Journey Out Of Lockdown Begins
JOURNEY OUT OF LOCKDOWN BEGINS
Following this week’s Budget set out by UK Chancellor Sunak and the concomitant update of economic forecasts by the Office for Budget Responsibility (OBR), next week sees the implementation of the first of the UK government’s four-step roadmap out of lockdown for England. Different rules apply in other parts of the UK. The first step actually consists of two parts: Monday 8 March will see schools reopen, while two people from different households can meet outside and care home residents can have one regular visitor. The second part of step one from 29 March would see the easing of outdoor social contact limits further with the rule of six or two households mixing, and outdoor sports resuming.
Further moves will hopefully culminate in the removal of all legal social contact limits by no earlier than 21 June, although some residual restrictions may remain. Each step will be subject to four tests involving the rollout and effectiveness of the vaccine programme. The OBR’s new forecasts are broadly consistent with the government’s roadmap. It now predicts the UK economy will return to its prepandemic level by mid-2022, six months earlier than previously envisaged (Chart 1), driven in particular by a rebound in consumption. The OBR has nevertheless again pointed to considerable uncertainty in the economic outlook.
SHARP FALL IN JANUARY GDP LIKELY NADIR
The main UK data release next week is January GDP (Fri). We predict a month-on-month decline of 4.6% due to the initial impact of the third national lockdown and also some potential impact from new EU trading arrangements (the monthly trade data will therefore also be closely watched). That drop in GDP will probably represent the low point in Q1 if post-Brexit frictions recede and as schools reopen, with quarterly growth set to resume in Q2 and accelerate in the second half of the year if, as hoped, most restrictions to activity are removed.
ECB EXPECTED TO USE IN-BUILT PEPP FLEXIBILITY
The recent government bond market sell-off has elicited slightly different responses from global central banks. US Fed Chair Powell’s comment on Thursday that bond markets had “caught my attention” was insufficient to arrest the rise in yields, as 10-year Treasury yields increased towards 1.6%, up from below 1% at the start of the year. Last week, Bank of England Deputy Governor Ramsden said rising UK yields reflect positive news on the economy.
For the ECB, the tone of officials has been much more cautious about rising yields, not least because the Eurozone economy remains fragile amid the slow vaccine rollout. At next week’s monetary policy meeting (Thu), the ECB is not expected to announce changes to interest rates or to the size of its asset purchase programmes.
However, there is an expectation that the ECB will use the flexibility of the existing €1.85 trillion Pandemic Emergency Purchase Programme (PEPP) to increase its weekly pace of bond purchases, which so far have averaged just under €20bn (Chart 2). In fact, the latest weekly data showed a fall in purchases to €16.9bn, but new figures due on Monday may already show a pickup in reaction to the rise in sovereign yields.
President Lagarde’s comments on recent market developments will be closely watched, as will be the ECB’s new economic forecasts. Compared with the December forecasts, the near-term outlook for growth has darkened as a result of the new strain and extended lockdowns, while inflation has risen more than expected due to the higher oil price. However, the medium-term outlook for growth and inflation will probably be broadly similar to December.
Overall, the message from the ECB will be that policy will remain accommodative for a considerable time to come and it will use the flexibility of its policy tools to counter unwarranted tightening of financial market conditions if it threatens the expected economic recovery.
US FISCAL AND CHINA NPC FOCUS
In the US, there will be no further Fed speeches during next week’s ‘quiet period’ ahead of the 16-17 March FOMC meeting. Fiscal policy remains the key near-term focus, with the Biden’s administration’s $1.9 trillion package continuing its passage through Congress despite ongoing criticism from some quarters that it is much larger than the economy needs and so risks fuelling inflationary pressures.
The bill successfully passed through the House last week and is currently being debated the Senate, with reports that may be voted on this weekend. However, the Senate bill differs from the House one in some crucial areas, most notably an increase in the minimum wage. That means the two will need to go through a ‘reconciliation’ process which will delay final passage. The Democrats are keen for the package to be passed before 14 March when some existing stimulus measures are due to expire. Key US data releases next week include CPI inflation (Wed), weekly jobless claims (Thu) and consumer sentiment (Fri).
Elsewhere, in China, the government has set an economic growth target of “above 6%” for 2021, which seems attainable given the current consensus forecast for over 8%, and it would reaffirm the recovery from the coronavirus pandemic. The weeklong session of the National People’s Congress (NPC) will discuss a new five-year economic plan, which is expected to encompass policies on technology and climate change. There may be geo-politically contentious security measures on Hong Kong.
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