The pound starts the week higher as Prime Minister Boris Johnson returns to Downing Street and is expected to hold a cabinet meeting this morning. Pressure is mounting to release lockdown measures and to outline an exit strategy ahead of a review Thursday 7th May.
Sterling had dropped on Friday against both the Euro and US dollar following comments from the EU’s Chief Trade Negotiator Michel Barnier. In a sign of how fractured negotiations could become, he described progress as “disappointing” and said, “The UK cannot refuse to extend the transition and, at the same time, not budge nor make progress on some topics that are of importance to the EU.”
Citing several problem areas including state aid rules and fisheries, he said the UK had failed to properly engage in trade talks. Not only does the pound have coronavirus to contend with, but also the ongoing Brexit negotiations. The Sunday Times has reported in recent weeks that pressure is mounting on the government to extend the transition period although the line from Downing Street, for the time being, is no extension.
UK Purchasing Managers Index (PMI) surveys for the manufacturing and services sectors last Thursday reported a collapse in business. The services sector fell to 12.3, the lowest level recorded since they began over 20 years ago. To recap, anything over 50 indicates expansion and anything below signals contraction. The data confirms that the British economy is fast heading towards a severe recession as a result of the coronavirus lockdown.
Bank of England rate-setter Jan Vlieghe said last week: “Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier in the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.”
Ben Broadbent, Deputy Bank of England Governor also struck a heavy chord stating that a 35% contraction in the British economy, as predicted by the Office for Budget Responsibility, “did not seem unrealistic”. In terms of people’s behavioural responses, he said that “even if the government-imposed lockdown is lifted, demand may remain weak in some areas just out of people’s natural caution.” The concern is that a more protracted U-shaped recession could be on the horizon.
Former Chancellor Philip Hammond supports this view, stating: “I suspect that it will be something of a U-shaped recovery.”
In a sign that there could be further waves of the virus, Professor Brendan Wren from the London School of Hygiene and Tropical Medicine said: “The genie is out of the bottle and Sars-CoV-2 is endemic in the UK. With the vast majority of the UK population susceptible to an infection…a second, third or even fourth wave is inevitable.”
With no major UK economic data releases this week, some focus may be placed on Nationwide house prices on Thursday and also mortgage approvals for March. The UK property market is one anchor of the British economy and with nearly all UK property transactions on hold for the time being, any downturn here in the months ahead could be seized upon by the markets.
The European Council met virtually last Thursday to discuss how to rebuild Europe’s economies. It has been well reported that there are deep divisions on how the cost of these packages will be structured. Whilst hardest hit economies warn that loans are unhelpful, Germany for one rules out any grants.
The European Commission is now set to create a “recovery fund” to rebuild economies once lockdown ends. In a sign of the scale of the fund, the Commission President Ursula von der Leyen said: “We are not talking about billion, we are talking about trillion.”
A proposal is expected by mid-May and the EC president has said there will be a sound balance between grants and loans. Any new statements or developments could see considerable market reaction for Euro exchange rates considering the sheer size of the plan.
The European Central Bank meet on Thursday for the next interest rate meeting. Any change in its policies in response to Covid-19 or guidance on future asset purchasing schemes could see considerable volatility for the Euro. EU GDP for the first quarter and unemployment numbers for March are also released that morning.
The US economy saw a bad end to the week with a further 4.42 million Americans seeking unemployment benefits last week as Covid-19 continues to create havoc in the economy. This now represents 15% of the US workforce. Sales of newly built family homes dropped by 15% in March as the sector is damaged by Coronavirus. The concern in the US is the impact on GDP and how quickly normal life can resume. It has been reported that US GDP was expanding at 2.7% before Americans were laid off. A Reuters survey of economists’ forecasts growth to drop to -4.1% when the official figures are released later this week, on 29th April.
This Thursday sees another round of the important US initial and continuing jobless claims which should be keenly awaited. Richard Flynn, UK MD at Charles Schwab said that: “While this week’s 4.4 million jobless claims are staggering, there are signs that the pace of layoffs has reached its peak. The key questions at this point are: when can the economy reopen and what happens when it does?”
A leading public health official in the US has suggested that a second wave of cases next winter could be even more difficult to deal with as it would coincide with traditional flu, adding yet more future uncertainty to the US economy and the dollar.
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