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We think today’s Monetary Policy Committee (MPC) decision to keep rates on hold at +0.10% and increase Quantitative Easing (QE) by £100bn is unlikely to be the last act of policy loosening. And while we wouldn’t rule out the Bank of England cutting …
18th June 2020
Other forecasters were slow to appreciate the depth of the recession. Since then, the consensus GDP forecast has been revised down close to our own. But we think other forecasters are still underestimating how weak inflation will be, and how much further …
The latest data highlighted a diverging trend between the two main measures of unemployment. Neither measure is perfect, but at least the claimant count is timelier than the ILO measure. Until the ILO measure catches up, we are putting more weight on the …
17th June 2020
Persistently weak inflation to prompt regular QE expansions May’s further fall in inflation is probably only the beginnings of a prolonged period of very soft price pressure that we think will prompt the Bank of England to announce a total of £350bn more …
A continued return of risk appetite as the economy slowly recovers from the coronavirus crisis will boost equities and the pound so long as there is a compromise on Brexit. But with the Bank of England likely to keep interest rates close to zero and do …
16th June 2020
Headline ILO unemployment figures not capturing full force of downturn The labour market figures for April suggest that the unemployment rate may not increase quite as far as we had anticipated. Even so, bigger rises are almost certainly on the way as the …
We assume that a slim trade deal will be agreed by the end of this year and that a big step change in the UK-EU relationship will be avoided. But with the chances of a “no extension, no Brexit deal” rising, the risks to the UK’s economic recovery are on …
15th June 2020
Nailed it! At the risk of tooting our own horn too much (and tempting fate), the 25.0% drop in GDP since February means that our forecasts for the impact of the coronavirus lockdown on the UK economy have been spot on recently. (See here .) Indeed, back …
12th June 2020
Lockdown reduced economic output by 25% At its peak in April the lockdown reduced economic output by 25%, making the coronavirus crisis by far the deepest recession on record. The peak-to-trough fall in GDP was 7% in both the Global Financial Crisis and …
The huge amount of borrowing undertaken by firms in the last three months is reassuring in the sense that businesses are getting the cash they need to make ends meet. But some firms won’t be able to cope with the higher debt burden. And those that can …
11th June 2020
MPC likely to announce another £100bn of QE in June… …and that won’t be the last expansion Negative interest rates possible, but far from guaranteed The Bank of England has much more work to do. It will probably start by announcing £100bn more …
Unlike the period after the Global Financial Crisis (GFC), we doubt that the government will immediately turn to a prolonged period of austerity after the surge in the debt to GDP ratio during the coronavirus crisis. This suggests the economy won’t have …
10th June 2020
The bulk of the leap in the saving rate will be reversed as the economy opens and people start spending again but the desire to hold more savings post-lockdown combined with lower incomes will weigh on consumption over the next few years, prolonging the …
Business debt up, household savings up We got another look into how household and business finances are doing this week. Non-financial businesses took on another £8.4bn of bank debt in April, on top of the record £30.2bn they borrowed in March. This takes …
5th June 2020
While the most restrictive period of the lockdown is behind us, the measures enforcing business closures and social distancing are only being eased very gradually. According to the ONS “Business Impact of Coronavirus Survey”, the number of businesses …
4th June 2020
PMIs confirm activity is returning only gradually The rebound in May’s all-sector PMI suggests the economy is now on the long road to normality. But the PMI echoes the message from the high frequency data that the recovery will be protracted. At 40.7 and …
Households deleveraging but businesses continue to load up on debt The record fall in net loans to households and another surge in borrowing by businesses in April is an indication of how the lockdown has affected consumer spending and business revenues. …
2nd June 2020
While this week’s high frequency data have confirmed that the low point for the economy is behind us, the figures have done little to alleviate our concerns that the recovery will be protracted. The good news is that after giving the green light to some …
29th May 2020
Weak animal spirits may hold back the recovery While the slight easing in social distancing rules in May helped industrial confidence to recover a little, the headline UK Economic Sentiment Indicator (ESI) fell further in May as services and retail firms …
28th May 2020
The goings on in the gilt market neatly summarise how it is been a negative week for the economy and financial markets. On Wednesday, the government sold 3-year gilts at a negative yield (of 0.003%) for the first time, meaning that if investors hold the …
22nd May 2020
April marks the low point for sales The 18.1% m/m fall (consensus forecast -16.0%) in retail sales volumes in April was easily the largest on record. The good news is that April should be the low point. But the bad news is that May is unlikely to be a …
Government borrowing skyrockets The double whammy of the precipitous fall in economic activity and the government’s measures to combat the crisis has already pushed borrowing to alarmingly high levels. While the small easing of the lockdown on 13 th May …
The government’s furlough scheme has prevented the UK economy from being engulfed by a tsunami-like first wave of unemployment. But a second wave will probably come once the reduction in the generosity of the scheme in August forces businesses to decide …
21st May 2020
Activity still well below normal The nature of the PMIs makes them tricky to interpret, but the rise in the composite PMI from 13.8 in April to 28.9 in May probably shows that April was the low point for activity, and that the slight easing in the …
Easing price pressures suggest the Bank has more work to do The energy-driven slump in inflation in April is unlikely to concern the Bank of England much, but it might find the easing in underlying price pressures a little harder to ignore. And with the …
20th May 2020
The recent weakness in the pound has been driven by renewed concerns about Brexit and the prospect that the Bank of England will have to cut interest rates below zero to support the economy. As a result, there could be some upside for the pound if the UK …
19th May 2020
Sanguine headline figures belie hundreds of thousands of layoffs The headline labour market figures have not yet caught up with the fall in employment of between 500,000 and 1 million revealed in the timelier data for April. And we suspect that …
As the UK imports lessons from Asian countries about controlling pandemics, it may also be useful to take note of the fiscal situation in Japan. The UK Treasury is reportedly already thinking up ways to reduce public debt in the aftermath of the …
15th May 2020
With the Office for Budget Responsibility’s (OBR) government borrowing forecasts only including the cost of just one of the extra four months of the Job Retention Scheme and no medium-term scarring effects of the crisis, borrowing is likely to end up …
14th May 2020
We think it is far more likely that the Bank of England will use further rounds of Quantitative Easing (QE) to boost demand rather than cut interest rates into negative territory as the market is suggesting. Over the past few days money markets in the UK …
As a protracted economic recovery from the coronavirus crisis will force the Bank of England to keep interest rates close to zero and further expand its quantitative easing programme (QE), gilt yields will probably stay very low for many years. And …
Record collapse in economic activity and worse to come March’s GDP figures showed that the UK economy was in freefall as soon as the coronavirus lockdown began. And with all the restrictions in place until mid-May, and then only lifted very slightly, …
13th May 2020
BoE scenario too optimistic There can be little doubt about how bad the recession will be now that the Bank of England has joined us and the Office for Budget Responsibility in forecasting that GDP will fall by 25-35%. Indeed, we will get the first glance …
7th May 2020
While the Monetary Policy Committee (MPC) left its interest rate and quantitative easing (QE) policies unchanged this morning, it implied that an expansion of QE is imminent. This leaves our existing call that the MPC would expand QE by around £100bn at …
The Bank of England has been expanding its balance sheet during the coronavirus crisis mainly to fulfil its role of lender of last resort in a liquidity crisis. That will probably remain the focus for a while yet. But at some point, the Bank may change …
6th May 2020
Survey at a record low, but still not capturing collapse in GDP The collapse in the construction PMI in April confirms that no sector of the economy has been spared from the slump in activity. We already knew that the composite activity PMI, which covers …
While the latest data suggest that our estimate that GDP has fallen by an eyewatering 25% from peak to trough is in the right ballpark, it looks as though the most restrictive parts of the coronavirus lockdown will be eased in May rather than in June as …
5th May 2020
Easing envy It’s possible that on the day before next Friday’s bank holiday to commemorate the 75 th anniversary of the end of the Second War World (VE Day), Boris Johnson will declare that the UK is winning the war against the coronavirus. But while the …
1st May 2020
MPC to signal it continues to stand behind gilt market There’s a chance it could extend QE But that’s probably more likely to happen in the coming months The Monetary Policy Committee (MPC) will probably use its policy announcement on Thursday 7 th May to …
30th April 2020
The calm before the storm The drop in both the number of corporate and individual insolvencies in Q1 is unlikely to be maintained over the next few months as the collapse in revenues and employment caused by the coronavirus pushes many more firms and …
We estimate that banks will have to absorb about £50bn of loan losses from corporate and household defaults as a result of the coronavirus crisis. If anything, the risks are for even bigger losses approaching the £80bn written off during the Global …
29th April 2020
With the reopening of the economy to be governed by the extent to which the coronavirus is brought under control and the burden being placed upon the NHS, there is still a lot of uncertainty about how long the current restrictions will remain in place and …
The shape of the economic recovery from the coronavirus crisis mainly depends on the spread of the virus, the effectiveness of the policy response and the extent to which consumers and businesses change their behaviour. This Update sets out how and why …
27th April 2020
This week’s economic news has been in line with our expectations that economic output will fall by around 25% in the first half of this year. The 5.1% m/m fall in retail sales volumes in March suggests that household consumption declined by at least 4% …
24th April 2020
Sharp drop in sales in March to be followed by a plunge in April The 5.1% m/m fall (consensus forecast -4.0%) in retail sales volumes in March was the largest on record and suggests that household consumption declined by at least 4% q/q in Q1. However, as …
Survey points to unprecedented monthly contraction in GDP in April The eye-watering declines in April’s flash PMIs confirm the coronavirus lockdown has pushed the economy into a recession of unprecedented speed and depth. Particularly worrying was the …
23rd April 2020
First signs of higher borrowing emerge, but much worse to come Despite the slight deterioration in March, the budget deficit was still only £48.7bn (2.1% of GDP) in 2019/20, but it will soon surge next year. The government measures to combat the economic …
CPI inflation starts to slide In March CPI inflation took the first leg of what we suspect will be a sustained journey down to around 0.5% by the summer, easing from 1.7% in February to 1.5% (consensus forecast 1.5%). The fall in CPI inflation in March …
22nd April 2020
Strains in the financial markets have generally eased due to policymakers’ decisive action and equity markets have rebounded on hopes that the spread of the coronavirus is slowing. (See Chart 1.) Of course, asset prices have not recouped all their losses …
21st April 2020
Small crack may soon turn into chasm The small crack that appeared to be opening up in the labour market in March may soon turn into a chasm with the unemployment rate rising from 4% to almost 9%. February’s Labour Force Survey (LFS) data weren’t very …
