Time to recap

Britain is facing its worst recession in 300 years, according to the latest scenario from the Bank of England. The BoE estimates that GDP will plunge by 25% this quarter, with unemployment hitting 9%, due to the abrupt halt to activity under the Covid-19 lockdowns.

The BoE’s scenario shows the economy shrinking by 14% during 2020 as a whole, followed by a recovery of 15% in 2021.

BoE governor Andrew Bailey said the slump was unprecedented, but he hopes GDP will bounce back once the pandemic is over.

Economists cautioned that the economy may not recover as strongly as the Bank hopes, due to the damage caused by the virus.

The Office for National Statistics has reported that two-thirds of firms have tapped the UK Job Retention scheme and furloughed some workers. It also estimates that roughly a quarter of companies are currently closed, particularly in the hospitality sector.

In America, another 3.1 million people have lost their jobs last week, lifting the total to around 33 million.

But stock markets have jumped in Europe and in New York, on hopes that lockdown measures will soon be eased successfully.

Hugh Grieves, US equities investment manager at Premier Miton, explains:

US Initial Jobless Claims fell to 3.2m, down from the previous week’s figure of 3.8m and half the peak recorded 5 weeks ago, but roughly in line with economists’ forecasts. These figures support estimates of the April unemployment figure, to be released tomorrow, to reach a shocking 16%.

“Markets, however, are now looking beyond the employment data and forward to the potential recovery. With some US states now beginning to reopen for business, investors will be watching closely to see how quickly employees return to work and how rapidly economic activity bounces back.

Goodnight. GW

The gloom in the luxury goods sector is deepening even though some countries have started to relax their coronavirus lockdowns.

Global sales of luxury handbags, clothes, watches and cosmetics are set to slump by 50% to 60% between April and June, compared with an estimated 25% decline in the first three months of the year, the consultancy Bain says in its spring report.

For 2020 as a whole, Bain is predicting that luxury sales will fall by 20% to 35%, and it will take two to three years to return to last year’s sales of $303bn. Shops in China have started to reopen and Chinese consumers are expected to account for nearly half the market by 2025.

Bain partner and report co-author Federico Levato says:

“As consumers slowly emerge from lockdowns, the way they see the world will have changed and luxury brands will need to adapt.

Safety in store will be mandatory, paired with the magic of the luxury experience: creative ways to attract customers to store, or to get the product to the customer, will make the difference.”

Luxury accessories such as handbags have fared a bit better while watch sales declined the most, because of a lack of online sales platforms.

Newsflash: Another 3.1 million Americans filed new claims for unemployment benefit last week, as the US jobless crisis rages.

That’s down from 3.8m in the previous week, but still another awful number.

It lifts the total number of new ‘initial claims’ for welfare since the crisis began to around 33 million people.

The US Labor Department also reports that 22.6 million people filed ‘continued claims’ (meaning they’ve been receiving help for more than one week).

Our economic editor Larry Elliott says the BoE is pinning its hopes on a V-shaped recovery to GDP - and pushing banks to do their bit.

One of the key messages from the Bank to the high street lenders was that they stand to lose more by not lending than they will by lending freely, because there will be more long-term scarring of the economy, more companies going bust and more losses for them to swallow. At his press conference, the Bank’s governor, Andrew Bailey, said he was ramming home this point to lenders at at every opportunity.

But is this forecast too optimistic? Quite possibly, Larry adds:

Forecasting is tough at the best of times: in the current circumstances – where there is uncertainty about how fast restrictions will be lifted, how consumers will behave, and whether there will be a second wave of infection – it is all but impossible.

All that can really be said is that the risks to the Bank’s scenario are skewed heavily to the downside. Threadneedle Street decided against providing more stimulus at this week’s meeting, but it is only a question of time.

In the event that the pandemic does return, Bailey said the Bank would find new tools from somewhere. That might sound a bit like Mr Micawber saying “something will turn up” but broadly sums up current thinking: this is bad, but somehow or other we will get through it.

Just in: nearly a quarter of UK firms have temporarily closed due to the pandemic, and two-thirds are furloughing some staff.

That’s according to the Office for National Statistics. It just reported that 23% of businesses who responded to its latest survey said they had “temporarily closed or paused trading” last month.

It adds:

• Of businesses that responded to our fortnightly survey for the period 6 April to 19 April 2020, the main sectors reporting they had temporarily ceased trading were accommodation and food service activities (81%) and arts, entertainment and recreation (80%).
• 67% of responding businesses had applied for the Coronavirus Job Retention Scheme (CJRS), with 28% of the workforce in these businesses being furloughed.

One word of caution --only 35% of the 17,623 businesses contacted by the ONS responded, but the picture is still pretty clear:

My colleague Richard Partington writes that the Bank of England has sounded the alarm about the slump in the UK economy this year:

The Bank of England has warned the British economy could shrink by 25% this spring and unemployment more than double as the coronavirus pandemic brings the country to an effective standstill.

Leaving interest rates on hold as the economic crisis unfolds, the central bank said economic activity across the country had fallen sharply since the onset of the global health emergency and the lockdown measures used to contain its spread.

Sounding the alarm over the mounting damage to the economy during the coronavirus outbreak, the Bank said GDP could shrink by 14% for 2020 as a whole.

Threadneedle Street’s nine-member monetary policy committee (MPC) voted unanimously to keep interest rates on hold at 0.1%, the lowest level in the bank’s 325-year history, after using two emergency cuts in March at the onset of the Covid emergency in Britain.

However, in a reflection of the scale of the economic shock, the rate-setting panel was split over increasing the Bank’s £645bn quantitative easing stimulus package, with two members voting for an immediate £100bn increase.

Here’s his full story:

Yael Selfin, chief economist at KPMG UK, fears the UK economy could shrink even more sharply than the Bank of England has forecast.

The Brexit cliff-edge at the end of the year, when the UK-EU withdrawal agreement ends, creates added uncertainty, she writes:

“Despite the stark numbers issued by the Bank of England today, additional pressure on the economy is likely. Some social distancing measures are likely to remain in place until we have a vaccine or an effective treatment for the virus, with people also remaining reluctant to socialise and spend. That means recovery is unlikely to start in earnest before sometime next year.

“Looking at the medium term, beyond the impact of reduced investment, other forces could to be in play dampening future productivity. Supply chains are likely to be reconfigured in light of this crisis, potentially increasing geographical diversification and reducing efficiency in order to increase resilience. ‘Just in time’ operations are also likely to be a thing of the past, further eroding productivity. On the other hand, we could see significant consolidation among SMEs, lifting productivity among the long tail of underperforming businesses.

“Brexit is another significant downside risk for this year’s outlook, with the probability of a smooth transition to a comprehensive free trade agreement with the EU in January relatively small, adding further uncertainty to businesses and the prospect of increased trade frictions next year.”

Adrian Lowcock, head of personal finance at investment platform, Willis Owen, says the Bank of England’s forecast of a 14% slump in GDP this year is ‘the stuff of nightmares’

The only good news today is that the Bank expects this economic bombshell to be short-lived, and for the economy to bounce back rapidly. However, the MPC itself concedes it is flying blind to a large extent, warning that a pandemic like this is “especially difficult to quantify”.

Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, predicts the BoE will boost its stimulus package soon (reminder: two MPC members wanted to increase its QE programme)

“While the Bank of England did not change its monetary policy stance at today’s meeting, it is surely only a matter of time before they decide to. The 7-2 split on whether to increase asset purchases indicates a continued dovish bias from certain voting members.

With the Bank hoovering up gilts equivalent to those issued since the additional £200 billion in quantitative easing was announced, it will run out of firepower to support government spending within in months. Therefore, expectations will be high for an increase in the purchase target at the next meeting in mid-June.

The Covid-19 pandemic has forced the Bank of England to delay its much-anticipated bank climate stress tests.

The central bank has concluded that UK banks have enough to deal with, without calculating how they are positioned to handle the climate emergency (a key concern for former governor Mark Carney).

“Recognizing current pressures on firms, and in light of the responses to the December 2019 Discussion Paper on the Climate Biennial Exploratory Scenario, the PRC and FPC have agreed to postpone the launch of the exercise until at least mid-2021.

This delay reflects a desire to maintain the ambitious scope of the exercise, whilst giving firms enough time to invest sufficiently in their capabilities to allow them to deliver to a high standard.”

It has also decided to pause insurance stress tests. The Bank of England will not publish the results of last year’s exercise and is postponing the next insurance stress test to 2022.

There is some good news.... the Bank of England is confident that Britain’s banks can ride out the Covid-19 pandemic, and handle a 14% plunge in GDP this year.

It says the banking sector is sufficiently capitalised to cover losses during the outbreak, especially as the BoE is providing more support to the sector.

The BoE explains:

Businesses and households will need to borrow to get through this period. We want banks and building societies to expand lending. We have tested the major UK banks. They are strong enough to keep lending, which will support the economy and limit losses to themselves.

We are offering more long-term funding to banks that increase their lending.

In particular, we will give extra funding to banks that offer more lending to small and medium-sized companies. These firms often need more support in times like these.

But while UK banks are equipped to keep lending throughout the downturn, the crisis is likely to wipe out half of their key capital buffers and result in impairment charges worth around £80bn. However, the BoE said that was less than the £100bn estimated as part of its last set of annual stress tests.

The Bank of England has produced a 20-minute video, explaining today’s monetary policy decisions and its new scenario for how the UK economy will shrink this year:

You can also ready more about the Covid-19 scenario in the Bank’s new Monetary Policy Report, online here. The Financial Stability Report can be seen here.

Reuters points out that the Bank of England is predicting the worst economic slump in centuries this year -- and a very strong recovery in 2021:

The Bank of England held off further stimulus measures but said it was ready to take fresh action to counter the coronavirus hammering which could cause the country’s biggest economic slump in over 300 years in 2020 before a bounceback in 2021.

The BoE said its Monetary Policy Committee kept Bank Rate at its all-time low of 0.1% and left its target for bond-buying, most of it British government debt, at £645bn.

However, two of its nine policymakers - Michael Saunders and Jonathan Haskel - voted for £100bn-worth of more bond-buying firepower.

In what it called an illustrative scenario, the BoE said it saw a plunge of 14% in Britain’s economy in 2020 followed by 15% bounce-back in 2021.

Such a scenario would require very significant monetary and fiscal stimulus, it said.

Many economists expect the BoE to increase its asset purchase programme next month, before the extra 200 billion pounds it gave itself in March is exhausted by the furious pace of its buying of British government debt.

“However the economic outlook evolves, the Bank will act as necessary to deliver the monetary and financial stability that are essential for long-term prosperity and meet the needs of the people of this country,” Governor Andrew Bailey said.

“This is our total and unwavering commitment.”

Despite the government’s efforts, the Bank of England predicts that unemployment will rise sharply in the next few months.

Its new Covid-19 scenario suggests the UK jobless rate could soon spike to 9% - up from 4% at present - even though the government is encouraging firms to furlough staff.

The BoE’s explains:

As activity has fallen, the number of people in work has dropped sharply. It is likely that the Government’s Coronavirus Job Retention Scheme (CJRS) has materially reduced the number of redundancies. Early data suggest that applications for furlough have been received from 800,000 companies covering over six million jobs.

The number of people furloughed might be a little lower, though, as some could have more than one furloughed job. While the CJRS has significantly limited job losses, the flow of new Universal Credit benefit claims and early indicators of redundancies suggest that unemployment has risen sharply over the past couple of months. The unemployment rate is expected to rise to 9% in Q2.

The Bank of England has forecast that the UK economy could shrink by 14% this year.

It has drawn up a new scenario, showing how the Covid-19 pandemic will hurt growth.

The spread of Covid-19 and the measures to contain it are having a significant impact on the United Kingdom and many countries around the world. Activity has fallen sharply since the beginning of the year and unemployment has risen markedly.

It predicts that GDP will contract by 25% in the current quarter -- a really serious slump -- before recovering later in the year.

The BoE explains:

The illustrative scenario incorporates a very sharp fall in UK GDP in 2020 H1 and a substantial increase in unemployment in addition to those workers who are furloughed currently. Given the assumed path for the relaxation of social distancing measures, the fall in GDP should be temporary and activity should pick up relatively rapidly.

Nonetheless, because a degree of precautionary behaviour by households and businesses is assumed to persist, the economy takes some time to recover towards its previous path. CPI inflation is expected to fall further below the 2% target during the second half of this year, largely reflecting the weakness of demand.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Some early breaking news: The Bank of England has voted to leave UK interest rates at their record lows, at its policy meeting today.

The BoE’s monetary policy committee voted 9-0 to hold borrowing cost at just 0.1%, where they were slashed back in March as the Covid-19 pandemic struck.

It is also maintaining its plan of buying another £200bn of government bonds to sooth the economy, although two committee members wanted to boost this quantitative easing stimulus package by another £100bn,

The BoE has also warned that the UK economy has taken a serious jolt since the pandemic struck, with sales falling sharply and employment rising.

The minutes of the meeting says:

The timeliest indicators of UK demand have generally stabilised at very low levels in recent weeks, after unprecedented falls during late March and early April. Payments data point to a reduction in the level of household consumption of around 30%.

Consumer confidence has declined markedly and housing market activity has practically ceased. According to the Bank’s Decision Maker Panel, companies’ sales are expected to be around 45% lower than normal in 2020 Q2 and business investment 50% lower.

There has been widespread take-up of the Coronavirus Job Retention Scheme. Nevertheless, sharp increases in benefit claims are consistent with a pronounced rise in the unemployment rate.

More to follow.... (it’s an unusually early start - we normally get these minutes at noon, but the BoE have brought them forward due to the lockdown).

Also coming up today

Halifax bank will publish their latest UK house price index, although the plunge in transactions since the lock-down might undermine the data.

New US unemployment figures are expected to show that another three million Americans filed new claims for unemployment benefit last week, on top of the 30 million already filed.

The agenda

• 7am BST: Bank of England’s interest rate decision and Monetary Policy report released
• 8.30am BST: Halifax UK house price index for April
• 1.30pm BST: US initial jobless claims for last week