A negative oil price, pint-sized PMIs and spiralling government spending all point towards a new world order. And while the accuracy of survey-based indicators has diminished, consumer demand has clearly collapsed and firms are going out of business. Although the governments have been swift to act, it doesn’t come without a price.
New data and economic forecasts paint a dire picture – prepare for the worst economic downturn since the Great Depression. More countries are gradually lifting restrictions and some 86 candidate vaccines are being developed around the world. But we are still far from a clear exit strategy.
The first A.C. (After Covid!) PMI and labour market data confirm the scale of economic and social disruption. Central banks asked commercial banks to cancel dividends and share buybacks to boost their capacity to absorb losses and support lending. Financial and commodity markets are volatile, but grasp the profundity of events.
Amid new rules limiting people’s movement and closing non-essential businesses, data has begun to emerge highlighting the severity of the downturn. PMI indices in the UK, US and EU have all recorded historical lows. Unemployment applications are breaking all records. Fitch, a ratings agency, downgraded the UK sovereign debt, citing the impact on the public finances and the economy.
Coronavirus has now spread to 104 countries. The Italian government took exceptional measures to put in quarantine 16 million people living in 14 provinces in North Italy, it also announced restrictive measures covering the whole country. The Fed made an emergency 50bp rate cut, but this failed to put a floor under the falling stock market. Oil prices have plunged following OPEC’s failure to cut output, resulting in a price war between Russia and Saudi Arabia.
The new UK points-based migration system was revealed last week. It sets the same rules for immigrants from all countries and will take effect on January 1st 2021. These rules will make it harder for sectors relying on low paid workers to fill the jobs. Northern Ireland has the highest concentration of these jobs within the UK (>1 in 5). The hope is that this will lead to higher productivity due to investment in education and automation. With a record low unemployment rate, the adjustment period is likely to cause some disruption.
Name the UK chancellor not to deliver a Budget? Sounds like a Trivial Pursuit question. Sajid Javid may be the first one in 50 years but he is not the only one. Javid’s six-and-a-half months in power did not see him deliver a fiscal set-piece. But he still fared better than Iain Macleod who took ill and died within a month of becoming Chancellor in 1970. Expectations have been raised for the new occupant of 11 Downing Street to embark on a fiscal stimulus. The economy certainly needs a boost.
Parallels are being drawn between the coronavirus and the SARS outbreak in 2003. But the contours of the world economy have shifted over the past 17 years. China is 17% of global GDP. It was a mere 4% back then. So shuttered business, foregone spending and leisure trips, not to mention the supply-chain disruptions matter much more for the global economy.
The UK has left the European Union. The transition period, during which the UK remains in both the single market and customs union, lasts until the end of the year, with trade negotiations set to start in March. In the background, the Bank of England kept Bank Rate unchanged, but lowered its forecast for the 2019 UK economy to 0.75%.
A return of Stormont provided a confidence boost. But the honeymoon appears to be over. New Decade New Approach said all the right things but will positive actions follow? Optimists hoped the approach of the new Executive would be akin to Mario Draghi’s “do whatever it takes” commitment in 2012 for public services and the economy. Instead local politics quickly turned into Meatloaf’s “but I won’t do that”. With red lines drawn, ruling out water charges, increases in tuition fees and revenue raising, it looks a lot like the old approach.
