13 November 2020: Economy slowing before lockdown

Economy slowing before lockdown

13th November: Highlights

  • Economy struggling to maintain Q3 bounce
  • Jobless and inflation both fall
  • Eurozone fails to spend early and spend big

Jury still out on Sunak’s furlough extension

The UK economy grew by 15.5% in the three months to September but remains around 25% smaller than it was pre-Pandemic.

In comments made following the publication of the Q3 GDP data, Chancellor Rishi Sunak admitted to concerns that the economy was slowing before the country went into the current lockdown but went on to say that there are signs that give him a cautious optimism and the news of a vaccine provides a genuine chance of a return to normal.

It is obvious that the regional restrictions that were in place prior to the lockdown started in motion a fall in activity and the Bank of England’s latest data predicts a 2% fall in GDP in Q4.

However, with growth predicted to return in Q1 ‘20 provided there are no more shocks, and the Government can regain control of the rate of infections a double-dip recession is less likely.

The UK’s official death toll form Coronavirus passed 50k this week and yesterday it recorded a record number of infections although there is no reason yet to believe as yet that the lockdown is failing.

With children returning to school in Q3, the education sector started to recover from the effect of the first lockdown and construction is also a sector seeing good growth according to the Office for National Statistics. The fact that schools have remained open this time has been a small positive for Q4, but the economy will end the year at least 10% smaller than a year earlier.

The UK is lagging behind other G7 nations in the pace of its overall recovery. Sunak attributed this to the fact that the hospitality sector is a more significant contributor to GDP than in other nations and therefore its continued struggles reflect poorly on growth.

Yesterday, the pound corrected its recent bout of strength versus the dollar. It fell to a low of 1.3106, closing at 1.3121.

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Employment improvement continues as pandemic rages

The fact that the weekly jobless data continues to improve despite the fact that there is no sign of progress on a relief package appears on the surface to fly in the face of the Fed’s continued claim that it threatens the recovery.

Jerome Powell, the Fed Chairman believes that there is a growing number of workers clinging to jobs in various ways due to the fact that they know that they will, as things stand, receive little or no Federal support.

With infections reaching a high of 120k per day, and continuing to rise in 49 States, the urgency for funding to be put in place is growing more urgent despite the employment situation improving. The rate of fatalities is also rising in 39 States with the symbolic number of 250k deaths rapidly approaching.

Inflation data was released yesterday, and core price rises fell to 0% from 0.2% last month. A small increase in inflation was predicted and the data will have not gone unnoticed at the Fed which had been clearly expecting prices to begin to rise given Powell’s recent comments on how the inflation target is likely to be adjusted to allow for the Fed to keep interest rates at historically low levels.

As with the employment data, Covid-19 has had an effect on the data. With cases surging again, the effect on consumer spending will have been growing with shoppers reluctant to buy anything but essentials.

It is now almost a week since Joe Biden was declared the victor in the election and became President-elect.

There have been no signs that President Trump’s position over electoral fraud has changed although he has become noticeably less active on social media.

The press in the U.S. is, on the whole, hardening its stance over Trump’s tactics, almost resigned to a what did you expect attitude.

The dollar index continues to be buffeted by changing levels of risk appetite. Yesterday, it rallied to a high of 93.13 as its range narrows, and fell back to close two pips lower on the day at 92.98.

How to borrow and how to lend? Lessons to learn

It is obvious that there is no Central Bank template for how to deal with the crisis that is currently engulfing the global economy but it is generally accepted that spend early and spend big has been the most successful tactic.

While the Fed caught onto the idea quickly, despite Congress dragging its feet since August, the ECB clearly didn’t get the memo.

The apparent reticence of the ECB to follow suit has been born out of the structure of the Eurozone and the lack of a functioning Treasury.

With nations across the entire region suspicious of one another’s spending plans, the level of support that has been provided together with what is expected in the future is in danger of falling short.

This is despite the fanfare with which the Heads of State announced the first issue of bonds with the guarantee of the EU.

That hasn’t led to a significant increase in issuance although with rates in negative territory, benchmark bond returns mean that Governments are almost being paid to borrow.

Recent data releases have seen the level of negativity grow and a return to recession is becoming more likely. This and the fact that deflation continues feeds through into consumer confidence and produces a downwards spiral that is difficult to escape.

That entire scenario is something that the BoE is studying closely as it discusses taking interest rates into negative territory.

The Eurozone economy is clearly slowing significantly despite the lockdowns that are currently in force being nowhere near as draconian as the first time around. The return of a degree of strength to the euro will attract the attention of the ECB which must have been relieved to see it fall back below the 1.18 level versus the dollar.

Yesterday, it climbed back to a high of 1.1823 but fell back to close at 1.1807. There appears to be a degree of interest to sell around 1.1820 but that could easily be swept away should the dollar index fall back to recent lows.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”