27 May 2020
The 1998 Durham Chess Club Championship final saw two teenagers compete for the title. One of them was a young Dominic Cummings. It’s not surprising that he’s a chess player – he was the mastermind behind the Vote Leave and 2019 General Election campaigns, and he’s made his name as a strategist. Over the Bank Holiday weekend however, Cummings now finds himself in a political stalemate. While Bishops across England joined the many voices criticising his actions, the Prime Minister stood by his adviser and defended his actions during a Downing Street press conference on Monday.
It could prove to be a bad time to break trust with the public. With lockdown measures on the verge of relaxation, reciprocal trust between the government and the public is vital to protecting against a second wave and allowing the economy to reopen. It remains to be seen whether Boris Johnson has broken this trust or if it remains intact.
Snapshot of the economy
The Office for Budget Responsibility (OBR) announced on Friday that UK Government borrowing in April reached £62.1bn, its highest level since records began in 1993. At the same time, revenue from tax receipts has fallen over 40% while expenditure continues to climb.
This illustrates the sheer magnitude of the effect of lockdown on businesses and individuals, as well as the government’s spending requirements. The data release caused the FTSE 100 to fall, which erased its gains for the week. And for the first time in its history, it issued £3.8bn in gilts on a negative yield last Wednesday as the governments borrowing requirements continue to stack. This means investors who hold the debt to maturity will get less back in interest payments and capital than they paid.
It’s the medium- to long-term impact of these measure that economists are questioning, wondering about the ‘scarring’ potential to future prosperity. But predictions are difficult – only time will tell the full impact. “It will take many months before the true scale of even the initial shock becomes clear,” said the OBR.
A lack of demand during April, pushing inflation down to its lowest rate the CPI has seen since August 2016: 0.8%. The fall was energy-driven, with utilities and fuel dropping by over 50%. A rise in food prices, the supermarket’s response to a hike in demand, partially offset this fall, but it still intensifies speculation that the Bank of England could cut interest rates below zero. “We’re not ruling it in, and we’re not ruling it out,” Governor Andrew Bailey told Parliament’s Treasury Committee last Wednesday.
It just proves that the scale of the current crisis has meant nothing can be ruled out. “We have to remember the reason they are keeping the policy plates spinning is because we face the worst economic situation for many decades,” said Chris Iggo from AXA, managers of the St. James’s Place Diversified Income Fund. “The reluctance of some central bankers to rule out the use of negative interest rates tells us there are future scenarios under which the economy and markets would be so weak that tools to dissuade and companies from holding cash would be needed.”
A slight silver lining comes from flash PMI data, which indicates output levels across different sectors of the economy. The slight rise from last month means that, while the UK economy hasn’t returned to growth, it’s shrinking at a slower and less aggressive rate. Composite PMI data for the eurozone indicated moderate improvement too, rising from an all-time low in April.
“The rise in flash PMIs implies that, in advanced economies at least, we appear to have passed the worst,” said Gabriella Dickens, Assistant Economist at Capital Economics. The lockdown easing coming in June means that gradual improvement is expected over the coming months. “However, labour market scarring and weak demand suggest that the rapid rebound many commentators hoped for at the start of the virus is not in sight,” she cautioned.
Old tensions flare
Moderna, a US pharmaceutical company, raised hopes for a vaccine and allowed markets to rally at the start of the week. However, they were rattled on Friday after China announced a new national security law in Hong Kong that it is due to come into effect this week. Equity markets drooped, while the region’s Hang Seng index registered its worst trading day in five years, falling 5.6%.
Another round of fiscal stimulus has been announced from China, largely in the form of bond issuance, and has stopped short of announcing a GDP growth target for the year. While cautious about the country’s economic recovery, China is bolder in advancing its political agenda. Worried Hong Kong citizens returned to the streets to protest the new law, which threatens their liberties, while wearing masks to protect against both the virus and tear gas.
Investors are nervous about the bill’s impact on the area’s status as a top-tier international financial centre. “It risks undermining the rebound in equity markets and the recovery of Hong Kong’s economy,” said Capital Economics. The proposed law has inflamed already painful tensions with the US, who are already arguing over Huawei and the origins of the pandemic.
In the US, November’s presidential election is inching closer, and Trump is under pressure to get the economy back on its feet – over a fifth of the workforce is currently unemployed. And with the number of US deaths approaching 100,000, the country remains the global epicentre of the coronavirus outbreak.
There are now relaxed restrictions – to some degree – in all US states, just in time for many Americans to gather for Memorial Day, which remembers late veterans. While public health experts became nervous of a second wave, Trump returned to the golf course.