The Times - UK (2020-08-07)

34 1GM Friday August 7 2020 | the times

Business

The economy is forecast to be 9.5 per

smaller by the end of the year, down

from an estimate of 14 per cent. This

would still mark the worst downturn in

a century and suggests that the lock-

down had a larger impact in Britain

than in other countries.

This is put down to social consump-

tion. Spending on things that typically

involve interactions with other people

— such as attending cinemas, restau-

rants or live sports events — represents

about 13 per cent of total UK output,

compared with about 11 per cent in the

US and 10 per cent in the euro area.

the recovery

Britain is hauling itself out from the

wreckage but the 15 per cent rebound

pencilled in for 2021 in May has been re-

vised down to 9.5 per cent. The eco-

nomy will take months longer to recov-

er to its pre-pandemic levels as the fear

of infection will continue to weigh on

spending and weak confidence will

hold back business investment.

The recovery is looking less rosy than

in May but even the revised forecasts

could prove too optimistic. The latest

report assumes that social distancing is

gradually eased and the country slowly

returns to normal. Regional spikes in

infection rates and the prospect of new

lockdowns could threaten this.

The Bank has not modelled for a

second wave but Andrew Bailey, the

governor, said it had assumed that

consumers would stay cautious. “We

don’t assume any explicit vaccine or

treatment. We do assume that the

uncertainty gradually attenuates as

there is progress in tackling Covid.”

employment

The fiscal response has centered on

saving jobs and the Bank’s forecast sug-

gests that government policies may

have worked. The Bank revised down

its forecast for peak unemployment

from 9 per cent to 7.5 per cent.

The bank estimates that six million

workers were furloughed on average in

the second quarter and most are ex-

pected to return to work. A 7.5 per cent

joblessness rate will take time to return

to its present rate of 3.9 per cent.

The forecasts may have improved

but they show the true damage is to in-

comes and livelihoods. This is because

many workers have moved from jobs to

inactivity as school closures meant that

many people stopped looking for work.

The Office for Budget Responsibility,

which includes inactivity in its measure

1

Boris Johnson is on a collision

course with Tory-controlled

local authorities by ordering

England’s more affluent areas to

release the most land for housing.

Local discretion over the rate of

building will go as government

will distribute an annual target, at

present 300,000 homes, among

local authorities. Page 6

2

The Bank of England warned

banks not to tighten credit

this autumn, saying

businesses face a £200 billion cash

shortfall. In evidence of its

concern that banks might call in

loans or fail to extend credit in

order to conserve capital, the Bank

said it was in their best interests to

keep lending. Page 33

3

The three brothers who have

steered Lakeland for almost

five decades are retiring and

handing over to outsiders. Julian,

57, Sam, 66, and Martin Rayner,

69, are resigning from the board of

the company their father founded

next month, although the families

will retain ownership. Page 33

4

Microsoft is exploring the

possibility of buying TikTok’s

entire business. The software

giant has been in talks with

Bytedance, Chinese owners of the

video-sharing app, to buy services

in the US, Canada, Australia and

New Zealand. Page 33

5

Hammerson has launched an

emergency rights issue and

proposed a sale of its interest

in a designer outlets business as it

battles to avoid the fate of Intu

Properties. The owner of the

Bullring in Birmingham wants to

raise £800 million to reduce its

£3 billion debt pile. Page 36

6

Glencore has scrapped its

dividend after falling to a

$2.6 billion first-half net loss.

The commodities group said that

it would be “inappropriate” to

proceed with the proposed

$2.6 billion payout given the

uncertain outlook. Page 38

7

The new boss at Aviva has

promised a shake-up and

signalled a retreat from

continental Europe and the Far

East. Amanda Blanc said that

difficult decisions would be made

to drag the company out of its

long underperformance. Page 39

8

A restaurant boss said that

the first three days of the Eat

Out to Help Out scheme had

been “astonishing”. David Page,

owner of the Franco Manca pizza

chain and The Real Greek, said

that the group’s restaurants were

“so busy even I couldn’t get a table

if I wanted one”. Page 40

9

ITV’s profits fell by 90 per

cent in the first half of the

year after the broadcaster shut

down productions and suffered its

steepest ever fall in advertising

revenue. Income fell 43 per cent in

the second quarter as companies

cut marketing during lockdown,

ITV said. Page 41

10

The construction industry

has recorded its strongest

monthly rise in activity in

nearly five years. The IHS Markit/

CIPS construction purchasing

managers’ index rose to 58.1 in

July from 55.3 in June, above

forecasts and a sharp rebound

from April’s low of 8.2. Page 43

Need to know

Bank lowers crash

forecast but warns

of slower recovery

A return to spending is

a welcome surprise but

policymakers still see

danger signs looming,

writes Gurpreet Narwan

Much has changed in the three months

since the Bank of England published its

last monetary policy report. Back

in May policymakers were predicting

the worst economic downturn in 300

years. The last time things looked so

bleak was in 1706, when the country

was embroiled in the War of the

Spanish Succession.

Yesterday, however, as the Bank pub-

lished its new report, it said the down-

turn caused by the pandemic would on-

ly be as bad as 100 years ago, when Brit-

ain was suffering from the aftermath of

the First World War and Spanish flu.

That change was brought about by a

shift in the Bank’s forecasts. It said that

the downturn in GDP this year may not

be as big as feared, as household spend-

ing had improved with lockdown eas-

ing. The bad news, however, was that

the recovery may be slower.

The V-shaped recovery predicted in

May looked a bit wonky yesterday, as

the Bank sought to temper hopes of a

quick swing back to pre-pandemic

levels. The Bank’s report included 58

pages on the outlook for the economy.

These are the main points:

the downturn

The lockdown has damaged the eco-

nomy less than feared. Official GDP

figures are due to be released next week

but the Bank said that they were most

likely to show that the economy was 20

per cent smaller by the end of June than

it had been in December. This was more

optimistic than in May when the fore-

cast was for a 30 per cent drop.

The Bank said that the lockdown was

being lifted faster than it had expected.

In May policymakers thought that the

rules would be unwound between June

and late September but most have

already been eased. The recovery in

June was stronger than expected.

Negative rates stay locked in toolbox

The Bank of England

dampened expectations

that it might introduce

negative interest rates

yesterday after

announcing in June that

it was considering the

policy (Gurpreet

Narwan writes).

Andrew Bailey,

governor of the Bank of

England, said that

policymakers had no

immediate plans to cut

rates below zero but

that the option was

firmly on the table.

“This is, I think, the

first time the Bank of

England has said

definitively, yes, they’re

in the toolbox,” he said.

The report dedicated

four pages to the

impact of negative

policy rates on the

economy but the Bank

failed to come down on

either side. It said: “The

effectiveness of a

negative policy rate will

depend, in part, on the

structure of the

financial system and

how the policy

transmits through

banks to the interest

rates facing households

and companies. It will

also depend on the

financial and economic

conditions at the time.

“The MPC [monetary

policy committee] will

continue to keep under

review the

appropriateness of a

negative policy rate

alongside all of its

policy tools.”

Mr Bailey said that

British banks relied

heavily on retail

deposits, which could

undermine the

usefulness of the policy.

Evidence from other

countries where the

policy has been

implemented suggested

that negative interest

rates were rarely passed

on to retail customers.

Savers are more likely

to withdraw savings and

hold them as cash if

they are charged for

depositing them in a

bank account. This

could cause margins to

decline and damage

bank profitability.

“The overwhelming

focus in the Bank’s

analysis seemed to be

on the drawbacks,” said

George Buckley, an

economist at Nomura.

“The MPC’s conclusion

was about as clear-cut

as one could have

expected.”

Samuel Tombs, an

economist at Pantheon

Macroeconomics, said

that the Bank’s “neutral

statement should

ensure that markets

continue to price in a

fair chance that the

MPC will push Bank

Rate below zero in the

first half of 2021”.

Demand for inquiry into cash panic

The Bank of England has called for an

internationally co-ordinated investi-

gation into the resilience of markets

and investors after the panic-stricken

“dash for cash” in March when the

extent of the pandemic was becoming

apparent.

Only the intervention of central

banks with unprecedented infusions of

newly created cash and, in the US, the

purchase of junk bonds by the Federal

Reserve brought relative calm back to

the bond and equity markets.

“While the recent shock was

exceptionally severe, the reliance on

extraordinary central bank support to

address dysfunction in key markets

suggests there is a need to review the

resilience of investors and markets

under stress,” the Bank said.

There had been “severe market

dysfunction” in mid-March with even

government bonds, which are normally

seen as a safe haven, shunned and the

prices of corporate bonds briefly going

into freefall.

Without central bank intervention,

the liquidity stress would have been

“even more severe”. During the month

the Bank slashed the base rate from

0.65 per cent to 0.1 per cent and an-

nounced an additional £300 billion of

asset purchases.

The Bank expressed surprise that

corporate bond values had recovered

so strongly. Spreads, which move

inversely to values, now appeared

“compressed” and were below histori-

cal averages despite the deterioration

in credit quality.

“Markets might be vulnerable to a

sharp repricing,” it said.

It added that the inquiry needed to

look at margin calls in times of stress,

the role of leveraged investors, and

risks relating to money market funds

and other open-ended funds.

The G20’s Financial Stability Board

has undertaken to look at aspects of

markets in the light of the shock from

the Covid pandemic.

Patrick Hosking Financial Editor

£300bn

Bank’s extra asset purchases in March

Keep credit

taps on full,

lenders told

Continued from page 33

extending credit, worried they may be

throwing good money after bad and

concerned that every extra loan weak-

ens their capital ratios and could ex-

pose them to reputational and funding

risk in the event of a full-blown crisis.

While the bounce-back loans they

make to smaller firms are fully guaran-

teed by the Treasury, they still shoulder

20 per cent of the risk of so-called coro-

navirus business interruption loans.

Some signs of stress were emerging,

the Bank warned, with 100 large com-

The Bank’s assessment of the slump in

GDP and employment is less severe than

other forecasts, including its own forecasts

from May. In explaining the difference with

other forecast, the Bank said that the OBR

includes in its unemployment estimates a

measure of economic inactivity

Bank of England forecast v others

OBR

Bank in May

Bank in August

2020 2021 2020 2021

GDP Unemployment

GDP Unemployment

GDP Unemployment

In worst case scenario, OBR says

unemployment will peak at 11.6

per cent in 2021

OECD

GDP Unemployment

Single wave scenario

-11.4%

9% 11.7%

7. 2 %

2020 2021 2020 2021

-12.4%

8.7%

8.8%

10.1%

2020 2021 2020 2021

peak

-14%

15%

9%

7%

2020 2021 2020 2021

peak

-9.5%

9%

7. 5 % 6.6%

Charting the way ahead