Consumers have been driving the recovery in developed countries. But signs of fatigue are beginning to show. With much of the initial pent up demand sated and labour market stress building, policy makers are increasingly being called upon to do the unexpected. Is the Bank of England finally coming to terms with negative rates?
Staging a retreat from outsized policy stimulus was never going to be straightforward. Indeed in many countries the trend is in the other direction. The French government has announced a €100bn stimulus plan, while its Spanish and German counterparts look set to extend their furlough schemes. Might the UK recovery need a bit of a helping hand, too in the coming months?
Acknowledging the damage inflicted by the crisis, and the lessons of recent years, central bankers are fine-tuning their tools, downgrading inflation worries and putting more weight on boosting employment. Easy monetary policy is here to stay.
A solid report card on the recovery in this week’s data – retail sales above pre-Covid levels, PMI levels marching upward and 95% of businesses back up and trading. In many respects the worst appears behind us. Unfortunately that can’t be said for the labour market. Meanwhile the familiar choreography of Brexit talks continues.
Two things are becoming increasingly clear. The low hanging fruits of the recovery may have been plucked, things look set to get harder from here. While policy support needs to remain in abundance to help the recovery along.
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.
Q2 GDP fell off a cliff. Yet months of shocking headlines has made record declines feel somewhat “normal”. They’re not. What is creating a stir is the rising number of hotspots locally as well as globally. The battle with the virus is going to be long, drawn out, and fraught with unpalatable trade-offs, especially between lives and livelihood.
Both the UK and the Euro area PMIs rebounded strongly in July. And, in a historic moment, the members of the Euro area finally agreed on the recovery fund, widely touted as the first step towards a limited fiscal union. But US indicators painted a more sobering picture, like a mirror to the world, revealing how things could stall if the virus spread intensifies.
The US economy had been sprinting into the lead, as key indicators for May and June recovered much of the pandemic imposed losses. But at a huge cost – the second wave will leave behind a weaker than earlier projected Q3. The UK’s disappointing May GDP data signalled a modest initial recovery. Welcome to the world of slow healing.
The rolling back of restriction means trips to the pub and holidays are back on the agenda. But things can change, and rather quickly. Localized flare-ups in the US have resulted in reimposition of lockdown measures. Leicester is a story closer home. The long road to recovery will be a very bumpy one.
