26 March 2020
A week for the history books
Of the 52 WeeklyWatch articles we produce annually, never has a week stood out so starkly. Last week, we truly entered the unknown. Recent government measures brought unprecedented changes to our daily lives, with social distancing, home-working and school, pub and gym closures toppling our sense of normality. And this week, things have further changed, with three-week lockdown measures behind announced on Monday (23rd March). In doing so, Britain has now caught up with countries such as France, Italy, China and Spain that moved to a full lockdown at an earlier stage. As the FT commented:
“Not since the plague ravaged London in the 17th century have British households faced such tight restrictions on their movement with the aim of quelling an epidemic.”1
Business restrictions now include all non-essential retail stores, beauty salons, park play areas, places of worship and hotels. These are unparalleled and difficult times, with many of us facing extraordinary challenges and lacking any clear indication of when things may improve.
A revolutionary rescue package
The government’s ‘Coronavirus Job Retention Scheme’, revealed on Friday evening, will go down in history as the greatest state intervention ever seen in peacetime – surpassing Clement Attlee’s Welfare State of 1945 and Gordon Brown and Alistair Darling’s bank rescue package of 2008.
Chancellor Rishi Sunak’s wage-rescue package will see the government pay 80% of the salaries of workers who would otherwise have lost their jobs, for at least three months. On top of that, Sunak allowed affected businesses to defer VAT payments until June 2021, announced £7 billion more in welfare payments for people who do lose their jobs, and £1 billion for people struggling to pay their rent.
This safety net constructed by the government is revolutionary in breadth and depth. Commentators were quick to point out that the Chancellor’s actions transcend the stances normally upheld across the political spectrum – in times like this, ideology need not matter.
Sunak said during the announcement:
“We want to look back on this time and remember how, in the face of a generation-defining moment, we undertook a collective national effort – and we stood together.”
This sentiment was echoed by trade unions who – normally the last to rally behind Conservative governments – came out in support of the measures. “Historic, bold and very necessary,” said Len McCluskey, General Secretary of Unite.
The Chancellor’s announcement means that the government’s economic support is now worth more than £110 billion, or 5% of GDP, according to Capital Economics. The government’s measures will certainly bring relief to workers in sectors under the most amount of strain.
But more is needed to support self-employed people in the UK, who make up 15% of the workforce, but have no buffer when demand for their services dries up. According to the BBC, Rishi Sunak will unveil a package of support for self-employed workers facing financial problems as a result of coronavirus difficulties later today.2
House sales plummet
This morning, real estate portal Zoopla reported that UK house sales are set to plunge by 60% in the next three months, with lockdown measures making it nearly impossible for sellers to market homes. 3 According to their report, the slump in the second quarter, which is usually among the most active sales periods, will be followed by a further decline in the three months through September, as coronavirus continues to buffet the UK economy.
The global picture
The UK government’s open-ended commitment to protect the economy reflects the approach taken by central banks and governments around the world. The European Central Bank has introduced measures that boost liquidity by €3 trillion. The White House and Congress, meanwhile, have already agreed on more than $100bn in funding to tackle aspects of the virus, and today (26th March) the Senate has passed a $2 trillion (£1.7tn) coronavirus aid bill that is the largest economic stimulus in US history.
The Bank of England’s monetary policy committee has also committed to helping the economy as much as it can. On Thursday, the committee cut interest rates to 0.1%, the lowest rate in history, and increased its holdings of government bonds and sterling non-financial investment-grade corporate bonds by £200 billion.
How will this stimulus help the real economy? Azad Zangana, Senior European Economist at Schroders, explains:
“The intention is to help finance loans for small- and medium-sized enterprises, at least on a stop-gap basis. This will help bridge the period where we’re going to see a great deal of disruption.”
Lower interest rates and gilt purchases should help ease the stress in financial markets, and help banks support businesses. Yet, this can take some time to filter through to firms, which is why the government is also providing emergency relief to businesses. But while size matters, so does speed. With many companies unexpectedly facing solvency risks, time is of the essence to protect the livelihoods of workers and business owners.
Coronavirus continues to spread, with nearly 480,000 cases and over 21,000 deaths, at the time of writing (26th March). China, Italy, USA, Spain and Germany are amongst the highest total cases, although China’s new-case tally has slowed remarkably. On Sunday (22nd March), German Chancellor Angela Merkel reportedly entered quarantine, after a doctor she had had contact with tested positive for the virus.
How are markets responding to recent developments?
The Dow and S&P 500 both fell over the course of last week – and hot on their heels was the FTSE 100 which, despite rallying following the government stimulus announced on Friday, fell earlier this week in reaction to the US coronavirus bill stalling. Yesterday, the FTSE finished in the green after the US stimulus deal; however, this morning it slumped again after retail sales figures showed that volumes in February fell 0.3% month-on-month.
Experts are predicting that the UK economy is heading for a deeper recession than the 2008-09 financial crisis, with unemployment surging and the public finances sliding sharply into the red because of the coronavirus pandemic.4
Investors are closely monitoring companies’ liquidity for signs that they may become insolvent. While all sectors are affected by the current crisis, those most at risk are energy, transportation, retail and leisure, which have already been forced to lay off employees.
Adrian Frost of Artemis Capital Management, Manager of the St. James’s Place UK & International Income fund, said:
“The first line of defence will be the actions managements take to protect their companies. To do this, it might be necessary – indeed preferable – for some companies to reduce or suspend their dividends for the time-being. This may seem to run counter to your interests as unitholders – but we would rather see management preserving the fabric and long-term earnings potential of a company rather than taking measures to support dividends in the short term.”
The challenge faced by everyone is the uncertainty of not knowing how long this period of lockdown and market volatility may last. In the government’s press conference last Thursday (19th March), Boris Johnson suggested that the UK may be able to ‘turn the tide’ of the virus within 12 weeks. Economic forecasts – which remain plentiful and wide-ranging – are trying to estimate how long recovery may take. While GDP “could be down this year by 8%, we do expect quite a sharp recovery by 2021,” says Zangana.