Chief Economist’s Weekly Briefing – Shaken

To cushion the economic fallout of a second lockdown in England, the Bank of England is expected to supplement the extended Job Retention Scheme with a further dose of monetary stimulus later this week. And that’s after the small matter of an historic US election. 

Back, again. The economic recovery had been losing steam since the summer, while renewed restrictions have made it more challenging. A renewed lockdown will stick it into reverse, even if only briefly. For retailers the challenge will be enormous, coming so close to Christmas. The shift to digital will receive further impetus, for those with the capacity to process the extra demand. On the support side the Job Retention Scheme has been extended. Meanwhile a fresh dose of quantitative easing from the Bank of England is expected. That’s unlikely to be the end of the support measures, both fiscal and monetary.  

Acute. A limited rise in the unemployment rate to date masks some stark challenges for various parts of the UK labour market. Last week the Resolution Foundation set out those challenges on workers to date, highlighting that the employment effects of the crisis have been particularly acute in London, as well as those in the most deprived areas of the country. While self-employed workers have been receiving lower earnings compared to pre-Covid in every month since April. Dislocations such as this prompt labour reallocations out of the hard hit sectors to others. But there is little sign of that happening, so far at least.

Society’s marshmallow test. A momentary reflection intensifies the need to ensure those losing their jobs during the pandemic have double support. Unemployment scars. And these scars are often passed through the generations. In 2019, nearly 1 in 13 children, 0.9m, were growing up in households with long term worklessness. But that ranges from 1 in 7 in the North East to 1 in 20 in the South East. For Northern Ireland the figure is 1 in 8. Key factors appear to be both skills and disability, with 1 in 3 children with parents/guardians with either no qualifications or disabled growing up in a workless household. A stitch it time…

Two stories. The experience of the UK housing market to the labour market couldn’t be more different, for now at least. Mortgage approvals reached 91,500 in September – the highest since September 2007 and 24% above February 2020. Pent-up demand post (first) lockdown and the cut to stamp duty is fuelling a mini-boom. On the unsecured lending side it was distinctly cooler with borrowers making net repayments of £0.6 bn, following additional net borrowing in July (£1.1 bn) and August (£0.3 bn).

On the rebound.  The US economy is already on the rebound: recovering yet vulnerable.  Propelled by a revival in consumer spending, US GDP grew at a record 33% annualised pace in Q3.  Yet the economy remains 3.5% smaller than late 2019.  It has fundamentally changed, too.  People are getting out less; spending less on travel, leisure and eating out while forking out more on durables like vehicles and household goods, as well as investment in technology and home improvements; all now at record levels. 

Gathering clouds. Euro area GDP posted a strong recovery in Q3, increasing 12.7% over the quarter. This is the sharpest increase on record, surpassing both the ECB and consensus estimates. But sitting behind this aggregate is widespread variation in country level performance, with the periphery struggling to recover some of its lost output. For instance, despite a c.17% q-o-q increase in Spanish GDP, its output remained c.9% below the pre-pandemic level (vs 4% for the region). And dark clouds are gathering over Q4 growth prospects as much of Europe reimposes restrictions….. 

Awaiting December. ….so much so that further monetary stimulus is on the cards next month to shore up the struggling euro area economy. European Central Bank President Christine Lagarde acknowledged risks to euro area activity are “clearly” tilted to the downside. This suggests the ECB will mark down its forecasts next month particularly given latest downbeat surveys and disappointing ”fast” data. Another round of QE looks likely in December but a cut in the discount rate, currently -0.5%, is not guaranteed.

Happiest at home?  Latest UK data show that roughly 4 out of 10 workers are basing themselves at home, with that share rising somewhat in areas that have extra local restrictions. The Bank of England’s Chief Economist Andy Haldane offered his perspective on this abrupt change in a speech this week, highlighting the gains (home workers are doing more hours, partly down to a reduction in commuting) as well as the losses (productivity can rise or fall depending on the circumstances).  Haldane particularly stressed the importance of maintaining social capital amongst colleagues in this environment, so your next team Zoom drinks are officially sanctioned by the chair of the UK’s Industrial Strategy Council no less!

DigiCash. In 1983, Microsoft Word was launched. A seminal phenomenon! The same year, David Chaum introduced the idea of “digital cash”. Fair to say the “Word” didn’t catch on quite as well. Of late though, it has found many advocates including central banks. The Bank for International Settlements reports that earlier this year, 80% of the world’s central banks had already started to conceptualise and research the potential for CBDCs (Central Bank digital currencies), 40% were building proof-of-concept and 10% were deploying pilot projects. A CBDC promises to be a more inclusive, accessible, safe and convenient form of money. DigiCash may not be revolutionary anymore but certainly is evolutionary!

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