Deloitte Monday Briefing: US elections, UK lockdown - The Monday Briefing


Faced with choosing to write about the US elections or the lockdown in England in this week’s briefing we are doing the obvious thing and covering both.

First to US politics. To deliver much of his programme president-elect Joe Biden will need to control the Senate. If the Democrats take two Republican seats in run-off elections in Georgia on 5 January the Senate would be split between the two parties, leaving vice-president-elect Kamala Harris holding the casting vote. Control of the Senate would enable Mr Biden to push through a substantial and sustained increase in public expenditure, along with selective tax increases, healthcare reform, education subsidies and a higher federal minimum wage. Betting markets, never an infallible guide, currently see a roughly two in three chance that the Republicans hold the Senate.

Regardless of the result in Georgia, Republican Senate leader Mitch McConnell has already made it clear that he would like to pass a lesser expansionary package by the end of the year (much of the previous package expired in July). Investment bank UBS expects Mr McConnell would aim to negotiate an additional stimulus of $1tn (5% of GDP), compared with the over $2tn Democrats hope to pass if they win the Senate.

Even if the Democrats do not take the Senate Mr Biden will have broad authority on trade, migration, foreign policy and some regulatory matters. He has said that he will immediately re-enter the Paris climate agreement, remain in the World Health Organisation and reconsider some tariffs imposed by Mr Trump. He could also reverse Mr Trump’s deregulatory executive orders in areas like environmental protection and energy standards.

Mr Biden has expressed his opposition to Brexit and, in particular, concern about its impact on the Good Friday agreement. The presidential transition period which lasts until 20 January will freeze talks on a UK-US trade deal, and there is little indication that a Biden administration would prioritise a deal. However, Mr Biden is likely to find common ground with Boris Johnson on climate action and defence, priorities for both leaders.

Financial markets rallied after last week’s election, boosted by declining uncertainty as the outcome became clearer. Recent months saw a growing narrative that a Democratic sweep of the White House and Senate would result in large fiscal stimulus that would boost growth and offset the negative effects of higher taxes and greater regulation. But in a striking example of ‘win-win’ thinking this swiftly gave way to a new narrative of political gridlock blocking significant tax or regulatory changes. Equities headed higher, especially healthcare and technology stocks which are seen as being particularly vulnerable to greater regulation. The prospect of more limited fiscal stimulus weakens the outlook for growth and corporate profits. But equity markets choose, instead, to focus on the fact that less fiscal stimulus means interest rates staying lower for longer, so boosting equities valuations.

Without the Senate the change in leadership may be most apparent on the international stage with a return of US support for the Paris climate agreement and more predictable foreign and trade policy. With the support of the Senate Mr Biden would be able to pursue a significantly more expansionary fiscal policy in support of growth and to improve public services.

We turn now from US politics to England’s second COVID-19 lockdown which started last Thursday. The rise in cases in the UK since September is part of a wider wave, seen across Europe and in the US. Europe’s second wave has spread quickly and more uniformly. France, Spain and Italy which all had high case rates in the first wave have seen cases rise sharply, even more so than the UK. Many countries which did well earlier in the year, including the Czech Republic, Poland, Hungary, the Netherlands, Belgium and Switzerland, are seeing higher levels of infection than the UK.

The surge in cases in the US and Europe has taken global infection rates to record levels and deaths close to the previous peak. But outside the West the picture is more favourable. East Asia – China, Japan, South Korea, Taiwan, Vietnam, Thailand – are posting exceptionally low case and death rates. Infections are declining in many emerging economies, including India, Brazil and South Africa.

Many European countries have implemented tighter restrictions in response to surging case rates in the last few weeks. We have scrapped our previous forecast that the UK economy will show continued growth from the third quarter, and now think that the lockdown will generate a sizeable 4.5% contraction in GDP in the fourth quarter with continued, albeit lesser restrictions, generating a 0.5% contraction in the first quarter of next year.

Sizeable though these numbers are, they are a fraction of the 25% shrinkage of the UK economy between February and April during the first lockdown. This time the lockdown is time-limited, to one month, rather than more than three months in the first lockdown. It is also less restrictive, with schools, universities, manufacturing, real estate, construction, nurseries and garden centres continuing to operate. The fact that the economy is 9.5% smaller than in February means that there is, quite simply, less activity to disrupt. And the experience and ‘work around’ that individuals and organisations have developed since the pandemic struck means we are likely to be better at maintaining activity under restrictions.

The latest survey data from the Office for National Statistics suggest that, even before the lockdown, the rate of growth of new infections was stabilising and the growth in total case rates was slowing. Case rates among 17-24-year-olds, the group with the highest infection rates, are falling, suggesting the boost to infections from the return to university may be fading. Regional lockdowns appear to be working. In Liverpool, which moved into tier-three restrictions on 14 October, daily case numbers have halved from their early October peak. In Wales, where a 17-day lockdown ended on Sunday, case rates appear to have plateaued.

More recent data from the King’s College London COVID Symptoms Study suggest that progress has been maintained. The King’s study shows that new cases have fallen nationally, particularly in areas with high infections. While the ONS estimates that the R number has declined to 1.2-1.3, the King’s study puts it at 1.0. Commenting on the results, Tim Spector, professor of genetic epidemiology at King's College London, said, “our data is an early indicator of the future NHS situation as we are two weeks ahead of hospital data and four weeks ahead of most deaths… we believe [our data]… are a positive sign that we have passed the peak of this second wave”.

It would be premature to declare the worst of the second wave behind us. Hospitalisations and patients on ventilators are running at roughly 15 times the levels seen in the summer. Death rates are almost certain to rise over coming weeks.

But with cases showing signs of plateauing even before the lockdown it seems quite likely that infections will decline further, paving the way for the government to end the lockdown as planned on 2 December.

To suppress the virus through the opening months of 2021 is likely to require more onerous restrictions than prevailed over the summer. These may take the form of local or national measures. It is the expectation of continued such restrictions, quite possibly falling short of full national lockdowns, that make us think that UK growth is unlikely to return until spring.

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