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WeekWatch 26/05/2020

WeekWatch 26/05/2020

In 1988, Durham Chess Club saw two teenagers compete for the Championship title. The match saw Michael Ayton defeat his opponent – a young Dominic Cummings.

It’s unsurprising that Cummings, who masterminded the Vote Leave and 2019 General Election campaigns, is a chess player. He has made his name as a strategist whose successful campaigns have changed the course of this country’s future. But, over the long weekend, Cummings found himself in something of a political stalemate, as calls mounted for his resignation after he made a series of dubious moves during lockdown. Bishops across England joined the chorus of criticism on Monday after the Prime Minister stood by his adviser, who later defended his actions at a Downing Street press conference.

With lockdown measures due to be relaxed further in the coming weeks, reciprocal trust between the government and the public is critical in preventing a second wave and allowing the economy to reopen. Whether Boris Johnson’s decision to defend his adviser keeps that trust intact remains to be seen.

UK Government borrowing in April reached £62.1bn, the Office for Budget Responsibility (OBR) announced on Friday: the highest level since records began in 1993. Meanwhile, its revenue from tax receipts has fallen by over 40% – while expenditure has continued to climb.

This ‘triple whammy’ of economic woes illustrates the sheer magnitude of the government’s spending requirements and the effect of lockdown measures on businesses and individuals. The FTSE 100 fell after the data was released, erasing its gains for the week. As the government’s borrowing requirements continued to stack up, it issued £3.8bn in gilts on a negative yield on Wednesday, for the first time in its history. This means investors who hold the debt to maturity will get back less in interest payments and capital than they paid.

Economists are questioning the medium- to long-term impact of these measures, asking how ‘scarring’ they could be to future prosperity. But, until the virus has passed and government spending has been reigned in, that’s difficult to predict. “It will take many months before the true scale of even the initial shock becomes clear,” said the OBR.

As fewer goods and services were purchased in April, lack of demand pushed inflation down to 0.8%, the lowest rate the CPI has seen since August 2016. The fall was energy-driven, with the price of fuel and utilities dropping by over 50%. It was partially offset by a rise in food prices, as supermarkets responded to a hike in demand. The fall in inflation intensified 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 on Wednesday.

Negative interest rates may have seemed like an impossibility a few months ago, but the scale of the current crisis suggests 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 households and companies from holding cash would be needed.”

Flash PMI data, which indicates output levels across different sectors of the economy, offered a thin silver lining. 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 also indicated a moderate improvement, 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. With lockdowns due to ease further in June, a gradual improvement is expected in 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.

Global markets rallied at the start of the week, as Moderna, a pharmaceutical company in the US, raised hopes for a vaccine. Following a relatively subdued few days, markets were rattled on Friday after China announced a new national security law in Hong Kong that is due to come into effect this week. The region’s Hang Seng index registered its worst trading day in five years, falling 5.6%, while equity markets elsewhere also drooped.

China has just announced another round of fiscal stimulus – mainly in the form of bond issuance – and has stopped short of announcing a GDP growth target for the year. Cautious about the country’s economic recovery, the country is more brazen in advancing its political agenda. Hong Kong citizens, worried about their liberties under the new bill, returned to the streets to protest against the law, wearing masks to protect against tear gas and the spread of the coronavirus.

The ‘mainlandization’ of Hong Kong would change the nature of services and transactions conducted in the hub; and 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 tensions between China and the US, who are already arguing over Huawei and the origins of the pandemic.

With the Presidential election in November drawing closer, and over a fifth of the workforce currently unemployed, Trump is under pressure to get the economy back on its feet. As the number of deaths in the US approaches 100,000, the country remains the global epicentre of the coronavirus outbreak.

All of the US states have now relaxed restrictions to some degree, allowing many Americans to gather yesterday to celebrate Memorial Day, the holiday which remembers late veterans. Public health experts looked on nervously at the gatherings, anticipating a second wave, while Trump returned to the golf course.

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