What happened over the summer

What happened over the summer

Following a break over the summer our COVID-19 webinar returns this Thursday, 10 September, at 13:00 BST. Our regular presenters, Ian Stewart and Karen Taylor, will assess where we stand on the economy and public health as we head into the final quarter of the year. To register for this 30-minute webinar please visit: https://ukinfo.deloitte.com/kR0Ew0250MA02GQmQr01U0I

• This week’s Monday Briefing looks at economic developments over the summer and covers our new, upgraded forecasts for UK growth.

• Having appeared to stabilise in July and August the number of new cases of COVID-19 globally has edged up to new highs in the last fortnight. Europe is seeing a second wave, particularly in Spain and France, but the case rate in the US has fallen. The centre of the disease, both in terms of cases and deaths, has shifted to emerging markets, particularly Latin America, Mexico and India. Death rates in the US and western Europe have fallen suggesting that more effective shielding of vulnerable groups, improved treatments and increased testing are paying off (next week’s Briefing will examine the global health picture in detail).

• Rising case rates in many emerging markets have weakened growth prospects in much of South Asia and Latin America. Growth forecasts for advanced economies, which collapsed in the first half of the year, appear to be stabilising. The rich world is on course for a strong bounce in third quarter growth following the reopening of swathes of activity although the picture varies across countries. The momentum of growth in August, for instance, was stronger in the US, UK and Germany than in France and Spain where the resurgence of the virus seems to be weighing on activity.

• Policy has been eased, but not uniformly. In July EU leaders agreed a historic €750bn stimulus package, financed for the first time by collective EU borrowing. Germany and France announced significant new spending measures and tax cuts. In an important easing of US monetary policy the Federal Reserve last month switched from a 2.0% inflation target to targeting an average inflation rate of 2.0%. The Democrats and the Republicans were unable to agree on a further stimulus package and a special, higher rates of unemployment benefit lapsed in August.

• US politics moved centre stage with the Democratic and Republican conventions in late August. An average of recent polls by RealClearPolitics has Joe Biden 6.9 percentage points ahead of Donald Trump in the race for the White House, down from an 8.6 percentage points lead in mid-July. Forecasting models based on polling data show a 70% plus probability of a Biden win. But betting market odds on a Trump victory have shortened, perhaps because of the growing salience of law and order. RealClearPolitics reports that an average of betting odds gives Mr Biden a 50.5% chance of winning the presidency compared to a 48.8% chance of victory for Mr Trump.

• The main news in currency markets has been the weakening in the US dollar, down 8% against the euro and almost 9% against sterling since mid-May. This seems odd given that the dollar is usually a safe haven in times of uncertainty and other ‘safe’ assets, including gold and government bonds, have been rising in value. The decline in the dollar has been variously attributed to the easing of the Fed’s inflation target, the growing toll taken by COVID-19 and an increasingly fractious domestic US political scene.

• Global equities rose over the summer, lifted by buoyant US tech stocks and a resurgent Chinese equity market. The UK FTSE 100 has had a torrid few months and is now trading about 10% below levels seen in early June.

• The near-term outlook for the UK economy has brightened. Warm weather, pent-up demand, a rise in staycations, the ‘Eat Out to Help Out’ initiative and reduced rates of stamp duty have helped lift retail and housing activity. The broadest and most timely measure of output, from the purchasing managers, shows UK output growth running ahead of China, the US or the euro area in August. GDP growth in the third quarter will be boosted by the resumption of non-essential NHS operations and the reopening of schools in September. (The closure of schools contributed nearly two percentage points to the 20.4% decline in second quarter GDP, and we expect a similar size boost to output this quarter.)

• The stronger tone to the monthly data has led us to raise our forecast for third quarter UK growth, from an increase of 11.4% to 15.0%. This is a record rate of growth – but it would only partially make up for the 22% contraction in the economy in the first half of the year.

• Our forecast for UK growth for 2020 as a whole also rises, from a previous contraction of 11.6% to one of 10.1%. For 2021 we see the UK economy growing by 7.5%.

• The recovery is likely to slow from the fourth quarter as the initial boost from pent-up demand fades and the furlough scheme is wound down. (After increasing by 15.0% in the third quarter we see UK GDP growth rising 4.2% in the fourth quarter.) It will be an odd recovery, with historically strong rates of quarterly growth accompanied by elevated unemployment and stress in household and corporate finances. Even on our new, relatively positive forecasts, levels of activity would not return to pre-crisis rates until late 2022.

• The worst of the COVID-19 recession is probably behind us. But without a vaccine the return to anything approximating to normal is likely to be slow and fraught.

For the latest charts and data on health and economics, visit our COVID-19 Economics Monitor:

https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF LAST WEEK’S NEWS

The UK FTSE 100 equity index ended the week down 2.8% at 5,799, the lowest level since May.

COVID-19

• The UK recorded 10,043 new cases in the week to 4 September, up from 8,088 the previous week
• France and Spain recorded their highest new daily infections since March and Italy since early May
• India recorded 2m cases in August, a global record, while new daily cases continue to rise in September
• The World Health Organisation recommended the use of cheap steroids for treating severely ill COVID-19 patients
• The UK committed £500m to trials of mass rapid COVID-19 testing and to scale up testing capacity for the winter months
• The US government said that it will not join the COVID-19 Vaccines Global Access (COVAX) Facility, a global coalition to develop and equitably distribute a COVID-19 vaccine
• 74% of respondents said they would be willing to be vaccinated against COVID-19, according to a World Economic Forum/Ipsos global survey. Results ranged from 97% in China and 87% in India to 59% in France and 54% in Russia
• Apple and Google announced a new contract-tracing tool that is embedded in smartphone operating systems and does not require the installation of an app, in hopes of boosting uptake
• Economic developments
• In the second quarter GDP contracted by 7% in Australia, 9.7% in Brazil, 23.9% in India, 18.9% in Mexico and 9.9% in Turkey
• The US ISM manufacturing PMI rose sharply in August, to the highest rate of expansion since November 2018
• The US added 1.4m jobs in August and the unemployment rate fell to 8.4% from 10.2% in July
• The euro area unemployment rate rose to 7.9% in July from 7.7% in June, with government furlough schemes limiting job losses
• Euro area retail sales contracted by 1.3% in July following growth of 5.3% in June
• UK mortgage approvals rebounded sharply in July to near pre-pandemic levels. Nationwide’s measure of average UK house prices hit a record high in August
• UK new passenger car registrations fell by 5.8% year on year in August, after rising by 11.3% in July
• US equity markets fell sharply, driven by a correction in large cap technology stocks

Policy response

• France announced a €100bn (4% of GDP) supply-side fiscal package focused on green energy, transportation, skills training and business tax relief. It expects to fund €40bn of the plan via grants from the EU joint-recovery programme
• The UK’s ‘Eat Out to Help Out’ scheme subsidised 100m restaurant meals in August at a cost of £522m
• The US banned rental evictions until the end of 2020 after a previous moratorium on evictions expired in July

Business news

• US corporate bond issuance has totalled $1.919tn this year, according to Refinitiv, already exceeding the full-year record set in 2017
• UK café chain Pret A Manger is launching a £20/month coffee subscription service, a delivery service and more suburban branches
• Costa Coffee expects to cut 1,650 jobs in the UK
• Virgin Atlantic plans to cut 1,150 jobs in addition to the 3,500 jobs it has already cut out of its 10,000-employee workforce
• Amazon announced the creation of 7,000 new jobs in the UK in addition to the 3,000 new workers it has hired in response to higher demand during the pandemic
• UK supermarket Co-op plans to create 1,000 new jobs and to open 50 stores
• The Premier League terminated its three-year $700m TV deal with Chinese broadcaster PPTV

Politics

• China expanded its list of restricted exports to cover the technology used in TikTok, which could complicate the sale of TikTok’s US operations to a US-based owner
• The latest Economist US election model shows Joe Biden winning 54.1% of the vote against 45.9% for Donald Trump, a slightly narrower gap than in recent weeks. It gives Mr Biden an 83% chance of winning the electoral college, securing 334 votes against 204 for Mr Trump (270 are needed to win)
• An average of betting odds gives Mr Biden a 50.5% chance of winning the presidency, against 48.8% for Mr Trump, according to RealClearPolitics
• Facebook will block new political advertisements in the week leading up to the US presidential election

And finally… airline pilots in Los Angeles have reported seeing “a guy in a jet pack” at 3,000 feet. The FBI is investigating the incident after two pilots on separate flights reported seeing the individual from the cockpit, one of whom said they were just 300 yards from the plane, at the same altitude – rocket man