Government borrowing in July was £26.7 billion, up by £28.3 billion compared to last year. In the first four months of the financial year the government was forced to borrow £150 billion up by £128 billion on the same period in 2019.
The OBR expects total borrowing in the current financial year to hit £322 billion around 16% of GDP. Total debt increased to £2 trillion, over 100% of GDP.
Rishi Sunak, the Chancellor or the Exchequer explained "The crisis has put the public finances under significant strain. We have taken action to support millions of jobs, businesses and livelihoods. Without that support things would have been far worse."
He also warned, "today's figures are a stark reminder, that we must return our public finances to a sustainable footing over time. This will require taking difficult decisions!" No extension of the furlough scheme towards the end of the year, The "Eat Out to help Out" scheme at a cost of £180 million to date, will not be on the menu from the end of the month. The government is keen for the return to work to continue. "protecting, supporting and creating jobs, to ensure nobody is left without hope". Oh dear, that doesn't sound good!
In the markets, Sterling closed at $1.31 against the dollar. The move above $1.32 a little too ambitious in the week. The FTSE closed down, finding support at the 6,000 level. In the US, NASDAQ pushed to a new high, assisted by Apple's all time high. Gold bears were singed a little as the test of $2,000 proved a little too much. The Bitcoin boys were baffled, as the move above $12,000 was short lived,
That's all for this week! Have a great, safe, week-end ...
It's official. Output in the UK economy dropped by over 20% in the second quarter. The actual figure, year on year, was 21.7%, that's slightly better than our forecasts, since start of lock down.
Construction output fell by 36%. Manufacturing output was down by 22%. Service sector output fell by 21%. The leisure sector, accommodation and food, was down by almost 90%. Lock the doors and turn off the lights. Don't be too surprised if revenues take a hit.
So what happens next? Our multi sector model of output, GDP(O), phases in the gradual return to normality. We expect a V shaped recovery. Recoveries always are or have been, V shaped, since formal records began in 1948.
The "Eat Out To Help Out" has confirmed families will return to restaurants. Retail sales confirm consumers will return to high streets. The fans are desperate to return to the terraces, as football, cricket and rugby return to the screens. Car sales were up in July, house sales and prices are rising. The government is committed to infrastructure spending. The Bank of England is committed to liquidity in the banking system, Money supply, M4 based is rising in double figure growth. No return of austerity. The mantra is a return to normality. Strong growth will return in 2021. The year on year comparisons will have such a low base for comparison.
This year, our base case scenario is for an output drop in Q3 of 10% and a 5% drop in the final quarter of the year. For the year as a whole the economy will be down by 10%. This is in line with the Bank of England latest forecasts and the mainstream consensus view from the HM Treasury panel.
In the final quarter, travel and tourism will continue to impact on the leisure sector. Manufacturing will face the overhang of Brexit uncertainty. Construction, retail and distribution will remain down compared to prior year. The government really needs to set out the policy for travel and tourism. The industry is warning, a full recovery may take years yet ...
The big challenge is the probable increase in jobs lost. Unemployment is likely to increase to 2.5 million to 3.0 million by the end of the year, unless the furlough scheme is extended. This week, Yo!Sushi announced the closure of 19 of 69 outlets, with the loss of 250 jobs. Fashion chain Jigsaw filed a proposal to close 20 stores with 200 redundancies. The restructuring in retail continues. There will be more to follow the CVA route ...
In the USA, Joe Biden has found his running mate. Senator Kamala Harris is on the platform. It's a dream ticket for Democrats, a nightmare for the White House.
Kamala Harris is a sitting U.S. senator. The daughter of immigrants from Jamaica and India, Harris was born in Oakland, California. The first black woman, an Indian American on a major party ticket. Harris could be the follow on President if Biden wins the election. Aged 77, he is expected to serve just one term.
Californian Senator since 2017, Harris was Attorney General in the State. A formidable intellect, skilled in interrogation and debate. "She takes pleasure in campaigning, making speeches, waving, laughing, smiling and pressing the flesh", according to the Washington Post. The October VP debate with Mike Pence should make for great television.
Joe Biden has answered the call from the Democratic party. He ticked all the boxes, the party had demanded. A progressive, minority woman, who could succeed him as President in 2024, if not sooner! Trump reacted by calling the Senator a "nasty woman", a "very, very nasty woman", who was very disrespectful to Joe Biden in the primaries.
The Trump camp are struggling to position the Biden Harris ticket for attack. Birtherism returns, the suggestion Harris may not be eligible for office is met with derision from mainstream media and the democratic party.
Trump is behind in the polls. The election is just 80 days away. The momentum is swinging to the Biden Harris ticket. Markets are adjusting to the prospect of Joe Biden in the White House. With Harris on the platform, the Presidential campaign just gathered additional momentum ...
Trump complained this week, the water pressure from shower heads is too low. It is playing havoc with his hair style. "I don't know about you, but it has to be perfect. Perfect". The President explained.
Ah yes, soon we may have to say good bye to our White House WTF feature ...
The President is behind in the polls. The pressure on China is increasing. This week Trump signed an executive order banning TikTok in the US. A forced sale to Microsoft may follow. Trump is expecting a slice of the action, for the arranged marriage.
Huawei, TikTok and now WeChat. The Tencent App was added to the hit list this week. The clear and present danger threat continues. The anti China stance makes for great ratings in the Trump camp, masking the problems with his handling of the Covid crisis.
Sanctions were imposed this week on eleven Chinese state officials including Hong Kong leader, Carrie Lam. The Treasury department singled out Lam for her role in "overseeing and implementing Beijing's policy of freedom and democratic process."
Trade sanctions, consulates closing, social media apps banned. Chinese companies listed in the USA have been given notice of compliance with US accounting norms or face de-listing.
This week, the State Department announced the highest level visit to Taiwan in decades. The US Health Secretary is to lead a delegation to Taiwan to discuss the pandemic and to "celebrate the shared value of the two democracies".
The visit is adding to tensions between Beijing and Washington. China's ambassador to the US, Cui Tiankai, has warned military activities in the South China Sea are increasing the risk of potential confrontation. The US is garnering allies in the region. The US led "Five Eyes Alliance" including Canada, UK, Australia and New Zealand is turning its gaze to the East. New Zealand changed course last week and aligned with other alliance members in suspending the extradition treaty with Hong Kong. The move was in protest against Beijing's decision to impose the new national security law in the province.
Japan this week announced an interest in joining the alliance. Defence Minister, Taro Kono said the five members "share basic values with Japan" and Japan wants to "continue to cooperate closely with the five countries."
The clock is ticking to the election in November. TikTok goes the cold war clock. "I don't think a new cold war would serve anybody's interest" said Cui Tiankei this week, "why should we allow history repeat ... when we are faced with so many new challenges? ... why indeed ...
A flicker of life on the forecourt. Car sales were up by 11% year on year in July. Private sales were up by 20%. Fleet sales were up by 5%. Business sales were down by 20%. Time yet for those purchase orders to be signed before the end of the year.
The recovery is expected to continue. Hybrid sales increased by over 250%. Diesel sales were down by over 25%. Mike Hawes, Chief Executive of the SMMT remains cautious, "showrooms have only just opened nationwide but there is still much uncertainty about the future."
"Much uncertainty about the future perhaps", but the latest IHS Markit / CIPS data points to continued strong recovery in manufacturing, services and construction. Output in the manufacturing sector hit a three year high. The rate of growth in services and construction was the highest for five years. All sectors reported an index reading into the mid 50s, confirming a strong recovery from the Q2 setback.
Data next week is expected to confirm UK GDP fell by 20% in the second quarter. The Bank of England expects the fall for the year as a whole to be 9.5%. The bounce back in 2021 is expected to be around 9%. This is significantly better than the "Old Lady's" earlier prognosis. The V shaped recovery remains in play.
The MPC held base rate at 0.1%. The stay-cation on Planet ZIRP continues. The stock of government debt will be held at £745 billion. The Bank will continue as "buyer of last resort" to meet the extensive borrowing requirement this year. When questioned, the Governor confirmed "Negative Rates" are now in the tool box. The reassuring news, no one is reading the instruction manual, just yet.
Unemployment remains a significant concern, as the furlough scheme unwinds. The Bank expects the number out of work to be 2.5 million by the end of the year as the U-rate increases to 7.5%. The pressure is increasing on the Chancellor, Rishi Sunak, to extend the furlough scheme to the end of the year and into 2021.
It will take more than the "Eat Out to Help Out" campaign, to restore the fortunes of the leisure sector. Hopes for travel and tourism were set back, as quarantine bridges were blocked to Europe and elsewhere. News that "pubs may have to close, if schools are to re-open" just added to the mixed message confusion.
The job losses will be both structural and cyclical. The furlough scheme will have a continued role to play for those sectors, late to recovery in the cycle. For the moment, the Chancellor remains unmoved ... but back bench pressure is increasing ...
Just when you thought it was safe to go bowling, the Prime Minister has made it clear, all bets are off. The people of Manchester and elsewhere, cannot meet with with others, at home, in the pub or in restaurants. No skating, no trips to the casinos, no facials. The army is on standby to enforce law and order. The music will be turned off at illegal raves in Manc. The flashing lights are going out at Daisy Nook. We may not see them lit, in our lifetime again, or at least before Christmas.
Matt Hancock made it clear this morning, the real problem is not the result of people going to pubs or restaurants or illegal raves for that matter. The problem is that of families visiting each other's houses. Contact tracing has shown, the vast majority of infected people, have mainly been seeing friends and extended family, living nearby. Close, close relatives in extended kinship groupings, the obvious target.
The restrictions were announced, just three hours before the start of Eid al-Adha, the "Festival of the Sacrifice". The Prime Minister was accused of discriminating against Muslims. The Grinch who stole Eid, the claim. The pub ban additionally offensive. The government response "we also screwed up Easter and may cancel Christmas as well" suggests plans are in hand to mess up with Yom Kippur, in the name of impartiality.
The second wave is coming from Europe, "we must be prepared" the warning from Johnson. The latest slogan is "hands, face and space". Be alert for more government warnings. "Hands, Knees and Bumpsadaisy" a more catchy slogan. "We apologize for bumping into you, in the name of social distancing" a more simple SOCO, the single over-riding communications objective.
So what of strategy, the underlying challenge, "the return to normality"? This is confusing setback. The Prime Minister has slammed the brakes on the easing of lock down. The risk is, he may have also hit the brakes, on the speed of the recovery ... there will be more pressure to extend the furlough scheme until the end of the year ... over one million jobs are at risk ...
Unleash The Dogs Of War ...
Peace returned to Portland this week. The Fed troops withdrew, the protestors dispersed. The President's law and order play, polled badly. A rethink was required in the White House.
Trump is trailing by ten points in the polls. Biden is ahead in Arizona, Florida and Michigan. Key states for the President are at risk. The solution from the Rose Garden ... to postpone the election.
Tweeting on Thursday, Trump attacked the idea of Mail-In voting and suggested the election should be delayed ...
"2020 will be the most inaccurate and fraudulent election in history. It will be a great embarrassment to the USA. Delay the election until people can properly, securely and safely vote". (for me)
The idea of postponing was immediately slammed by Democrats and Republicans alike. Congress alone can determine the date of the election. Trump reverted to suggestions, he may not accept the result in November, should he lose anyway!
Mike Pompeo continued his assault on China, in the latest "Wag the Dog" strategy. The consulates have now closed in Houston and Chengdu. The pressure is increasing on Huawei, The President is threatening to ban TikTok. A sale to Microsoft may follow, to save those essential video clips, for young American.
China is the enemy of the nation, Beijing, a clear and present danger. The President blames China for Covid now but in January and February he had praised Xi's response to the pandemic. Pompeo attacks China's civil rights record in Xinjiang but John Bolton has written that on two separate occasions, Trump told Xi, he should go ahead with building the Uighur camps as the "right thing to do".
Pompeo may seek to wade in on Hong Kong, but in June last year, Trump spoke with President Xi by phone, and told him he would not condemn a crackdown in Hong Kong. Trump told the press, "Hong Kong is part of China, they will have to deal with that themselves, they don't need advice".
This month Pompeo was in London to solicit support for American foreign policy but which one? Trump announced troop withdrawals from Germany and threatened to pull troops out of South Korea and Japan unless the host nations paid up.
This month China issued a warning to the UK. Stay out of Hong Kong and the South China Sea. Trade deals will be at risk if Johnson becomes a mere "Puppet of Pompeo". One Aircraft floating in a far off sea, is not a return to the glory days of Palmerston and "Civis Brittanicus Sum" ...
DIY and Gardening Lead The Way ...
Retail Sales bounced back in June. DIY and Gardening were the best performing sectors, along with household electrical stores and dispensing chemists.
Overall retail sales were up by 1.7% excluding fuel. This compares to a fall of 19% and 10% in April and May. Food sales were up by over 5% in the quarter. Binge drinking in April eased. Alcohol sales, up by 40% in April, fell by over 4% in the latest month available.
Overall non food sales were down by 17%. Clothing and footwear sales were down by over 30%. Open and they will come the message to retail. The figures represent a dramatic improvement on the period of lock down. Internet developments continue to dominate. Online sales were 32% of all transactions in June and 32% for the quarter as a whole.
Food sales on line have doubled during lock down, accounting for 11% of total sales. Non food sales on line eased back slightly as stores reopened. 33%, that's one in three transactions, of non food sales, were secured online. Clothing sales lead the way. The impact on high street and shopping centres, an irreversible trend of shrinking retail footprints and slowing consumer footfall.
Output Gathers Momentum in July ...
"The UK economy started on a strong footing" according to Chris Williamson Chief Business Economist at IHS Markit "as business continued to reopen doors after the Covid lock down". July data indicated a marked improvement in business conditions. The latest survey data indicated a return to growth for the service sector and a much faster rise in manufacturing production than seen in prior months.
The manufacturing index increased to 53.6 in July from 50.1 in June. The service sector index, increased to 56.6 in the month, from 47.1 prior month. The overall composite index increased to 57.1 from 47.7 in June.
"The momentum was fueled by the release of pent up demand as clients and customers returned to spending. Businesses were able to open their operations as staff returned." according to Duncan Brock Group Director at CIPS.
The overall picture suggests a rapid bounce back as the economy reopens. The data supports the prospect of a V shaped recovery. Just as well. The economy appears to have contracted by 24% in the second quarter. We expect a steady improvement in the third quarter, with output still down by around 8% in the final three months of the year.
Three million jobs could be at risk unless the furlough scheme is extended to the end of the year. Government borrowing in the first three months of the financial year was £128 billion. The Office For Budget Responsibility expect borrowing for the full year to be over £300 billion for the financial year as a whole. Time yet to determine the shape and speed of the recovery. Time yet to determine, the shape and speed of the jobs recovery specifically ... before spending just a little bit more ...
The consulates are closing in Houston and Chengdu. China has ordered the closure on the US consulate in Sichuan province. A retaliation measure for the enforced closure of the US consulate in Houston Texas.
Federal agents entered the Chinese consulate on Friday. The US had given China 72 hours to "cease all operations and events". The Chinese foreign ministry call the move an "unprecedented escalation" amid ongoing tensions.
Mike Pompeo has been unleashed by the President as the China attack dog. This week Pompeo was in London to meet with the Prime Minister. Support for American foreign policy was on the agenda. Support for the campaign against Huawei and TikTok part of the commitment. The World Health Organisation and the administration in Beijing were part of a new axis of evil preparing weapons of mass infection, presumably.
This week, Pompeo, gave a provocative speech, calling on all Chinese citizens to work with Uncle Sam to change the direction of the ruling Chinese Communist Party. "Today China is increasingly authoritarian at home, and more aggressive in its hostility to freedom everywhere else".
Freedom everywhere did not appear to include Portland, Oregon. Federal agents acting under the direction of the White House used tear gas and rubber bullets to suppress demonstrators in the city. The Mayor of Portland was teargassed in the process. Demonstrations against racism and police brutality have morphed into demonstrations about the presence of federal agents in the city. Both the Mayor of Portland and the Governor of Oregon have said the agents are not welcome. Videos have emerged of protestors taken away by camouflaged troops in unmarked vehicles.
Trump has threatened to send a "surge" of federal troops to other "Democrat" led cities to "help" combat crime. This is election year. 100 days to the polling date. Trump is trailing Joe Biden by over ten points. The President needs an external enemy to close ranks within the GOP and an internal enemy to galvanise the right. China is easy to blame for the Covid crisis, as the case load hits four million in the USA.
The White House is challenging the authenticity of the postal ballot. The President is suggesting he may not accept the result in November, if Biden wins. Scenes from Washington and Portland were reminiscent of the Reichstag fire and Blackshirts on the streets of Berlin.
In Washington today, the President is now wearing a mask and the troops have better camouflage ...
The Prime Minister outlined plans to get Britain back to normal this week. The advice to work from home will be dropped next month. Employers will be offered greater discretion to determine, how and when, employees may return to the work place.
Civil servants will return to Whitehall. The use of public transport will be extended. Casinos and bowling alleys will reopen. Skating rinks will thrill, once again, to the sound of blades on ice.
Exhibitions halls will open. Business events will resume. Fans may be allowed to return to the sports stadiums in October, if all goes well. "Let's get Britain back to normal, in time for Christmas" the message from Boris Johnson. "Let's get business, back to normal, in time for Brexit" he should have added.
There is much to be done to avoid a significant setback this year. Latest ONS data suggests the economy fell by 24% in the second quarter. Construction output fell by 40%, manufacturing output fell by 25%. Retail, transport and storage sectors fell by over 30%. The leisure sector collapsed by 90%, to just 10% of prior output.
The latest jobs figures mask the underlying problem. The furlough scheme is providing much needed support to the jobs market. The u-rate held steady at 3.9%. The number of people officially unemployed ticked up slightly to 1.35 million.
Ominous signs abound. Underlying earnings growth slowed to 0.7%, bonus pay fell by 24%. The number of vacancies fell to 333,000 compared to 800,000 at the start of the year.The experimental ONS claimant count hit the 2.6 million level, compared to 1.4 million in March.
How back will it get? We now expect growth for the year as a whole to fall by just over 12%. Our detailed sector output model suggests a V shaped recovery, with output down by around 8% in the final quarter of the year.
The number of people unemployed by the end of the year will rise to over 2.5 million if the furlough scheme is ended in October. We would still expect a significant recovery by the Spring of next year if all goes well.
For a more detailed presentation, join us for The Saturday Economist Live on the 31st July or the Brabners Quarterly Economic Briefing on the 23rd July. We outline our forecasts by quarter and by sector.
China Avoids Recession ...
In China, GDP increased by 3.2% in the second quarter of the year, following a drop of 6.8% in the first quarter. The second largest economy in the world avoided a technical recession, defined as two consecutive quarters of negative growth.
Exports increased by 0.5%, imports increased by 2.7%. Manufacturing increased by over 4% in the quarter. Growth of 5% is expected in the second half of the year. China will be the first major economy to achieve positive economic growth as Europe, Japan and the US struggle to reopen their economies.
In the US, some states are pausing or reversing plans to reopen businesses. Nationally, 3.6 million Covid cases have now been reported. The fatality rate is set to hit 150,000 by the end of July. The daily death toll is rising. Texas, Arizona and South Carolina have seen death rates double. Significant spikes have been seen in California and Tennessee.
The White House is struggling to formulate an appropriate response. The President has been committing less of his time and energy to managing the pandemic. "He is not really working this anymore, he doesn't want to be distracted by it" the claim in the Washington Post this week-end.
In a latest poll, 64% do not trust what the President is saying about the pandemic. Just 33% approve of Trump's handling of the crisis. With just over 100 days to go to the election, Joe Biden is now 11 points ahead in the polls. Body bags and refrigerated trucks are heading to Florida. The swing state is faced with a real crisis as curfews are imposed in parts of the state.
The US economy will shrink by an estimated 6% this year. The unemployment rate is over 10%. 54% of voters say they approve of Trump's handling of the economy ... Joe Biden's personal rating is slipping ... the race is far from over yet ...
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
|The Saturday Economist|
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.