25 November 2020: 10%+ contraction for 2020 expected

10%+ contraction for 2020 expected

25th November: Highlights

  • Sunak to give then take eventually
  • Biden transition begins
  • Q4 activity so far at lowest since 2012

Sunak’s spending review to aim at a rebalance

Chancellor of the Exchequer Rishi Sunak will stand before Parliament later today and present his spending plans for the next year.

In light of the Coronavirus Pandemic a more formal budget for the year ahead was considered inappropriate as the usual expenditure and taxation measures do not necessarily apply right now.

The main purpose of the spending review is to ensure that all Government Departments receive the necessary support to carry on through the next twelve months. How this will all be paid for is, as Sunak said in an interview on Sunday, a matter for another day.

So, Sunak, less than twelve months in the job, will again be seen as the good guy handing out support to every part of the economy. The day will come when he, or his successor, will have the far less palatable job of determining how the largest peacetime Government debt pile ever is serviced.

The first ever National Infrastructure Plan will also be published today. This is almost the first item from the Conservative manifesto that is seeing the light of day since Boris Johnson’s Cabinet has been firefighting since it was elected nearly a year ago.

It will set out in broad strokes the major projects that are either started or about to start to ensure that the country is prepared for the challenges it faces.

Transport, telecoms, health, and social housing will be the main pillars of the document while the setting up of a major fund to prove a million jobs will form part of the Spending Review. £3 billion will be set aside for training and job searches, while jobcentres will be updated and have their capacity increased.

With the economy set to end the year about 10% smaller than it started with the largest fall in GDP for 300 years, one of Sunak’s main priorities will be to level the playing field between the south and the north to repay the faith of the new Conservatives, who essentially provided the support for the 80+ seat majority.

Yesterday, MPC member Jonathan Haskell commented that while vaccine creation provided a degree of light at the end of the tunnel, there is still a long way to go and the support of monetary policy is vital to any recovery.

The pound continues its flimsy looking rally versus the dollar. It rose to a high of 1.3381, closing at 1.3361. Versus the euro, it has corrected its recent rally so far this week, falling to a low of 1.1218.

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Dow breaks 30k barrier

It has taken three weeks to sink in, but President Trump is finally getting onboard with the fact that he lost the Presidential Election.

In what was seen as the least like a concession concession in history, Trump told his staff to prepare for the transition to a Biden Presidency. He confirmed that the fight will go on but having now officially lost Georgia, Michigan, and Pennsylvania, it seems that the penny has finally dropped.

The ignominious close of the most divisive Presidency in a century will finally come to an end with Joe Biden’s inauguration to take place on January 20th.

In the meantime, and while Biden starts to get daily briefings and his team move into the White House, the job of both combatting the rising number of cases of Coronavirus and the support for those whose livelihoods have been decimated by the Pandemic goes on.

New York, Chicago, and the whole of California have introduced tougher measures. Three Democrat States leading the way is almost fitting although Los Angeles has the highest infection rate in the whole country.

New York Fed President John Williams provided further support to Fed Chair Jerome Powell yesterday by commenting that monetary policy decisions made recently will naturally evolve should the economy perform better than expected going into 2021 but accommodative policy is helping the country weather the storm.

A slowdown is inevitable given the pace of the rate of infections and the fact that three major states are now in almost full lockdown.

There seems to be a less sentimental approach being taken to the Holiday Season than has been seen in the UK or Eurozone but it remains to be seen how effective the measures will be and that will determine how the rest of the country reacts.

A full recession is considered unlikely but there remains a risk of a contraction in GDP in Q4.

The dollar index remains in a broad downtrend although some are still calling it a correction. Yesterday, it fell to a low of 92.12, closing at 92.14. The first close below 92.20 since April 2018 could see the pace of the fall accelerate, but with so many factors in play, it could also be a medium-term low.

Downturn to last a long time

It has been evident for some time that the ECB has run out of tools with which to fight the economic fallout from the Coronavirus Pandemic, and with the EU Commission seemingly powerless to effect sufficient region-wide restrictions, the second wave has been close to out of control for several weeks now.

However, there is a light at the end of the tunnel, in the shape of an effective vaccine. While it is going to take several months, possibly the entirety of 2021, for any vaccination programme to be completed, relief appears at least to be on the way.

It is unclear, as is normal, how the production, cost and distribution of the vaccine will be dealt with. It is likely that a committee will be formed with a Vaccination Commissioner appointed. This is the EU Commission’s normal modus operandi, but it is to be hoped that whoever gets the job has the degree of urgency impressed upon them.

Economically, the fallout from the Pandemic equals the cost in human terms and will carry on long after every EU citizen has been immunized.

November will undoubtedly see the largest fall in activity output and confidence since the spring and in some countries could even exceed that.

France has become the focal point of infections although Italy is catching up again.

Germany has efficiently gone about putting measures in place and is heading the response to the second wave. However, the three outputs from the influential IFO’s monthly survey have each declined in November. The business climate fell from 92.5 to 90.7, the current assessment from 90.4 to 90 and expectations from 94.7 to 91.5.

The handling of the runup to Christmas will be dealt with on a national basis but travel restrictions are expected to stay in place.

Yesterday, the euro closed at its highest level since early September at 1.1892 and any approach to 1.20 will be seen as a dagger through the heart of the ECB’s inflation policy as it fights months of deflation.

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.”