Chief Economist’s Weekly Brief – Opening up

Last week was a bit of a reality check  –  the largest ever monthly drop in the UK GDP, signs of a second wave in the southern US and a bout of market volatility. At least numerous indicators point towards a bottoming out of economic activity across much of the world. The road ahead has opened up for a run at a recovery.

Bottom. It was well flagged, but data showing the UK economy shrunk 25% in the three months to April was no less shocking. In April alone the economy shrunk by 20.4% (keep in mind the drop during the crisis was 6%). In accommodation and food services the drop was 92%. For now it looks as though April was the low-point. Numerous indicators, from surveys to retail sales to more unconventional data such as mobility indicators point to a recovery underway. Now, it’s all about the pace. Expecting different phases, from quick to more modest, is likely reasonable. But undoubtedly all the while challenging.  

Panic on the streets of London. Panic on the streets of London. The first full monthly figures roll in, bringing with them the storm-caused detritus. Turnover in services fell by 33% between March and April, with cash running through the metaphorical tills down £59bn. The casualty list has few surprises. Hospitality down 86%, car showrooms 85%, retail, wholesale and travel 82%. And what’s that joke about lawyers? Because legal services faired best, with sales down just 5%. Turnover in production fell 35%, or £16bn, with cars worst hit. Notable exceptions, with positive domestic sales, were pharmaceutical and dairy products. An odd combo. 

Turning the taps off. International trade is normally more volatile than domestic activity so following the scale of the fall in GDP it shouldn’t be a surprise that the amount of business we did with the rest of the world dropped by even more, but the scale is staggering. Exports were 30% lower than in April last year and imports fell by 37%. Trade in services was more badly affected than goods, showing a halving of imports, but even exports of goods still fell by close to a quarter. At this point trade with EU and non-EU destinations is comparatively evenly affected. Later releases will show whether demand comes back online faster from countries that have handled the virus more effectively.

Tighten your purse strings. An analysis by the ONS shows that more than a fifth of customary household spending has been held back due to lockdown related restrictions. Those with limited income and limited savings will be most vulnerable to an adverse income shock. For instance, a young household, renting an apartment, typically spends approximately 60% of their income on ‘essentials’. Shift that flat to London and the overall kitty looks even smaller.  Private renters are also the ones who are less likely to receive payment holidays relative to homeowners, according to research by the Resolution Foundation.

Inching forward Freak economic indicators were par for the course in recent months, but some of the more timely data is moving in the right direction. Online job adverts in the UK for the first week of June nudged higher for the third week running. While the number of postings remains at 45.6% of 2019 levels it still marked a seven-week-high, albeit catering & hospitality jobs plunged to a record low of just 18% of 2019 levels. The peak in new declarations for Universal Credit and new claim advances has passed. Figures for the start of June are now approaching levels seen in the first half of March.

Not even thinking about it. The Fed kept its benchmark rate at 0% – 0.25% and will continue its quantitative easing and emergency lending facilities for businesses and local authorities. And signalled it’s ready to do more if rising market interest rates threaten the recovery. While things may not be getting any worse from here, a long, hard road lies ahead. The Fed sees GDP as only being 1.6% above its pre-virus level at the end of 2022. No surprise then Chairman Powell said the Fed is not even thinking about raising rates.

Stomach churning.  Another 1.5 million initial unemployment claims were registered in the US last week.  So, despite a steady reduction in the numbers of newly unemployed since April, people in the world’s largest economy continue to be laid-off at a terrifying rate.  That’s only half of the overall story though.  Although many people are losing their jobs, many others are returning to work.  Numbers of continuing unemployment claims actually fell by 300,000 last week.  Many people who were made redundant during the lockdown, now appear to be getting their jobs back as businesses re-open.  But can this recovery survive signs of new wave of infections in the Southern and Western States?

Resilient. Monetary Policy Committee member John Cunliffe’s latest speech highlighted the recent resilience of the global financial system in the face of Covid-19. He noted capital buffers for banks has improved significantly since the global financial crisis (GFC) in 2007-2009, aided by many financial reforms and increased global policy co-ordination. Witness the lack of systemic banking failures and a major credit crunch recently, unlike the GFC. Mr Cunliffe warned about illiquidity, citing the dysfunctional US government bond market and the “seizing up” of US money market funds in March 2020.

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