UK GDP Set For Rebound
A STRONGER-THAN-EXPECTED REBOUND…
The UK economy is set for a strong bounce-back in Q3 following the revised plunge of 19.8% in the second quarter. The previous easing of lockdown restrictions and the boost to the hospitality sector from government measures such as the ‘Eat Out to Help Out’ scheme are likely to result in another strong step-up in monthly GDP. We predict August GDP (Fri) to have risen by 6.0%, following the 6.6% increase in July. A further rise in September, albeit likely at a slower pace, could put the economy on course for a rebound of around 20%. Still, the economy has yet to fully recoup the sharp drop in output that occurred during March and April as lockdown restrictions were initially imposed. The level of GDP in August is still expected to be approximately 6% below February before measures were taken to tackle the pandemic, similar to the full peak-to-trough decline in GDP during the global financial crisis. And with stricter local containment measures now in place to tackle resurgent coronavirus cases, the pace of recovery is set to slow in Q4. That may lead to renewed divergence in sectoral performance. …
BUT FACING THE UNHOLY TRINITY OF RISKS
Bank of England Chief Economist Haldane talked about the ‘unholy trinity of risks’ in a recent speech. Aside from Covid-19, the other key risks are the labour market and Brexit. It remains to be seen to what extent the Chancellor’s new Job Support Scheme, which replaces the Coronavirus Job Retention Scheme in November, will limit the rise in unemployment. A key feature of the new scheme is that the government and employers will top up the wages of a worker on reduced hours, but it will not support jobs that are no longer viable.
Meanwhile, financial markets have paid particularly close attention to this week’s EU-UK trade negotiating round, with a breakthrough remaining elusive. UK PM Johnson and European Commission President Von der Leyen will reportedly have a high-level discussion on Saturday in an attempt to break the logjam. The intervention could pave the way for further negotiations and a potential agreement ahead of the EU leaders’ summit on 15/16 October. With still more work to do to bridge the gap between both sides, the risk is that talks may have to continue beyond mid-October.
IMPLICATIONS FOR UK MONETARY POLICY
What does the strong rebound in activity and the unholy trinity of risks mean for UK monetary policy? The outlook remains highly uncertain. However, the economy so far looks to have recovered more strongly than anticipated. Further, the new Job Support Scheme could present an upside risk to the Bank of England’s central outlook. On the other hand, more stringent restrictions to tackle Covid-19 may have the opposite effect, as would a ‘no deal’ with the EU. The message from the Bank of England is that it is ready to provide more policy stimulus, if needed. Bank officials have played down the likelihood of an imminent move to negative interest rates. Thus, should more easing be required, it will likely come from more QE, potentially later this year. MORE ELECTION UNCERTAINTY In the US, prospects for the coronavirus and its impact on the economy and the upcoming election, as well as a further fiscal stimulus package, will remain the key focus. President Trump tested positive for Covid-19 and it has already affected his campaign, with the cancellation of scheduled events. It also appears increasingly unlikely that the next scheduled Presidential debate on 15 October will go ahead. Vice-President Pence would take over as interim President if Trump is unable to continue. But it leaves open the question on what might happen to the 3 November election if a candidate becomes seriously ill. Many Americans have already cast their postal vote based on the current candidates and it is unclear whether there would be sufficient time to have a new candidate on the ballot before election day. The US data focus will be the ISM services survey (Mon) and weekly jobless claims (Thu). We look for a slight fall in the September ISM to 56.5 from 56.9, still consistent with decent growth. However, the rebound in the labour market is slowing, with this week’s data showing September nonfarm payrolls increasing by 661k, down from 1489k in August, while private sector jobs growth also slowed to 877k from 1022k.
FED AND ECB ON STANDBY
Both the US Federal Reserve (Wed) and the European Central Bank (Thu) will release minutes of their latest policy meetings. We may not learn significant more than we already know about prospects for US monetary policy. At the September FOMC meeting, the Fed updated its forward guidance in light of the change in its policy framework to average inflation targeting. Its updated ‘dot plot’ signalled no expected rate rise at least through 2023. Fed Chairman Powell (Tue) is among several Fed officials scheduled to give a keynote speech on the economic outlook. The ECB ‘account’ of its September policy meeting may be more interesting. There is no urgency to add more stimulus at the moment. It expects Eurozone GDP to fall by 8.0% this year, less than previously thought, and some Governing Council members reportedly wanted a more upbeat communication on the outlook. However, with September inflation falling further into negative territory and Covid-19 infections rising particularly in France and Spain, the majority of ECB policymakers remain vigilant against any softening in economic activity or indeed unwarranted rises in the euro exchange rate.
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