Chief Economist’s Weekly Brief – Peaks and troughs

Last month saw an abundance of two things – national variations in how to ease lockdown measures and additional policy support. The latter especially prominent in the EU and Asia’s largest economies (Japan’s additional fiscal stimulus elevated it to the largest in the world). Green shoots followed. But beware famous last words.

Pinteresque. Harold’s Pinter’s plays are famous for conveying meaning in what’s left unsaid; the unspoken voice. It can feel similar trying to extract information from current business surveys. Ten weeks in and we’re aware four in five businesses remain trading, with one in five (18%) pausing operations. A similar proportion of firms (79%) have applied for the Coronavirus Job Retention Scheme. Yet what stops this being useable data are the silent voices, i.e., the business owners who don’t answer surveys (just 1 in 4 respond or in Northern Ireland just 1 in 6!). Until we know their intentions, drawing longer-term implications on jobs loses and firm restructuring remains elusive.

Grim reading. The CBI Distributive Trades Survey reported that UK retail sales volumes inched higher to -50% in May, from -55% in April, but remain close to all-time lows amid continued supply disruptions. Orders fell at their fastest pace in May since August 2016. Weakness in retail sales was widespread last month, notably in wholesale and motor trade as the lockdown took its toll. Grocery sales bucked the downtrend, returning to positive territory. All retail outlets are due to open in England in mid-June, but rising unemployment and social distancing point to a grim outlook for retail sales.

U, V, W, L, or something else? Unemployment in Northern Ireland is expected to peak at 12% this year and the local economy to contract by 12.7%, according to a new report by Ulster University’s Economic Policy Centre. Mid Ulster; Newry, Mourne and Down; the Causeway Coast and Glens, and Mid and East Antrim are expected to be worst hit by rising unemployment. This is due to their concentration of jobs in areas such as construction, manufacturing, accommodation and retail. The report notes that it is still not known what shape the recovery will take, or when it might start. What seems clear though is that the prospect of a V-shaped recovery is receding further, and that something akin to the shape of a well-known sportswear company’s logo is much more likely.

The way we live now. Like most things (sadly), how we’re affected by the lockdown is largely shaped by our socio-economic position. While the UK’s lowest income households increased their time working outside the house, matching 2014-15 levels, high-income households work from home. And they spend those precious saved hours not commuting doing gardening, DIY etc. Parents are spending more time providing childcare, up 35% from 5 years ago. Men have increased their chores and women have reduced theirs, resulting in a slight reduction in unpaid labour gap…but still large at 1 hour 7 minutes a day.

Wary. Michael Saunders was one of the only two members who voted to increase stimulus program in the last MPC meeting. So, it wasn’t surprising to observe his pessimism about the long-term impacts of Covid-19 on the UK economy. In a speech last week, he outlined his concerns about a second wave of infections and a permanent scarring driven by wounded labour market and bankruptcies. He believed that the risks of a soft policy are far outweighed by the risks of doing too little. We have heard similar tones from the Fed, certainly a viewpoint that cannot be ignored.

Flattening the curve. Inflation pressures in the Eurozone have evaporated in recent months with consumer price rises almost flat-lining in May. Last month’s 0.1% y/y increase marked the weakest rise in four years. A sharp fall in energy prices (-12% y/y) has pulled the headline CPI rate down to the brink of deflationary territory. Stripping out the effect of energy prices – alongside other volatile items such as food – core inflation remains at a more respectable 0.9% y/y…for now.  But the ECB is well aware that the collapse in economic activity will pull core inflation down. Cue more stimulus.

United States of Europe? European Commission President Ursula von der Leyen has called for the power to borrow €750bn to fund the recovery efforts after the CV19 crisis. This might not sound as much in the world where countries are borrowing on unprecedented scale, but this would be a momentous turning point in the EU integration. Borrowing would be guaranteed mutually by the governments of the EU states and two thirds of the funds would be distributed as grants, not loans, to the hardest hit regions. Unsurprisingly, there is a serious opposition, but crucially France and Germany are on board.

Accelerate. How do you galvanise the economic recovery and facilitate the green transition? One way is a car scrappage scheme to encourage replacement of older vehicles for electric ones. Many countries adopted similar policies after the financial crisis. Last week France fired it back up, offering subsidies of up to €12,000 for the purchase of a new electric car. It wasn’t the only signal of an accelerating trend. One of the aims of the policy and broader automotive sector support was to relocalise manufacturing in France. A spot of evidence for those who think gloabalisation is about to be jammed into reverse.

From worse to bad.  Despite trending down for the last eight weeks, last Thursday saw another 2.1m initial claims for US unemployment benefits.  That’s more than 3x as many as recorded during the worst week ever of the 2008-09 recession.  But, as states begin to re-open for business, there’s a glimmer of hope that conditions are improving.  The number of new layoffs is declining; down 13% in the past week and by two-thirds since the late March peak.  The number of continuing unemployment claims also fell more than expected, suggesting that employers may now be starting to re-hire some workers.

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