Chief Economist’s Weekly Brief – Back in the black

Global output returned to growth for the first time since January. July was a pivotal month for the PMI surveys with a surge in the number of economies crossing the expansion (>50) threshold. The US, Eurozone, UK, the Republic of Ireland and Northern Ireland PMIs all returned to growth last month for the first time since COVID-19 struck. Notable absentees still stuck in the red (contraction) include Brazil, India, Japan and Scotland. 

Negative And Positive Thinking. Optimism or pessimism is a personal choice. Friendly or aggressive attitude

Glass half full.  The Bank of England stuck to its prediction of a V-shaped recovery in its latest forecasts.  After shrinking an estimated 21% in 2020 Q2, its central projection shows the UK economy rebounding sharply over the next six months to end the year 5% below the previous peak. Unemployment is projected to top-out at 7.5%.  But that’s assuming the effects of Covid-19 steadily fade away, paving the way for a strong recovery in consumer spending. Optimistic maybe. Risks are firmly “skewed to the downside”.  To derive some comfort, it also conducted a reverse stress test with two severe scenarios-  ‘slow recovery’ and ‘double dip’. The Committee continued to find the UK banking system resilient even to these severe shocks.

Loose for longer.  Absent any actual policy changes, the Monetary Policy Committee emphasised that policy would remain supportive for as long as needed to sustain the recovery.  New guidance states that the MPC doesn’t intend to tighten until there is “clear evidence” of “significant progress” being made in eliminating spare capacity and sustainably meeting the 2% inflation target.  Those waiting for a sign that interest rates are likely to be cut to negative territory will have to be patient though.  They’re “part of our toolbox…but at the moment we don’t plan to use them” according to BoE Governor, Andrew Bailey.

Two-speed recovery. The UK regional PMI suggests a two-speed recovery has emerged across the UK, which is closely linked to the speed at which lockdown restrictions have been lifted. All of the UK regions, bar Scotland, saw a return to growth in July.  Northern Ireland’s recovery has lagged behind England. Similarly Wales (50.2) and Scotland (49.3) trail further behind Northern Ireland. The West Midlands (61.9), the North East (60.4), Yorkshire & Humber (59.7) and the South West (59.7) all saw very strong growth rates around or above the 60 mark. Renewed localised lockdowns – which we have already seen across areas of England and Scotland – mean we can expect further divergences in regional performances going forward.   

At last!  Northern Ireland’s private sector posted a rise in output in July for the first time in 17 months. Retail reported the fastest rate of growth in activity (sales) of all the sectors. Meanwhile manufacturing and construction saw activity expand at its fastest pace in almost six years. Perhaps surprisingly, the services sector continued to contract at a significant rate. While over one-third of services firms saw a month-on-month rise in activity in July, an even greater number (40%) reported a fall. Clearly some firms have benefited from the reopening of the economy, but others are finding that their recently completed work isn’t being replaced by new business at a sufficient rate. 

Upbeat. In what can be termed positive news these days, the BoE’s decision maker panel survey in July underlined a continued recovery to the economy. 18% of the employees were on furlough in July, having roughly halved in the last two months. Similarly, forward looking estimates of impact on sales, employment and investment were less gloomy, relatively speaking. But causes of concern remain. The UK labour market is still expected to go through excruciating pain later in the year. And high level of uncertainty still prevails, with more than 3/5th of respondents now believing that it would not dissipate until June 2021. It’s still a long road ahead!

Going through the gears. Another week, another slew of UK businesses reopening. The ONS reported that 3% of businesses had recommenced trading in the last fortnight, taking the share of firms now operating up to 94%. Yet operating doesn’t mean firing on all cylinders.  32% of firms that have reopened are pulling revenue that’s down by more than 20% on pre-Covid times. Perhaps surprisingly however, only 16% of firms report turnover below operating costs. That shows impressive cost control for such a monumental shock to revenue.

Barking. Data comes in many forms and sometimes words offer insights numbers struggle to articulate. The ONS has explored the most common words firms use when answering surveys, a kind of Pavlov’s Dogs for lockdown. The results capture the past few months perfectly. So, the most common response to questions about turnover is “closed”. Yet thankfully this is declining, from nearly half of firms in March (46.5%) to just 17% in July. The most common response to questions on the government schemes has been “easy”. Seems about right. And firms will soon be adding the word “extend”. 

Tug-of-war. UK car sales increased by 11% y/y in July (NI = +17% y/y), the first full month of trading for UK dealerships since the lockdown. The support came from a 20% increase in private new car registrations, underpinned by pent-up-demand, inventory off loading, special finance offers and a new breed of customers trying to avoid public transport. However, cautious optimism is restrained by tight budgets. Overall registrations are still down 42% YTD and by slightly more in NI. Moreover, the most popular segment were ‘supermini’ and lower-medium sized cars as households face a tight budget. With significant labour market stress ahead of us, the future is left hanging in the balance.

So V, again. Euro area retail sales posted a 5.7% m/m increase in June, on top of the upwardly revised 20.3% rise in May. As a result, the levels of sales are now back to those seen in pre-crisis times. Interestingly, online sales fell for the first time since the crisis, pointing towards return of consumers to the high street. But the cheer is tempered by large cross-country variations. Germany and France are leading the pack but sales in the southern economies remain relatively weak. Looking ahead, rising unemployment and strengthening of the second wave of infections pose risk to future spending.

Slowing recovery. Recently US labour market has whipsawed between record job losses and gains. Despite a resurgence in COVID-19 infections, July exceeded Wall Street expectations with a gain of almost 1.8 million jobs. But this was down on the 4.8 million rise the previous month. The 9.3 million jobs gained in the last three months represents just 42% of the positions lost in the previous two months. These ‘easy’ gains are due to the reopening of closed establishments. Unemployment fell from 11.1% in June to 10.2% last month although remains higher than the peak after the last recession. Things may be moving in the right direction but the hard yards in job creation lie ahead.

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