Consumer, pay, jobs in The Monday Briefing
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The government response to COVID-19 has involved vast, debt-financed increases in public expenditure. The spending has been on a far greater scale than during the financial crisis. With interest rates close to zero fiscal policy is firmly in the driving seat.
That leaves governments, rather than central banks, with the task of securing growth. Instead of raising taxes and reducing public spending as many did after the last recession, governments are now planning the next stage of fiscal easing. Policy is pivoting from countering recession to bolstering the recovery. High levels of public borrowing are likely to be here for some time to come.
Last Wednesday’s UK budget illustrated these trends. The response to COVID-19 has cost about £160bn since March, equivalent to 20% of existing public spending or 7% of GDP. New measures announced last week add about £30bn to this tally through measures to support jobs, the hospitality sector and the housing market. The government has also granted tax deferrals and loan guarantees worth £123bn, some of which will never be recovered.
COVID-19 has monopolised the business headlines for the last three months. But now, with the negotiations stepping up a gear and the transition set to end by December, Brexit is moving back into the limelight.
Data released on Friday showed that the UK economy contracted by more than 26% in March and April as the lockdown collapsed activity. The governor of the Bank of England (BoE), Andrew Bailey, responded by saying that the Bank stood “ready to take action” to help the economy as it emerges from the lockdown. This week we consider whether the time has come for the Bank to deploy the big gun in its arsenal, negative interest rates.
As the lockdown eases the global economy is starting to come back to life. Last week’s better than expected US jobs numbers, and a surge in private sector activity in China, reinforced the view in equity markets that the worst is past. On Friday the US S&P500 equity index closed up almost 40% on its March lows.
The impact of the lockdown on the UK job market has been dramatic. Last month about a third of the UK’s 33m workforce were being supported by the government, through the furlough scheme, self-employment income support or Universal Credit. A further third were working from home and a final third were at work.
Governments in the West are spending and borrowing on a vast scale as they counter the effects of the pandemic. With investors eager to hold ‘safe’ assets, and central banks buying up bonds through quantitative easing (QE), there is no shortage of demand for government debt.
Last week’s UK GDP data underscored the scale of the economic damage wrought by the COVID-19 lockdown. The economy contracted by 2% in the first quarter of 2020, the sharpest quarterly contraction since the 2008 financial crisis.
Many European countries have started easing the lockdowns they imposed in March to contain the spread of COVID-19. Last night UK prime minister Boris Johnson laid out what he described as a “conditional plan” for the gradual easing of the UK’s lockdown.
Today’s briefing summarises the findings of the latest Deloitte survey of Chief Financial Officers which was released overnight. The full report is available at: https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html
The world faces a major contraction in economic activity. The scale of the likely decline, and the timing and magnitude of any upturn, are hotly debated. But of even greater importance are the long-term effects of the crisis.