Darkening Economic Outlook
LOOKING BEYOND RECORD Q3 GDP RISES In these exceptionally challenging times, with global Covid-19 cases exceeding 40 million and worldwide deaths surpassing 1 million, prospects of record GDP rises will probably get short shrift in the financial markets. We predict US Q3 GDP (Thu) to have surged 29% (on an annualised basis) after falling 31.4% in Q2, and the Eurozone economy (Fri) to have bounced back by 9% following the 11.8% plunge in the second quarter. But these numbers still leave the economies smaller than their pre-Covid levels. The outlook beyond the short-term bounce is looking increasingly uncertain as governments adopt measures to tackle resurgent coronavirus infections. In the past week, UK consumer confidence regressed to -31 in October from -25 in September, while the composite PMI business survey signalled waning growth momentum at the start of Q4. In the Eurozone, the composite PMI stayed below the key 50 level dividing growth and contraction. The likelihood is that it will be a while before economies fully recoup output losses associated with the pandemic.
UK JOB SUPPORT SCHEME AND PUBLIC FINANCES Against this uncertain backdrop, economies remain dependent on sizeable monetary and fiscal policy support. Global markets remain exercised by whether (at the time of writing) a US coronavirus relief package will be agreed by politicians before the 3 November elections. In the UK, Chancellor Rishi Sunak revamped the Job Support Scheme, which starts in November to replace the Coronavirus Job Retention Scheme, to make it more generous in terms of eligibility (fewer hours need to be worked to qualify) and government subsidy (employers paying less). Firms affected by Tier 3 restrictions (in England) are eligible for greater state support for their wage payments. What does this mean for UK public finances? Government borrowing has predictably ballooned in the first six months of the financial year (April-September) to £208bn, a sixfold increase on the same period last year, as coronavirus-related spending jumped higher and tax receipts fell. But it is actually less than the projected £263bn by the Office for Budget Responsibility (OBR). Nevertheless, with the outlook darkening and additional spending measures to support the economy, the OBR’s £372bn target for the full 2020/21 financial year may yet be reached or even risks being exceeded. There appears to be little market concern about rising debt levels, with UK gilt yields negative for up to five years out, keeping government debt interest costs low. That has been helped by Bank of England bond purchases, with more expected to be announced on 5 November. In the current environment and until the recovery is on a more solid footing, high debt levels are more sustainable.
ECB PEPP TALK The European Central Bank (ECB) in recent months has been in no hurry to add to its panoply of stimulus measures. However, evidence of increasing economic headwinds related to a second wave of coronavirus infections means that it is readying to act. As noted above, the coming week’s Eurozone Q3 GDP figures (Fri) will point to a stellar comeback for the economy, but timelier indicators suggest activity and confidence have probably started to wane. The German IFO (Mon) business survey’s main index is forecast to fall to 93.0 in October from 93.4, the first fall in six months. We expect the Eurozone October annual ‘flash’ CPI (Fri) to remain negative at -0.3%. The economic indicators are not so negative that the ECB will be panicked into adding stimulus at next Thursday’s meeting (although it is a risk). There is still time to assess incoming economic data before the December meeting when new macroeconomic projections will be available. President Christine Lagarde also prefers to build consensus before changing policy, and that means bringing more hawkish members on board. Moreover, the increase in the envelope of the Pandemic Emergency Purchase Programme (PEPP) in June to €1,350bn still has some way to run. Overall, the most likely course of action for the ECB next week is to tee up more policy easing in December, with comments pointing to increasing downside risks to the economic outlook. More stimulus in December is expected to come through an increase in PEPP by around €500bn. Policy interest rates, however, are expected to be left unchanged. The Bank of Canada (Wed) and the Bank of Japan (Thu) will also announce policy decisions next week, followed in the week after by the Australian, US and UK central banks.
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