Shock, not surprise
In the 15 months from February 2008 to May 2009 during the global financial crisis Britain’s economy shrank by 6.8%. In the one month from March to April this year the economy shrank by 20.4%. Gross domestic product is now smaller than it was 18 years ago.
April’s slump was a bigger contraction than the -18.4% predicted by analysts but it hardly came as a surprise, given the government-enforced shutdown of most of the services sector. Inevitably the quarterly shrinkage for Q2 will a sizeable one but there is a consensus that April will mark the bottom of the trough and May will bring relative growth.
As for how the recovery will pan out, there are almost as many theories as economists. Most agree that it will not come rapidly. The return to pre-lockdown levels of GDP will take “years not weeks”, even if the initial bounce is fairly steep as people return to work en masse. Sterling is so far quite relaxed about the situation. It fell an average of 0.2% on Friday, losing half a US cent, but was unchanged against the euro.
Resignation not surprise
Looking ahead, the uncertainty is compounded by the possibility of a no-deal Brexit, which could well return to the front pages tomorrow after the Prime Minister’s conference call with EU presidents. Unfortunately, the UK government’s optimism that a trade deal can swiftly be done is not borne out by the lack of progress to date.
If today’s talks perpetuate the notion that the rule-keepers in Brussels and the ideologues in Number 10 will never see eye to eye, it will reawaken the concerns about a no-deal Brexit that have in recent months been pushed onto the back burner by the tragedy of Covid-19. As long as the two sides cannot come to an accommodation, and assuming the Prime Minister sticks to his 31 December D-Day, an abrupt departure from Europe would be less than helpful to an already lockdown-scarred UK economy.
The more likely a no-deal Brexit, the greater the threat to sterling. Ever was it thus, even if it was has not always been at the forefront of investors’ thinking. The scale of the possible damage is, however, up for grabs. From its position prior to the referendum four years ago the pound has already fallen by around 15% against the US dollar, the euro and the Swiss franc. To some extent a crash-out is already built into sterling’s price. For the moment though, it must surely be considered a non-essential purchase.
In England today non-essential shops will be allowed to reopen and non-medical face masks will become mandatory on public transport. Investors will do their best to see these and other signs of activity as green shoots that herald a return to the new economic normality. They will not get much inspiration from the ecostats though.
Overnight the Business NZ performance of services index came in at 37.2, up by 11.5 points on the month but still no great shakes. Figures from China put retail sales in May 2.8% below their level in the same month last year. Industrial production was up by 4.4% on the year.
Italian inflation and the euro zone balance of trade are the only Euroland statistics. South African business confidence, Canadian manufacturing sales and the New York Fed’s manufacturing index complete the list. Tonight come NZ consumer confidence, Japanese monetary policy, the RBA minutes and house price indices from NZ, Britain and Australia.