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In the words of Rishi Sunak: “Hard times are here”

Posted: 27th August 2020   |   Share

By Sarah Ryman

Jackson Hole

As central banks look at how they can support their economies and encourage growth at the Jackson Hole gathering (taking place online for the first time), the probability of interest rate cuts for USD, GBP or EUR don’t look imminent this year but what will 2021 hold? Given that rates are so low how will central banks utilise the tools available to them to help? The IMF is forecasting 4.9% global output contraction due to coronavirus and arguably a lot of ammunition has already been utilised. Equity markets have benefited from the low yield environment as has gold.

UK

Some travellers that have managed to escape UK shores have found that they need to quarantine on their return as the UK’s ‘test and trace’ strategy faces criticism and pressure mounts to have a reliable approach ahead of schools reopening in September. 

The Bank of England has forecast a long and slow recovery to pre-pandemic levels of output and employment after a short-lived bounce back. They envisage the crisis will wipe out two years of economic growth and leave deep scars. BoE governor Andrew Bailey commented that whilst negative rates are now “part of our toolbox” he said they have no plans to use them (yet). 

UK GDP shrank a record 20.4% in the second quarter officially confirming (having had two consecutive quarters of economic decline) that the UK is in recession. In fact the UK appears to be into its largest recession on record as the coronavirus pandemic decimates economies globally. The figures for the UK were worse than figures recorded in the Eurozone (fall of 12.1%) and the US (contraction of 9.5% quarter on quarter). And despite a pick-up in growth in June as shops reopened and factories tried to ramp up production June was still a sixth below growth for February before the virus took hold. As we move forward the next quarter will be watched by all with keen interest, pace of recovery is increasingly important as the UK public debt has topped £2 trillion for the first time and borrowing is at its highest peacetime level in history.

Employment in the UK fell at the fastest pace for over a decade between April and June according to figures released by the Office for National Statistics (ONS) this month. Whilst the unemployment rate itself was largely unchanged these figures have likely been protected by the government’s furlough scheme. Arguably the full impact of the pandemic on UK unemployment will not be felt until after the scheme ends in October and the knock-on effects of a shrinking economy thereafter.    

EUROPE

As negotiations are set to reignite in September between the UK and EU leaders around Brexit perhaps we will get a clearer understanding of how stakeholders can move forward. Experience teaches us that this is unlikely to be straightforward. 

German and French economies have lost some momentum with Germany’s business activity slowing according to the composite purchasing managers index which fell to 51.7 this month. Whilst the German economy suffered a historic 10.1% contraction in the second quarter the figure is still over 50 and therefore it is encouraging to know that most companies continue to expand.

US

US Unemployment fell to 10.2% from 11.1% for July as employers added fewer jobs than in June and the number of Covid-19 cases increased but this reading was slightly better than had been expected.  Manufacturing also grew in July at a faster pace than anticipated as factory activity continued to pick up and the election campaigns get underway. 

US junk bonds have had their best month reported for July since 2011 as Federal Reserve market support bolstered yield-hungry investors’ confidence in more precarious companies. This may well enable some of these companies to survive the pandemic. Aluminium can-maker Ball Corporation secured the lowest-ever borrowing costs for a US junk-rated company this month as investors starved of return secured an annual coupon of 2.875% for a 10-year bond. 

GOLD

It would be remiss of me to not mention the all-time record highs (over $2,000 per troy ounce) that gold has escalated to. Perhaps this is not a huge surprise given that interest rates in major economies are near zero, gold tends to benefit during times of uncertainty with a flight to safety, bond yields are depressed and investors seek return but nonetheless a 36% increase this year so far is significant.

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