Harry Barclay – London business correspondent
Deloitte Monday Briefing’.
* The economic policy response to Covid-19 is starting to catch up with the escalating scale of the crisis. It is driving a cart and horses through conventional wisdom. The post-financial crisis shrinkage of government borrowing is over. Radical economic policies are on the agenda. Public spending and debt are set to soar. France is ready to nationalise at-risk businesses; Germany plans to take equity stakes. Money-printing by central banks to finance government spending, once a taboo associated with Weimar Germany and Zimbabwe, is no longer out of the question.
* Declining liquidity and rising stress in financial markets last week testify to the urgent need for action. The value of riskier assets such as emerging-market government debt or ‘junk’ bonds plummeted. Such was the panic that even assets traditionally seen as safe havens, such as gold and US government bonds, came under pressure as cash and dollar-hungry investors sold positions.
* The response has been on a huge scale. The Federal Reserve cut rates by an unprecedented one-percentage point and, along with the European Central Bank and Bank of England, has launched programmes of asset purchases. Central banks are massively scaling up the provision of loans to corporates. The Federal Reserve has offered new support to five major foreign central banks to support dollar liquidity.
* Markets stabilised somewhat on Thursday in light of the measures from central banks. But we are at the start of a major economic downturn of uncertain duration. Despite all the measures that were announced last week, the US S&P 500 equity index fell by 4.3% last Friday, the largest decline since 2009.
* Last week many governments announced measures to support businesses and household incomes. As with monetary policy, the scale of the prospective fiscal easing is significant. In the UK Budget the government announced £12bn of extra spending, followed by another £20bn last Wednesday. On Friday the chancellor Rishi Sunak unveiled “a coronavirus job support scheme”, extra support for those on benefits and a deferral of VAT payments and income tax for the self-employed. There is no official estimate of the cost of these measures but it is quite possible that the extra public spending in the UK could exceed 2% of GDP in 2020–21.
* The Financial Times reported over the weekend that, in a historic shift, the German government is planning to jettison its longstanding commitment to balancing the budget. A €150bn increase in public borrowing will be accompanied by state-backed loans for corporates and a plan for the government to take equity stakes in ailing companies.
* Mitigating the shock to incomes and businesses and preserving the productive capacity of the economy is essential for a swift recovery. Above all, lost incomes need to be replaced. Welfare systems provide a safety net, but in the UK replacement income tends to be low, conditional and slow to arrive (continental schemes are more generous, sometimes providing up to two-thirds of previous income for a limited period).
* The Covid-19 job retention scheme unveiled by Mr Sunak last week was, in a British context, revolutionary. For the first time the British government is prepared, without limit, to pay the wages of private sector employees who are laid off. It will enable employers to put staff onto ‘furlough’, rather than making them redundant, with the state paying 80% of their previous income up to a maximum of £2,500 a month. This retains the link between employee and organisation, and ensures that when demand returns there will be capacity to meet it.
* Income support schemes strike a balance between getting timely help to those in need with covering as many people as possible. In the UK’s case, 4.7m self-employed people are not covered by the Covid-19 income support scheme since they are outside the PAYE system. Yesterday the communities secretary Robert Jenrick said that the UK government were looking at extending the new scheme to the self-employed though doing so was, he said, “logistically and operationally” difficult.
* To get round such problems governments could simply give a lump sum to every taxpayer or household. This has the advantage of being quick and comprehensive, but it is also expensive and untargeted. Hong Kong and Singapore have taken this route; support is growing in the US for a similar policy.
* Whatever form it takes, help will need to come quickly. Weekly claims for unemployment insurance in the US have surged and the US treasury secretary, Steven Mnuchin, has warned that US unemployment rate could rise to 20%.
* But no amount of government spending or monetary ease will be able to offset the immediate shock to growth. Goldman Sachs estimates US GDP is likely to contract by 7.5% in the second quarter. In economic terms this is off the scale, literally. On the chart of US GDP we run on the Datastream system the largest previous decline since 1953, in early 1958, was 2.6%. At the height of the financial crisis in the fourth quarter of 2008 US GDP contracted by 2.3%.
* We’ve been looking at the possible effects on the UK economy in the second quarter. My colleague Max has gone through the GDP data and made some rough estimates of the possible sectoral effects which, in areas like tourism, hotels and leisure will be acute. Max’s calculations suggest a decline of 10% or more in UK GDP could be possible. That would be four times as great as any previous contraction in the last 60 years. On the employment side my colleague Debo estimates that there are over 4m jobs in the most vulnerable UK sectors, such as hotels, non-food retail and travel; many more, of course, are in related sectors. Certain jobs, including just under 5m self-employed people and more than 12m in small businesses, are also more likely to be vulnerable than those in large businesses and the public sector.
* The message from policymakers and politicians in the last week is that they will do whatever it takes. That implies large scale interventions and unorthodox policies. This will necessarily entail a significant extension of the role of the state and its involvement in everyday life. Public spending and debt levels are set to increase sharply. We are not at the point where central banks fund governments directly by printing money, or, strictly speaking, issuing it. But central banks’ asset purchases will have a similar result as they mop up new debt issued by governments.
* Policymakers have learned two of the big lessons of the financial crisis – to act in scale and deal with the bill later. The question is whether they will be able to apply one of the other lessons – the need to get help to the right parts of the economy and financial markets at speed.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 3.3% at 5,191 following a volatile week for global markets.
Economics and business
* Global cases of Covid-19 rose to over 333,000 and deaths to over 14,500. Europe, now declared an epicentre of Covid-19 pandemic, has more than 59,000 cases in Italy, 28,000 in Spain and 24,000 in Germany
* The Bank of England cut interest rates to a historic low of 0.1% and announced £200bn of new quantitative easing
* The ECB also announced it would buy €750bn of government and corporate debt in a bid to stabilise markets
* The US Federal Reserve offered greater liquidity to banks in the form of short-term loans and expanded its dollar swap lines to ease turmoil in foreign exchange markets
* Sterling fell to its lowest level against the dollar since 1985
* UK chancellor Rishi Sunak announced £330bn in loan guarantees for business lending and a package of cash grants for small businesses
* Mr Sunak announced that the UK government would cover 80% of the wages of furloughed workers, up to a limit of £2,500 a month, to avoid mass redundancies
* The US government is considering a significant stimulus package, potentially worth $1.2tn, which may include direct payments to all Americans
* Online retailer Amazon is hiring an additional 100,000 staff worldwide as it responds to huge demand for home delivery of goods
* Chinese industrial output contracted sharply by 13.5% year on year in February as retail sales also fell by 20.5%
* Iran has released 85,000 prisoners as it struggles to respond to Covid-19
* The Euro 2020 football tournament has been postponed by a year due to the virus
* Easyjet CEO Johan Lundgren said he expects to see a number of airline failures due to the impact of Covid-19
* UK supermarkets are hiring new staff to respond to unprecedented demand for food as consumption shifts from cafes and restaurants to the home
* UK food producers asked for hospitality workers to be seconded to processing lines to meet the demand
* Vodafone reported a 50% rise in internet usage as work and leisure activities moved into the home
* Netflix agreed to lower the resolution of its content in Europe to relieve pressure on internet networks
* In the US new unemployment claims rose to their highest level since 2017 as policymakers scramble to try and preserve employment
* EU-UK trade negotiations were postponed last week and are not expected to continue face-to-face
* Responding to speculation that the UK may seek an extension to the Brexit transition period due to the current disruption, UK prime minister Boris Johnson said he had “no intention” of doing so
* US presidential candidate Bernie Sanders is to “assess his campaign” following further primary losses to Joe Biden
* The influential German ZEW survey of business sentiment fell to levels not seen since the depths of the Euro crisis
* Car plants have shut across Europe and the US due to low demand, workforce absences and supply-chain disruption
* Companies and banks are halting dividends and share buybacks as they seek to preserve cash flow
* UK mobile phone retailer Carphone Warehouse is to close 531 stores as consumers move online and replace their phones less frequently
And finally… NASA’s Mars lander InSight encountered a problem recently with a probe designed to burrow into the surface of the Red Planet to analyse temperature fluctuations under the Martian surface. Unfortunately the soil was clumpier than expected, causing the probe to get stuck. After much deliberation, engineers decided to use a shovel on the end of a robotic arm to hit the probe, freeing it to burrow downwards – when push comes to shovel.
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