Chief Economist’s Weekly Brief – Step by step

A week with cause for cautious optimism. The report card on various countries reopening show no upturn in cases in Western Europe. While a better than expected US jobs report and recovering PMIs in China provide some encouragement. But the damage wrought is extensive. It will be a long, arduous journey through recovery with the risk of setbacks along the way considerable. The rising number of cases in the southern US a prime example.

Brexiting by Zoom. The latest round of talks between the UK and the EU on their future relationship ended with “no significant progress”. The EU demands that the UK sign up to a “level playing field” of environmental, labour market and competition rules in exchange for extensive access to the single market. But the UK sees it as an affront to the country’s sovereignty. Time is running out as any requests for extension of the transition period, which ends in December, have to be submitted by the end of this month. Conducting tricky negotiations by videoconference also hardly helps.

Make way for Brexit. Ahead of the UK-EU Brexit talks, the Brexit uncertainty index had returned to a level last seen at the start of the year. The participants of the Bank of England’s Decision Maker Panel survey currently view Brexit in 2020 with no deal and Brexit in 2021 with a trade deal as equally likely. That said, the adverse impact of CV-19 on businesses continues to dominate. As of May, CFOs expect a deep plunge in Q2 followed by gradual recovery. There was a notable reduction in the perceived hit to employment compared to the survey in April, thanks to the extension of the Job Retention Scheme.

What a drag.  Results from the latest ONS survey of the business impacts of Covid-19 – largely carried out before lockdown began to be eased – confirm that the UK economy was operating way below capacity in mid-May.  The better news is there has been a modest but steady rise in the proportion of firms that are actively trading, from just 77% in early April to 82% in the fortnight between May 4th-17th.  Manufactures saw the biggest increase, with 92% now operational again.  And now the bad news.  More than one-quarter of all businesses (25.7%) have experienced a drop in turnover in excess of 50%.  That’s the highest share recorded since the crisis began.

Slightly better. Northern Ireland’s private sector saw the pace of decline in output, orders and employment ease in May relatively to April’s record rates of contraction. But business activity and orders still fell at the second fastest pace since the PMI survey began. 15% of manufacturers reported a rise in output growth but they were outnumbered by more than four-to-one posting a decline. Manufacturing still compares favourably with services where social distancing continues to wreak havoc. Only 1 in 20 services firms saw growth in May – with almost three-quarters heading in the opposite direction. All sectors remain pessimistic about the prospect of a ‘V-shaped’ recovery with NI the only region expecting a fall in output in 12 months’ time.  

Heaven knows we’re miserable now. There’s been no V-shaped rebound in UK consumer confidence. The reliable GfK index fell marginally from its flash reading in early May to -36. There’s a slight attitudinal disconnect between personal finances and the wider economy, with people generally much more worried about the general situation than their own. This may reflect the uneven impact of COVID-19 across households. A small share are seriously struggling after losing more than half their income, whereas others have been left completely untouched. That said, a similar YouGov/CEBR survey suggests greater concerns for the outlook for family finances, while sharing generally gloominess about the future economy.

Stockpiling cash. UK households repaid a record £7.4bn of consumer credit in April. But this ‘repayment’ is somewhat misleading. It resulted from a huge drop in gross borrowing rather than a pick-up in repayments.  A surge in payment holidays has meant credit repayments are down 19% since February, while borrowing has almost halved. Big ticket items are suffering the most. Mortgage approvals for house purchase plunged 80% relative to February. Lack of spending and borrowing means households are saving (involuntarily) at a record rate. Unlike households, businesses have stocked up with borrowing in March & April. This wall of cash will be needed for the months ahead.

PEPP hardly over. The ECB’s  Pandemic Emergency Purchasing Programme (PEPP) was expanded by a further Eur600bn to Eur1.35 trillion, until “at least” mid-2021. The ECB’s latest quarterly macro projections incorporate three scenarios, ranging from a 5.9% fall in Euro Area’s GDP under the “mild scenario” to a sizeable 12.6% decline under the “severe scenario”. With the ECB downgrading its medium-term inflation forecast from March, the ECB is clearly keeping the door open for further action in coming months. A Euro-wide fiscal response is also in the offing.

Well out. US payrolls rose 2.5m in May (yes, that’s a rise) where a 7.5m decline had been forecast, while the unemployment rate edged down to 13.3% instead of a depression-like 19%. How so wrong? Traditional indicators had been pointing to more job losses. But high frequency data from unorthodox sources had been showing a pick-up in activity since mid-April, including hiring in retail and leisure. It shouldn’t be overstated (it’s only one tenth of the jobs lost during this crisis). But a valuable lesson for economists to consider unusual sources in tracking the recovery from a very unusual recession.

Time to spend. China, a good couple of months of ahead of us in the recovery stakes, is back posting PMI readings above 50 after, like the rest of us, historical declines. Manufacturers are picking up but there remains pronounced weakness in overseas demand. The domestic side appears to be recovering quicker – a 55 reading in the services PMI is the highest since late 2010. But indications of a far less than buoyant recovery in the labour market will be a reason behind the recent $850bn stimulus package, worth about 6% of GDP, including infrastructure spending and tax cuts.

Leave a Reply