Posted: 25th June 2020 | Share
By Sarah Ryman
Having had the sunniest spring on record I wonder what Summer will hold. Economies are accumulating debt levels that were last seen post World War II and the Great Depression and central banks continue to throw in all they can to encourage market stability.
As lockdown measures continue to ease and pubs, restaurants, cinemas and hairdressers get set to reopen in the UK the OECD has warned that rich countries will face a disappointing economic recovery from this historic downturn caused by the pandemic. An article published in the FT this month highlighted that the economy will be left with deeper scars than any peacetime recession in the past 100 years. The OECD commented that the UK could see one of the developed world’s deepest recessions in 2020 with output slumping more than 11% which is the most for more than 300 years! A sentiment that appears to be supported by the International Monetary Fund (IMF) who have commented this month that the coronavirus crisis will have an even bigger impact on the global economy that it initially thought. No doubt time will tell but as I type there seems to be a number of challenges to overcome before economic momentum can return. Many are asking if now is the right time for further easing as health leaders call for an urgent review to determine whether the UK is properly prepared for the ‘real risk’ of a second wave.
The UK manufacturing sector has started to tick up to 40.7 from the record low reading of 32.6 in April according to the IHS Markit / Cips (PMI) manufacturing purchasing managers’ index restrictions started to ease but the overall picture for Britain’s factories remains downbeat. Whilst still in contraction it is a step in the right direction.
Consumer confidence in the UK has dipped a further 2 points to minus 36 which is getting close to the record low of minus 39 as house prices fell and unemployment rose. The UK economy shrank a record 20.4% in April as businesses and workers reeled under the lockdown designed to control the coronavirus pandemic. The number of people claiming out of work benefits in the UK climbed to 2.8million in May according to the Office for National statistics (ONS). This is the largest year on year jump in over 100 years of data and unfortunately the figures seem set to climb further.
Brexit (yes that word is back in the headlines) is returning to the limelight. Progress between the UK and EU appears to be slow as both sides seek agreement on the terms of its new trading arrangements ahead of the transition agreement expiring in December. A number of European countries including France, Greece, Spain and Portugal are keen to adopt ‘transport corridors’ which will facilitate British holidaymakers to visit Mediterranean resorts without quarantining for 14 days. The prime minister Boris Johnson had said that this could only occur “when the evidence shows it is safe to do so”. Transport secretary Grant Shapps has said that this is a “massive priority” and that the UK is set to announce plans for travel corridors with as many as 10 countries next week.
The UK’s inflation rate has fallen to 0.5% for May according to the ONS who confirmed that the Consumer Price Index (CPI) is at the lowest level since June 2016 on the back of a record fall in fuel prices, clothing and footwear although food prices rose.
The Bank of England has responded by pumping a further £100bn into the UK economy through its bond-buying programme and kept interest rates at a record low of 0.1% this month.
As with the UK, European manufacturing is also showing some green shoots as restrictions are lifted and brings hope that manufacturing in Europe could return to growth in the third quarter.
Christine Lagarde has announced a fresh boost to its stimulus efforts to tackle the economic and financial fallout from the coronavirus pandemic. The European Central Bank (ECB) has expanded its EUR750bn Pandemic Emergency Purchase Programme (PEPP) by a further EUR600bn. The extra bond buying scheme that it launched in March will be extended to at least June 2021. The ECB also slashed forecasts for growth and inflation (to 0.3% this year). The president commented that the area was “experiencing an unprecedented contraction,” adding that “severe job and income losses and exceptionally elevated uncertainty” had led to a “significant fall” in both consumer spending and investment. Banks have flocked to borrow a record EUR1.3tn from the ECB at rates as low as minus 1 (even lower than the main refinancing rate which currently stands at minus 0.5) over three years. This is the first time that a major central bank has offered multiyear loans to banks at an interest rate that is lower than its main deposit rate introducing a ‘dual-rate’ system.
The US has also seen manufacturing improve for the third consecutive month from an 11 year low as Americans begin to emerge from lockdown but into unrest.
Unemployment in the states continues to climb with weekly tolls reporting at nearly three times as large as the worst figure posted at the height of the financial crisis more than a decade ago although the pace has slowed slightly.
The Federal Reserve chair, Jay Powell has warned Congress of “significant uncertainty” surrounding the “timing and strength” of the US economic recovery. The comments seem in line with most Fed officials’ expectations that interest rates will remain close to zero and are not expected to rise until at least 2023.
The precious metal is nearing eight year highs as nervous investors look for a safe place to put their cash. Whilst bond yields are at rock bottom and expectations for a rise in inflation mount gold is benefiting from the uncertainty.