‘V-shaped’ recovery hopes fade
Join our weekly 30-minute “COVID-19” webinar this Thursday at 13:00 BST. We’ll cover the latest health and economic impacts and our guests, Zahir Bokhari and Richard Kibble, will examine the options for recapitalising UK SMEs and how to return UK businesses to growth. To register for this week’s webinar, on 23 July, please visit: https://event.on24.com/wcc/r/2509985/53D8332224DF3ED80DD4ED9441F0B34B
- For our latest charts and commentary on the pandemic, bookmark the weekly COVID-19 Economics Monitor - https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html Its latest edition covers the economic recovery in China and Europe, UK May GDP data and the continued acceleration in new COVID-19 cases in the Americas and India. It also includes Deloitte’s GDP forecasts for China, Germany, the UK and the US.
- The big data event for economists in the UK last week was the release of May GDP numbers. After a record 27% contraction in March and April, the easing of the lockdown from May was expected to generate a strong bounce in activity. The outcome, a disappointing 1.8% increase in GDP, has dented hopes of a swift, ‘V-shaped’ recovery.
- This fits with the findings of the latest Deloitte CFO Survey, released today, which shows large companies planning for a long-haul recovery: https://www2.deloitte.com/uk/en/pages/finance/articles/deloitte-cfo-survey.html
- UK Chief Financial Officers expect growth to come back only slowly. Almost half think it will take a year or more for their revenues to reach pre-pandemic levels.
- CFO perceptions of uncertainty are higher than at any time before the COVID-19 pandemic, albeit slightly below April’s record reading. A huge shrinkage of the economy and pervasive uncertainty have knocked the animal spirits of corporates. Just 9% of CFOs say now is a good time to take greater risk onto their balance sheets, close to the lowest readings on record.
- Our forecasts for UK GDP growth this year has been at the low end of the range of market forecasts. The weakness of May GDP, alongside subdued readings from the CFO Survey, has led us to nudge down our numbers slightly, from a contraction of 11.7% to one of 12.2% in 2020. The average, or consensus forecast for UK GDP this year has dropped from -5.2% in April to -9.2% today. In 2021, we see the economy growing by 9%, up from our previous estimate of 8.5%.
- The easing of the lockdown in June and July should deliver a strong increase in activity and we are forecasting growth of 11.4% in the third quarter. This, like much else these days is unprecedented, but would represent a clawing back of just over half the loss of GDP sustained in the second quarter. The pace of the recovery is likely to be slow and we do not expect overall levels of activity to reach pre-pandemic levels until the summer of 2022.
- For corporates, the pandemic overshadows all other causes of concern. CFOs rate it as the greatest risk facing their businesses – and by a wide margin. As new fronts open in the ongoing US-China economic conflict, geopolitics is ranked second on their risk list while Brexit takes the third spot.
- Against a backdrop of elevated uncertainty and very weak demand, CFOs are firmly focused on protecting their balance sheets by bearing down on costs and building cash. Official data confirm that corporates’ are building cash reserves, and at the fastest pace on record. Views on corporate leverage have changed too. In the last ten years, CFOs have been relaxed about levels of corporate debt. But, following a recent surge in borrowing, the balance of opinion among CFOs is that corporate balance sheets have become overleveraged.
- Growth in business investment, which has slowed markedly since the EU referendum, is facing a continued squeeze. Almost two-thirds of CFOs expect their capital expenditure to decrease over the next three years due to a combination of the COVID-19 pandemic and the UK leaving the EU.
- As the lockdown eases growth will rebound. But UK corporates are planning on a slow recovery, one in which corporate revenues and activity remain below normal well into next year.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 3% at 6,288.
COVID-19
The World Health Organization reported a record increase in confirmed cases worldwide, with cases rising by nearly 260,000 in 24 hours
Two-thirds of new cases are occurring in the US, Brazil, India and South Africa
In the US, over 70,000 new cases were recorded in one day, roughly twice the level seen during the previous peak in April
California ordered the closure of bars and restaurants in response to surging infections
South Africa has seen a sharp rise in the number of new cases leading to the re-imposition of lockdown measures and a ban on alcohol sales
In the UK, the seven-day moving average of new cases rose to 610 on 18 July, up slightly from 581 on 11 July. The peak was 4,884 cases on 14 April
UK prime minister Boris Johnson said he does not want to impose a second national lockdown in the event of another COVID-19 outbreak
Mr Johnson announced a further loosening of lockdown restrictions, reopening most remaining leisure facilities and dropping advice that public transport should be used for essential journeys only
Mr Johnson also announced that employers will have “more discretion” over whether to bring staff back to workplaces from next month
The UK government announced that wearing masks will become compulsory in shops from 24 July
US retail chains Walmart, Kroger and Kohl’s will require customers to wear masks in their stores
US biotech company Moderna published results showing its vaccine has successfully produced an immune response in an early trial
A study of workers at a central London hospital found that the immunity to COVID-19 may decline over time, raising the possibility of re-infection
The Academy of Medical Sciences warned that the UK could see an additional 120,000 deaths this winter in a reasonable worst-case scenario but warned of the “high degree of uncertainty” over the future path of the pandemic
Economic developments
UK GDP grew by 1.8% in May from the previous month, a slower recovery than was anticipated after a fall of 6.9% in March and a record 20.4% decline in April
The number of workers on UK company payrolls fell by 649,000 between March and June
A British Chambers of Commerce survey found that 29% of UK businesses expect to cut jobs over the next three months
The number of job adverts for IT workers rose 15.5% last week compared to the same period in June, according to the Recruitment and Employment Confederation
The Office for Budget Responsibility (OBR) said that the UK government would need to raise £60bn in taxes or spending cuts in order to put the public finances on a secure footing after the COVID-19 crisis
The OBR said that in its worst-case scenario, £34bn of business loans guaranteed under the government support schemes would need to be written off
UK chancellor Rishi Sunak said he was not convinced the government should take equity stakes in companies that have borrowed under state-backed COVID-19 schemes. The Treasury is understood to be considering how it might tackle the higher levels of corporate debt which have developed as a result of the COVID-19 crisis
UK inflation rose slightly in June to 0.6%, but remained well below the Bank of England’s target of 2%
The UK government announced new border infrastructure plans as the UK prepares to leave the arrangements of the European Union. Businesses will need to fill out 215 million customs form, costing nearly £7bn a year
The FT reports that several large UK companies have begun stockpiling essential products as part of plans to mitigate the impact of the UK’s possible effective exit from the EU without a deal at the end of the year
The UK events industry is at risk of losing 30,000 jobs as the government has not yet announced when conferences, exhibitions and other events can return, warned trade body the Events Industry Alliance
China’s economy grew 3.2% in the second quarter following a record 6.8% decline in the first quarter
Euro area banks warned that they expect to tighten the provision of credit to businesses in the third quarter because they anticipate governments will scale back their loan guarantee schemes, according to a European Central Bank survey
Policy Response
The UK government announced an extra £3bn of funding for the NHS to prepare for a possible second wave of infections
The UK announced a review of the Capital Gains Tax regime, in a move that was seen by some as laying the groundwork for increases in the levy. The Treasury said the review was to “ensure the system is fit for purpose”
European Central Bank president Christine Lagarde held back from deploying further monetary stimulus but warned that risks “remain on the downside”
EU leaders are meeting in an attempt to agree a €750bn stimulus package to support the post-COVID-19 recovery. Countries are split on whether the fund should be financed by grants or loans, with German chancellor Angela Merkel saying "the differences are very very big and I cannot say if we will find a solution this time"
French president Emmanuel Macron announced a further €100bn in spending to support France’s economic recovery
Business news
UK outsourcer G4S is to cut 1,000 jobs in its cash handling division as the move away from cash to digital payments has been accelerated by the COVID-19 crisis
British Airways will retire its Boeing 747 fleet of 31 aircraft due to the downturn in the travel industry
Streaming company Netflix told investors that subscription “growth is slowing as consumers get through the initial shock of coronavirus and social restrictions”
Politics
An ABC News/Washington Post poll released yesterday shows Donald Trump 15 points behind Joe Biden among registered voters on 40% vs Biden’s 55%. The margin among likely voters is 54% Biden and 44% Trump. Biden has led Trump by double digits in seven of the nine telephone polls conducted since the second half of June
The UK banned Chinese telecoms firm Huawei from providing new 5G equipment to UK mobile providers and ordered UK firms to remove all existing Huawei kit from their infrastructure by 2027
China said the decision had reduced the UK to a “vassal state of the US” and vowed to take any measures necessary to defend the country’s commercial interests
The US is considering banning Chinese social media company TikTok as friction between the US and Chinese governments increases
The UK government published plans for how a UK-wide internal market will operate once the country leaves the arrangements of the EU. The Scottish and UK governments disagree over the extent to which powers that currently reside with Brussels should be devolved to the UK nations
And finally… the landlord of the Star Inn in St Just, Cornwall has found an innovative solution to encourage social distancing at his pub – he has installed an electric fence in front of the bar to prevent customers standing too close. Landlord Jonny McFadden invited people to “come and find out” if it was switched on – an abuse of power?