A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
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.
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 Biden a 50.5% chance of winning the presidency compared to a 48.8% chance of victory for 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.
