E3: Bank of England warns of worst contraction in centuries, as economic activity slumps - business live
UK is suffering fastest and deepest slump in “possibly several centuries”, warns BoE policy maker Jan Vlieghe
- Latest: Vlieghe says UK faces historic shock
- UK economy shrinking fast
- UK flash PMI has fallen to just 12.9 (record low)
- Eurozone PMI also hits record low
- UK to issue £225bn of new debt by July
Two of Britain’s big house builders, Taylor Wimpey and Vistry Group (formerly known as Bovis) have announced they will resume building work soon, having suspended operations under the lockdown.
My colleague Julia Kollewe explains:
Vistry said it would restart building houses on Monday. Since the covid-19 lockdown began four weeks ago, the company has taken 132 reservations net of cancellations, exchanged on 170 homes and legally completed 193 private sales.
Taylor Wimpey is to go back to its housing sites on 4 May, with subcontractors returning from 11 May. During the shutdown the firm added more than 200 homes to its £2.6bn order book.
Bank of England policymaker Jan Vlieghe also defended the stimulus measures announced by the Bank of England since the Covid-19 outbreak began.
If we were the central bank of the Weimar Republic or Zimbabwe, the mechanical transactions on our balance sheet would be similar to what is actually happening in the UK right now. That is not where you would find the smoking gun.
The difference would be that government would be telling the central bank what to do, implicitly or explicitly, in order to achieve fiscal objectives while subordinating any inflation objectives, a situation also known as fiscal dominance.
One of the Bank of England’s top policymakers has warned that the UK could be suffering its worst economic shock in several hundred years.
Jan Vlieghe, a member of the BoE’s interest-rate setting committee, made this warning in a speech just released:
Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.
Social distancing, in part voluntary and in part imposed, means that a wide range of consumption activities are sharply reduced or simply not taking place. Shopping in physical stores, recreational activities, personal services, and a long list of other types of spending have been sharply reduced.
As a result, the businesses that normally provide these goods and services have sharply reduced activity, or shut down entirely. Absent any policy response, most of the employees of these businesses would lose their jobs, and face a dramatic reduction in income. In contrast, those working in sectors whose output is still in demand, for example food retail and online businesses, face no reduction in income at all or even experience increased income.
Andy Bruce of Reuters has a good take on this morning’s alarmingly bad UK economic data, for those just tuning in:
Coronavirus hit Britain’s economy in April with more force than even the most pessimistic forecasters had feared as businesses reported an historic collapse in demand during a nationwide lockdown, a survey showed on Thursday.
The IHS Markit/CIPS Flash UK Composite Purchasing Managers’ Index (PMI) fell to a new record low of 12.9 from 36.0 in March - not even close to the weakest forecast in a Reuters poll of economists that had pointed to a reading of 31.4.
Coronavirus brings UK economy to its knees in April: PMI https://t.co/B401p6KpFS
Everyone’s agreed - the UK PMI report is just awful.
Even though we know the economy is in deep-freeze right now, the extent of the decline is still shocking.
“Though this significant and further deterioration from last month’s results came as no great surprise, it is no less devastating. Manufacturing output sometimes shrank into almost nothing as the pandemic’s grip took hold and factory closedowns at home and abroad made regular production schedules impossible. Supplier delivery times lengthened to an unprecedented extent. Some manufacturers commented on switching plant capacity to assist healthcare supply chains.
Meanwhile, service providers ramped up their online operations to survive, but others just hit a dead stop, shedding jobs and facing extreme cash flow difficulties.
The toll on services activity was particularly heavy reflecting the effective shutdown of several sectors.
We expect the economy to contract around 13% quarter-on-quarter in the second quarter on the assumption that there is some lifting of restrictions on activity during the quarter. We see GDP contracting 6.8% over 2020.
The collapse in the UK services, manufacturing and composite PMIs - key measures of activity in the economy - are unlike anything you’ve ever seen before. Well, unless you’ve just seen the ones for France and Germany. Not just worse than the financial crisis. Leagues worse. pic.twitter.com/bfJZqgF7U0
UK, French and Eurozone PMI data (basically an index of economic activity in manufacturing and service). These figures are woefully bad; unprecedented and worse than expected. Depression level stuff. pic.twitter.com/yw0dypC3Sy
April is a particularly cruel month for Britain’s textile and car-making industries, Markit says:
In manufacturing, the sharpest drop in output was registered in the textiles & clothing sector, largely reflecting collapsed demand from the retail sector, though the transport sector, including car production, also reported an especially steep decline
Customer-facing service providers often reported a complete shutdown of their business operations in April amid the public health emergency, while a wide range of survey respondents commented on weaker demand following temporary closures among their client
April’s grim PMI report suggests the UK could shrink by 7% this quarter -- but that could actually be an under-estimate!
Chris Williamson, Chief Business Economist at IHS Markit, explains:
Business closures and social distancing measures have caused business activity to collapse at a rate vastly exceeding that seen even during the global financial crisis, confirming fears that GDP will slump to a degree previously thought unimaginable in the second quarter due to measures taken to contain the spread of the virus.
“Simple historical comparisons of the PMI with GDP indicate that the April survey reading is consistent with GDP falling at a quarterly rate of approximately 7%. The actual decline in GDP could be even greater, in part because the PMI excludes the vast majority of the selfemployed and the retail sector, which have been especially hard-hit by the COVID-19 containment measures.
The message from today’s survey of UK businesses is clear -- output and employment have absolutely tumbled this month, much faster than during the financial crisis:
Four fifths of the UK service companies surveyed by Markit reported a drop in activity this month, as did 75% of manufacturers.
This was “overwhelming attributed to the COVID-19 pandemic.”
Newsflash: Britain’s economy is shrinking at an unprecedented rate this month, matching the slump in the eurozone.
Data firm Markit’s UK Composite PMI, which tracks activity across the economy, has slumped to just 12.9 for April. That’s down from 36 in March, and much worse than the the most pessimistic forecasts.
Chris Williamson, chief business economist at IHS Markit, predicts that the eurozone economy could shrink by 7.5% this quarter - judging by today’s dire survey of purchasing managers.
“April saw unprecedented damage to the eurozone economy amid virus lockdown measures coupled with slumping global demand and shortages of both staff and inputs.
The extent to which the PMI survey has shown business to have collapsed across the eurozone greatly exceeds anything ever seen before in over 20 years of data collection. The ferocity of the slump has also surpassed that thought imaginable by most economists, the headline index falling far below consensus estimates.
Newsflash: The eurozone economy is suffering the steepest falls in business activity and employment ever recorded this month, as it sinks into recession.
The eurozone-wide composite PMI, just released, has hit an all-time low of 13.5 in April, down from a prior record low of 29.7 in March.
The eurozone economy suffered the steepest falls in business activity and employment ever recorded during April.
Europe isn’t alone, of course. Earlier today, Japan’s PMI survey dropped to alarmingly low levels:
Wow! #Japan's Services #PMI collapsed to just 22.8 in April. pic.twitter.com/VgLbPEV6D7
"A devastating services report, but we see light at the end of the tunnel in manufacturing" @freyabeamish @mc_economist on #Japan Flash PMIs, April #PantheonMacro
We have gone from PMIs in 20s, teens and now shoe sizes https://t.co/73Hqfk8pQR
The unprecedented slump in French and German growth this month has knocked the euro.
The single currency has dropped below $1.08 for the first time in over two weeks, down 0.3% today.
$EUR not liking April PMI readings out of Germany & France. Sign that markets beginning to respond to data. Divergences to appear going forward based on speed at which economies bottom & turn the corner. For now risk on the backfoot as data shows size of contraction to be brutal pic.twitter.com/kCPCtABAj1
NEWSFLASH: The French and German economies are contracting at an unprecedented rate this month under the lockdown.
Data firm Markit’s latest surveys of purchasing managers, just released, shows that business activity in both countries slumped dramatically.
French private sector activity continued to plunge in April, with ongoing business closures stifling both supply and demand.
2. France preliminary April PMI at 11.2. pic.twitter.com/oEuujKq7EJ
The decline in business activity across Germany deepened in April, with both services and manufacturing seeing record decreases in output as a result of the COVID-19 pandemic and subsequent lockdown....
Businesses reported a collapse in demand from clients both at home and abroad in April. The rate of decline in overall inflows of new work far exceeded the previous record seen in March, with new business received from abroad falling at a similarly sharp pace. In both cases, the decline was led by the service sector
More gloomy news from Eurozone: #Germany's Apr Flash Comp PMI falls to 17.1 from 35 in March, lowest reading since series began. German Apr Services PMI PMI crashes to 15.9 vs 28 expected. pic.twitter.com/YfvyYD2d09
To put today’s plans into context, the UK only grew its national debt by £48.7bn in the last financial year:
Borrowing in the full 2019 to 2020 financial year was £48.7 billion, £9.3 billion more than the previous year and £1.3 billion more than the Office for Budget Responsibility forecast https://t.co/m3MobvO6PZ pic.twitter.com/B8ICxYdB2T
Today’s borrowing plans have brought home just how eye-wateringly expensive the Covid-19 lockdown will be.
Duncan Weldon of The Economist points out that the UK will now borrow more in four months than it previously planned for the whole financial year.
New UK gilt issuance timetable.
Yes, £225bn in four months is *a lot*.
Context: the original financing plan for all of financial year 2020/21 (as published at the budget a million years ago/last month) was £162bn. pic.twitter.com/CKIEIi8DFK
A lot of debt for years and years to come...@hmtreasury says it wants to raise £225bn in April to July by selling bonds (that’s Govt debt).
The pre-Coronavirus plan was to raise around £160bn for the whole year. pic.twitter.com/IWgLYdMzgF
Wow. The UK will raise £180 billion in government bond sales in just THREE MONTHS between May and July
Breathtaking numbers
HM Treasury also confirms all financing requirements will be through normal channels - ie the Debt Management Office selling Gilts.
Expected that much more borrowing will be done in the first 4 months of fiscal year (starts April) and not expected to continue for rest of year
So totals:
April: £45bn
May-July: £180bn
Total Apr-July: 225bn
The UK has announced plans for a massive surge in borrowing over the next few months, to cover the cost of the Covid-19 pandemic.
Britain’t Debt Management Office says it plans to issue £180bn of bonds between May and July.
This remit revision takes into account implications for the government’s financing requirement of all measures announced by government to date to support the economy through the period of disruption caused by COVID-19.
Wow. If you want to know how much Covid support is costing look at HMG's revised gilt issuance today. £225bn in total, in first four months of financial year. £45bn for April was already a record, now another £180bn May-July
“This higher volume of issuance is not expected to be required across the remainder of the financial year.”
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
A fresh blizzard of data today will show us just how badly the world economy is suffering from the Covid-19 downturn.
Sentiment clearly remain fragile and that could be magnified with the release of the PMI readings for the UK and Eurozone.
The service sector accounts for 80% of UK economic activity. In March the UK service sector contracted at the fastest pace on record, dropping to 34.5 on the index. And that was only the beginning of lock down! This months’ reading is expected to dive deeper into contraction territory to 29.
Over the last 4 weeks, a cumulative total of more than 22m claims have been made, which is around the number of jobs that were created in the decade of expansion. So it’s no exaggeration to call the scale of the declines unprecedented.
Two highlights today
- & Flash PMIs (Apr):Services & composite set to print fresh record lows, watch supplier deliveries impact on manufacturing
- Initial Jobless Claims (Apr 18): Pace of claims set to slow slightly, but still elevated, exp. 4.15mln