Jobseekers Allowance Universal Credit claims (where the primary reason for benefit was due to unemployment) jumped by 26,500 or 89% in April.  That takes the claimant count to its highest level (56,200) in six years. Meanwhile the claimant count unemployment rate leapfrogged the UK to 6.1%. The reference point for the latest data was the 9th April. So the current position, some six weeks on, is likely to be closer to 70k.  NI’s previous claimant count peak of 7.3% (Dec-12) is likely to be eclipsed in May or June.

2020 vision. NI’s housing market was the pacesetter in the last recession but has been tail gunner in the current crisis. As of Q1 2020, residential prices have risen by 44% in the last seven years following the biggest slump in prices in UK history. That seven-year cycle looks to have ended. The Covid-19 pandemic has paused the housing market with HMRC reporting an 80% y/y slump in transactions in April with a fall of that magnitude anticipated for Q2. Activity for the year is expected to be around half that of 2019. When the market gets moving again it will reflect the changed environment not least in the credit and labour market worlds.  

Slowdown. What is inflation? Normally a question liable to excite only those of a geeky persuasion. Yet one with real resonance now. How to measure prices when the economy is effectively closed? Officially, the annual rate of inflation slowed to 0.9% in April. But try buying a haircut in April (without being arrested). Excluding forbidden items doesn’t change the dial much, lowering inflation to 0.8%. Ergo, weaker demand softens prices. Conversely, tinned beans are up almost 5% since March. Truth is, we don’t know what the longer-term price effects of CV-19 will be. But for now, price growth is softening.

Consumerism defeated. As has been the case right across economies, UK retail sales statistics for April presented grim reading – an 18% drop m/m following a 5% decline in March. Among physical stores only alcohol and tobacco recorded an increase in sales (2.3%). Fuel and clothing sales fell by over 50%. And even spending on food dropped (-4%) after the surge in March. The biggest winners are online shops where sales increased by 18% and reached the highest share ever – 30.7%. As restrictions are gradually lifted, there will be a bounce back, but it might take a while before we reach pre-lockdown levels.

Time is money.  Every second throughout April, the UK Government borrowed an eye-watering £24,000.  That’s £62.1bn in total; by far the largest monthly deficit ever recorded; more even than was forecast for the whole of 2020/21.  Tax receipts fell by £26bn, or 42%, vs. last year, as levies on consumption, income and profits all collapsed.  Meanwhile central government spending jumped by more than half, £38bn, due to the cost of the Coronavirus Job Retention scheme and expanded public services. With public debt (excl. Bank of England interventions) reaching 88% of GDP, just be thankful that lower interest rates and falling inflation reduced debt interest payments.

Past the worst. The Eurozone composite PMI index increased from 13.6 in April to 30.5 in May thanks largely to an easing of the lockdown in many countries, but remains mired in contraction territory. The Eurozone services and manufacturing business activity indices rose to three month and two month highs in May. Still, social distancing measures are hitting hotels, restaurants, travel and tourism. With layoffs persisting, consumer spending faces significant headwinds in coming months despite government support measures.

Not going negative. The April Fed meeting started with the recognition of the part the US central bank played in the improvement of financial conditions from the abyss of March. However, committee recognized the large economic uncertainty that lies ahead, with three main concerns – corporate credit, mortgage delinquencies and emerging market vulnerabilities. Second wave of outbreak and permanent scarring in labour markets were some of the additional worries. Quite importantly, the committee agreed that rates will stay at present levels until “policymakers were confident that economy has weathered recent events”. That should put to rest the speculations around negative rates! But then again….

Leave a Reply