The coronavirus crisis: first steps to lockdown relaxation and the Bank warns of major GDP fall in 2020

The coronavirus crisis: first steps to lockdown relaxation and the Bank warns of major GDP fall in 2020

Date: 11^th May 2020

The coronavirus crisis: first steps to lockdown relaxation and the Bank warns of major GDP fall in 2020
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses recent key developments relating to the coronavirus crisis:

• The Prime Minister's speech on 10 May outlined the first conditional steps towards lockdown relaxation. Specifically, he said those workers not able to work at home, 'should actively be encouraged to go to work'. He will be setting out more details of his plans in Parliament on 11 May.
• The Bank of England's MPC left monetary policy unchanged at their May meeting, with a bias towards further easing.
• It has been reported the government will release a series of papers this week outlining its approach on 'restarting' the economy, safely and gradually.
• The Bank released its 'illustrative scenario', which suggested GDP would fall 14% in 2020, but recover by 15% in 2021. A fall of 3% in 2020Q1 is followed by a fall of 25% in 2020Q2, but GDP recovers relatively rapidly in 2020Q3, and rises further in 2020Q4 and into 2021.
• The Bank projected a surge in the unemployment rate to around 9% in 2020Q2, before easing gradually back. The unemployment rate is expected to average 8% in 2020, edging down to 7% in 2021 and declining to 4% in 2021.

Business update:

• The Chancellor announced a new Bounce Back Loan scheme for SMEs on 27 April.
• The ONS's latest Business Impact of Coronavirus Survey (BICS) showed nearly quarter of respondents reported they had temporarily closed or paused trading, while just 0.5% had permanently ceased trading. Concerning government support schemes, the Coronavirus Job Retention Scheme (CJRS) was the most popular government scheme applied for.
• The especially vulnerable sectors to lockdown continue to include non-essential' retail; transport; accommodation and food services; and arts and recreation.

Survey and data update:

• The ONS's latest Business Impact of Coronavirus Survey (BICS) confirmed nearly quarter of respondents had temporarily closed or paused trading, while three-quarters continued to trade. Concerning the workforce, 28% of the workforce had been furloughed under the Coronavirus Job Retention Scheme (CJRS), of which the accommodation & food service activities sector had the highest proportion, with 73%. Less than 1% of the workforce had been made redundant so far.
• The Markit PMIs for services and construction, as well as manufacturing, were dire in April, pointing to a sharp contraction in output in 2020Q2.
• The SMMT reported that new car registrations collapsed in April, they were down 97% (YOY).
• According to the Halifax, house prices fell 0.6% (MOM) in April, to be 2.7% higher (YOY).

International developments:

• The European Commission's May forecast was exceptionally pessimistic. Eurozone GDP is projected to fall by 7.7% in 2020, though partly recover (by 6.3%) in 2021. Within the Eurozone, the economies in Greece, Italy and Spain are projected to contract by around 9½% this year, and in France by over 8%, whilst in Germany and the Netherlands GDP may fall by 6½%.
• In the US, non-farm payrolls fell by 20.5mn, and the unemployment rate rose to 14.7%, in April.

Ruth Lea said, 'As the Prime Minister outlines the first steps to relaxing the lockdown, the scale of the economic damage continues to emerge. The Bank warned in its 'illustrative scenario' of a possible fall in GDP of 14% in 2020, with the unemployment rising to 9%. Next week (13 May) sees the release of the first estimate for GDP for 2020Q1, with expectations of a fall of about 3-5% (QOQ). But this fall will surely be dwarfed by the contraction in 2020Q2. Indeed the Bank suggests the decline could be 25% (QOQ).'

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
[e-mail]
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the coronavirus pandemic and its economic implications:

• The Government's response to the increasingly severe coronavirus pandemic has been to introduce increasingly strict curbs on activity in order to contain the spread of the disease. These restrictions have already had, and will continue to have, profound implications for business and the economy.
• It is currently impossible to say how long the current intensity of the restrictions will continue or, indeed, when the worst of the pandemic in the UK will be past. However, Sir Patrick Vallance (Government Chief Scientific Adviser (GCSA)) commented on 12 March that the peak could be '10-14 weeks ahead', accompanied by a graph suggesting the worst of the outbreak would be over by Autumn 2020.
• It will be some weeks before the ONS releases any indicators relating to March. But, in the meantime, Markit recently released its flash UK composite output index for March which showed a very sharp decline in activity - to a record low (the series began in 1998). The index implied contraction in 2020Q1. Moreover, Markit expect the decline to accelerate in 2020Q2.
• Markit's findings were broadly supported by the latest Bank of England Agents' summary (for example), which concluded '…the Covid-19 (Coronavirus) pandemic has caused a sudden, rapid decline in economic activity in recent weeks'.
• Given this information it now seems all but inevitable that the UK will experience a recession in the first half of 2020.
• Given the enormous unknowns, a scenario-building approach to projecting GDP is probably the most constructive way forward. Assuming that the worst of the outbreak is over by the Autumn and that measures of the Government and the Bank of England are effective in mitigating the worst of the down-turn, it is reasonable to expect the beginnings of recovery in the second half of 2020 after a very sharp contraction in the first half of 2020. We also assume that there will be some significant relaxation of the severe restrictions introduced on 23 March 2020 in April-May. Overall GDP could fall 2½-3% in 2020.
• This scenario is broadly in line with the MPC's assessment that there will be a large and sharp reduction in activity, but it should prove temporary.

Support measures by the Treasury and the Bank of England:

• The Chancellor has announced four significant packages of measures: in the Budget (11 March, including the Coronavirus Business Interruption Loan Scheme), 17 March (including the Covid Corporate Financing Facility), 20 March (including the Coronavirus Job Retention Scheme) and 26 March (for the self-employed).
• The Bank of England's measures include: cuts in the Bank Rate (to 0.25% on 11 March and to 0.1% on 19 March), the introduction of the Term Funding scheme for SMEs and an increase in Bank's holdings of UK government and corporate bonds by £200bn (to £645bn).

Internationally:

• In the US, the Fed cut the target range for Fed Funds again on 15 March (to 0-0.25%) and the Senate and the White House agreed a $2 trillion stimulus package on 25 March.
• The ECB announced a new Pandemic Emergency Purchase Programme (PEPP), with overall envelope of €750bn, on 18 March.

The pandemic has had major impact on the markets, including:

• The equity markets, with the FTSE100 dropping from around 7,500 in the first half of February to a recent low of under 5,000 on 23 March, ending last week at around 5,500.
• Sterling has weakened since the beginning of the year, reflecting the flight to relative safe havens (including the dollar) as well as the perceived, specific vulnerability of sterling, reflecting the UK's need to finance its current account deficit.
• Oil prices have collapsed from $65pb (Brent crude) at the start of the year to $25pb by 27 March, on falling demand, exacerbated by disagreements between Saudi Arabia and Russia.

Other news:

• The ONS's recent releases have related to January and February and are, therefore, not good indicators of where the economy can be expected to go over the next few weeks and months. The labour market data were robust, whilst inflation looks well-contained.
• The UK-EU Brexit talks are expected to continue in the forthcoming week, by video link.

Ruth Lea said, 'We are in unknown territory. The indicators we have, however, point to a fall in GDP in 2020Q1 and a very sharp contraction in 2020Q2. Recession, therefore, looks all but inevitable. If, however, the worst of the outbreak is indeed over by Autumn and the measures announced by the Treasury and the Bank of England mitigate the worst of the down-turn, the economy should start to recover in the second half of 2020. Under these circumstances, there would be a sharp V-shaped recession. Comparisons are being made with the Great Recession of 2008-2009 and it could well be, indeed it is likely, that the initial contraction in the economy is sharper that in 2008. But the Great Recession was characterised by a highly damaging, protracted U-shaped recession, which we do not expect this time'.

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
[e-mail]
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:

• There were two parts to the Budget. Firstly, a package of measures, costed at £12bn, to support public services (including the NHS), individuals and businesses affected by the coronavirus outbreak. Secondly, the new Government's overall fiscal strategy, including the spending envelope for the forthcoming Comprehensive Spending Review 2020 (CSR).
• The OBR's revised economic forecasts were little changed. GDP growth was revised to 1.1% for 2020 (from 1.4% in March 2019, last year's Spring Statement), 1.8% for 2021 (1.6%), 1.5% for 2022 (1.6%), 1.3% for 2023 (1.7%) and 1.4% for 2024 (new forecast). Significantly, these forecasts did not allow for the economic impact of the coronavirus outbreak.
• The OBR revised their public finances forecasts. Public sector net borrowing (PSNB) and public sector net debt (PSND) were revised significantly higher, reflecting the substantial increase in public spending. Cumulative extra borrowing for the years FY2020-FY2023 (inclusive) was £95-100bn, whilst debt was projected to be £99bn higher in FY2023, and some 2.9% higher as a % of GDP, than in March 2019. These forecasts did not allow for the Treasury's package of coronavirus-related measures.
• The Budget was very expansionary. The estimated net effect of the spending and tax decisions totalled £17.9bn (FY2020), £36.4bn (FY2021), £38.5bn (FY2022), £41.15bn (FY2023) and £41.9bn (FY2024), entirely driven by higher spending (with current spending increases greater than capital spending increases). The net tax measures were contractionary.
• Spending announcements included extra cash spending for the NHS, security and schools; around £640bn of gross capital investment for roads, railways, communications, schools, hospitals and power networks across the UK by FY2024; and plans to increase public R&D investment to £22bn a year by FY2024.
• Tax announcements included confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%; freezing fuel and alcohol duties for FY2020; and increasing the NICs threshold to £9,500 in April 2020.

Other UK news:

• The Bank of England announced an emergency cut in Bank Rate to 0.25% on 11 March, alongside a new Term Funding scheme for SMEs and a relaxation of capital buffers.
• GDP was flat (MOM) in January and flat (QOQ) in the three months to January.
• The underlying total trade (goods and services, excluding precious metals) balance showed a deficit of just £0.5bn in the three months to January.

The US Fed cut the target range for the Fed Funds rate to 0%-0.25% on 15 March, along with a major stimulus programme.

EU update:

• The ECB agreed a package of monetary policy measures to alleviate the impact of the coronavirus outbreak on 12 March, but no cuts in interest rates.
• The Commission sent a draft legal text, titled the 'New Partnership between the European Union and the United Kingdom', to the 27 EU states on 12 March.

Ruth Lea said, 'The coronavirus measures are to be welcomed. Concerning the rest of the Budget, it was more expansionary than expected, with large projected increases in current as well as capital spending. The OBR forecast significant rises in public sector borrowing and debt compared with March 2019. But, given the huge uncertainties ahead, there are serious risks that these forecasts could be significantly overshot. There is already speculation that the Autumn Statement may need to contain tax rises, though, at this point, it is too early to comment on this issue with any confidence.'

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
[e-mail]
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:

• There were two parts to the Budget. Firstly, a package of measures, costed at £12bn, to support public services (including the NHS), individuals and businesses affected by the coronavirus outbreak. Secondly, the new Government's overall fiscal strategy, including the spending envelope for the forthcoming Comprehensive Spending Review 2020 (CSR).
• The OBR's revised economic forecasts were little changed. GDP growth was revised to 1.1% for 2020 (from 1.4% in March 2019, last year's Spring Statement), 1.8% for 2021 (1.6%), 1.5% for 2022 (1.6%), 1.3% for 2023 (1.7%) and 1.4% for 2024 (new forecast). Significantly, these forecasts did not allow for the economic impact of the coronavirus outbreak.
• The OBR revised their public finances forecasts. Public sector net borrowing (PSNB) and public sector net debt (PSND) were revised significantly higher, reflecting the substantial increase in public spending. Cumulative extra borrowing for the years FY2020-FY2023 (inclusive) was £95-100bn, whilst debt was projected to be £99bn higher in FY2023, and some 2.9% higher as a % of GDP, than in March 2019. These forecasts did not allow for the Treasury's package of coronavirus-related measures.
• The Budget was very expansionary. The estimated net effect of the spending and tax decisions totalled £17.9bn (FY2020), £36.4bn (FY2021), £38.5bn (FY2022), £41.15bn (FY2023) and £41.9bn (FY2024), entirely driven by higher spending (with current spending increases greater than capital spending increases). The net tax measures were contractionary.
• Spending announcements included extra cash spending for the NHS, security and schools; around £640bn of gross capital investment for roads, railways, communications, schools, hospitals and power networks across the UK by FY2024; and plans to increase public R&D investment to £22bn a year by FY2024.
• Tax announcements included confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%; freezing fuel and alcohol duties for FY2020; and increasing the NICs threshold to £9,500 in April 2020.

Other UK news:

• The Bank of England announced an emergency cut in Bank Rate to 0.25% on 11 March, alongside a new Term Funding scheme for SMEs and a relaxation of capital buffers.
• GDP was flat (MOM) in January and flat (QOQ) in the three months to January.
• The underlying total trade (goods and services, excluding precious metals) balance showed a deficit of just £0.5bn in the three months to January.

The US Fed cut the target range for the Fed Funds rate to 0%-0.25% on 15 March, along with a major stimulus programme.

EU update:

• The ECB agreed a package of monetary policy measures to alleviate the impact of the coronavirus outbreak on 12 March, but no cuts in interest rates.
• The Commission sent a draft legal text, titled the 'New Partnership between the European Union and the United Kingdom', to the 27 EU states on 12 March.

Ruth Lea said, 'The coronavirus measures are to be welcomed. Concerning the rest of the Budget, it was more expansionary than expected, with large projected increases in current as well as capital spending. The OBR forecast significant rises in public sector borrowing and debt compared with March 2019. But, given the huge uncertainties ahead, there are serious risks that these forecasts could be significantly overshot. There is already speculation that the Autumn Statement may need to contain tax rises, though, at this point, it is too early to comment on this issue with any confidence.'

For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
[e-mail]
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
[e-mail]

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