Economic contraction to be worst ever

Yesterday’s Bank of England Monetary Policy Committee meeting was notable, not for the actions taken to stem the economic fallout from the Covid-19 pandemic, but for its acceptance of the crisis as the worst ever for the UK economy.

The economy is expected to contract by 14% in the current year but is expected to recover by mid-2021. The unemployment rate is likely to double, possibly reaching 10% but jobs that were needed and necessary prior to the outbreak are going to be in demand following the crisis and the rate should come back down quickly.

There are two significant caveats to the Bank’s expectations.

The first revolves around how long the lockdown will last and the Government’s decision about whether or not the package of measures around job support and workers’ wages are extended. The second questions whether businesses, particularly in the service sector, which is likely to be decimated, have the resources to reopen and regain trade.

Andrew Bailey, the new Governor of the Bank of England was fairly sanguine about the size of the contraction of the economy at his news conference and subsequent interviews yesterday. Without saying so in so many words, he intimated that he felt that the size of the contraction is fairly irrelevant since most of the fall will be quickly recouped and the speed of the collapse means that the bounce back will be similar if not identical.

He also asked the simple question; what else could we expect from the economy? To enter a shutdown virtually overnight will have dire consequences for any economy.

The fate of the economy and the pace of the recovery now lies in the hands of medics and scientists with the economic fallout being a consequence of, rather than a motive for, their actions.

The pound had a fairly volatile day yesterday, but it ended close to where it began. It traded between 1.2418 and 1.2266, closing 23 pips higher on the day at 1.2367

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Mixed views over a V Shaped recovery

Since the responsibility for the lifting of lockdown measures is largely the responsibility of the fifty State Governors and the rate of spread of Covid-19 is so random between those states it is impossible to say when the beginning of the recovery for the economy will start.

There are several states who are seeing an intense desire to reopen the economy, mostly based upon their resident’s desire to get back to work driven by the feeling that the pandemic has barely touched their State, while there are others that have been devastated and want the lockdown to remain.

New York State, the most seriously affected State remains most cautious about how and when things can begin to return to normal. Governor Cuomo has called for other Governors to be upfront about the human cost of lifting the lockdown which, he says, is the only number that should interest them since the Federal Government has pledged to support business for as long as it takes.

While there is optimism about a V-shaped recovery, FOMC member Neel Kashkari sounded a serious note of caution. Kashkari, who is President of the Minneapolis Fed believes that without an effective vaccine, the recovery will be appreciably slower than the current thinking. He believes that even as the lockdown is rolled back social distancing measures will see the transition be very gradual with bars, restaurants and public transport being the most at-risk sectors.

President Trump, who still has more than one eye on the election, predicted that the economy would have a strong fourth quarter which coincidentally would see confidence levels rising just when voting takes place. While he may not be in a minority of one, that is not a popularly held view, with several prominent economists seeing the recovery taking at least until Q1’21 to see the economy back in full swing.

There have been some wild predictions about today’s employment report, but the consensus is for the headline NFP to show around twenty million jobs having been lost. That would push the unemployment rate to well over 10%.

The dollar index fell back to 99.81 yesterday and closed just a single pip above the low. It is hard to predict just how volatile the currency will be today given the current situation both in the U.S. and globally. Obviously, a headline NFP of twenty million jobs lost would demand a significant fall but the market is well aware and only a significantly different outcome will cause a reaction.

EU Commission still believes in a joint plan

The EU Commission has finally woken up to the seriousness of the current situation for the very fabric of the current crisis engulfing the region. It has taken an inordinate amount of time to realize that there is a clear and present danger of the Union’s demise.

While the argument has rightly centred around the economic fallout of the pandemic, even that has lacked the concerted effort that should be the natural response of such a supposedly committed group.

Instead, there has been a virtual suspension of cooperation with borders being closed and a fracture in the supply chains so vital to the recovery of the individual countries.

With radical action needed the five states that have refused to countenance the guarantee of another Sovereign States debts have missed a trick in their desire to create a more Federal Union.

Germany, generally at the forefront of such conversations, has effectively locked itself away from the rest of the EU. While it seems to have done a terrific job in dealing with Covid-19 internally, it has been absent from any planning for the recovery. Having reopened many parts of its economy possibly to steal a march on other export led economies, the risk of a second spike remains.

The EU Commission governed by Ursula von der Leyen, a significant ally of German Chancellor Angela Merkel has again called for a unified response, but it appears that ship has sailed.

The EU’s Economics Commissioner, who happens to be Italian, and a past Prime Minister called for a more equal distribution of recovery efforts to redress the fiscal imbalances in the level of financial support being offered.

In its economic forecast, the EU commission had two major concerns, the uneven level of countries lifting the lockdown and with that a spike in the spread of secondary infections as travel between countries starts again.

The euro remained in the shadow of the dollar yesterday, it rose to a high of 1.0834, closing at that level as the markets prepared for today’s U.S. data.