The Great Shutdown to the Great Rebound

Historical periods of global economic disruption become associated with labels that convey the severity and length of the respective crisis; the Great Frost, the Panic of 1873, the Long Depression, the Great Depression, the Great Recession.

The last few months represent one of the most trying economic periods of the previous 100 years, and already commentators have christened the economic circumstances exacted by COVID-19 as the ‘Great Shutdown’.

As we mentioned last week, the cause of the ‘Great Shutdown’ means its character resembles the economic aftermath of a natural disaster, as opposed to a recession caused by unsustainable levels of private-sector debt. Therefore, the theory goes that lost economic output on this will recover more quickly than previous instances of contraction.

Accordingly, this week Andy Haldane, the chief economist of the Bank of England (BoE), gave a speech which indicated the global economy is rebounding faster than early projections suggested.

We examine the contents of his speech and to assess whether a Great Rebound will succeed the Great Shutdown.

Haldane’s Speech

Tuesday’s speech focussed on how the BoE currently understands the trajectory of the global and UK economies according to a series of traditional and novel economic indicators.

From Haldane’s vantage point prevailing global economic conditions improved markedly during the latter part of the 2nd quarter of 2020, with developed economies beginning to shrug off the unprecedented demand destruction wrought by Covid-19 in the early portion of lockdowns. Resultantly, the UK economy’s pathway to recovery, so far, has assumed a ‘V-shaped’ profile; a situation not countenanced in the BoE’s earlier Monetary Policy Report (MPR) published in May.

Haldane relied upon several economic indicators to justify his analysis of the data; a summary follows.

• Q2 Review – Indicators

Graph 1: Global Composite PMIs

Source: Bloomberg, data as of 30/06/2020

Graph 1 above shows the performance of the economies of the UK’s leading trade partners during the last few months by examining the composite Purchasing Managers’ Indices for each country. A PMI score over 50 indicates expansion, while one under 50 records a contraction in overall activity.

The graph evidences two things, firstly the sheer scale of the proportion of economic output extinguished by the Great Shutdown. More positively, we can observe the sharp recovery during the second quarter of 2020, with all western PMIs trending towards expansion. Meanwhile, data from China displays growing levels of output in both the manufacturing and services sectors registering a PMI reading of 55.6.

More locally, relying upon the same metrics, the trajectory of UK PMIs appears to be following a similar path. Graph 2 depicts the UK’s monthly manufacturing PMI over the preceding few months. As we can see, the UK’s manufacturing sector entered positive territory during June with a PMI of 50.1.

Graph 2: Monthly UK Manufacturing PMI

Source: Bloomberg, data as of the 30/06/2020

Haldane’s analysis also relied upon some novel and ‘fast indicators’, to bolster the backwards-looking survey data expressed by PMIs examined above. Utilisation of novel data sources reflects the unusual circumstances of the ‘Great Shutdown’, and we consider these indicators below.

• Novel Data

Haldane’s use of real-time indicators focussed upon signs of recovery in consumer spending to assess the overall strength of the UK’s economic recovery. By utilising payments data based upon credit and debit card purchases, Tuesday’s analysis revealed consumer expenditure across all sectors recovered from the lows observed in April. In one sector, staples, the expenditure recorded by June exceeded Pre-COVID 19 levels.

Graph 3: UK Sectoral Consumer Spending % change from Jan 2020

Source: Speech given on 30/06/2020, Bank of England (Page 9)

Overall, the UK consumer exhibited unexpected robustness during Q2 and, according to Haldane’s analysis, registered a faster recovery than the BoE own projections in May. Therefore, UK consumer spending from April to June surpassed the level expected by the BoE in the third quarter.

Likewise, in those segments of the UK economy still labouring under enforced lockdowns, such as hospitality, the BoE’s research suggests advance bookings indicate strengthening pent-up demand, which should provide a further boon to the UK economy if extensions lockdown relaxations continue.

The Beginning of the Great Rebound?

The picture presented by Haldane on Tuesday suggests, at present, the downside risk to the UK economy caused by COVID-19 is not as acute as first feared. However, economic forecasting is a challenging discipline, even in becalmed periods. The eminent economist John Maynard Keynes famously equated the merits of economic forecasting to astrology. Care must be taken not to equate economic forecasts with precise models of future trajectories.

As, Tuesday’s speech recognised, considerable uncertainty around jobs will persist near term. One scenario put forward on Tuesday suggests if a surge in unemployment materialises as government support for furlough schemes tapers back from August, the risk of households cutting back expenditure en masse becomes elevated. Conversely, if the increases observed in consumer spending through Q2 prove enduring, firms’ expectations of demand for goods and services could rise. Rising expectations may preclude managers from instituting redundancies due to the costs associated with rehiring. As a result, household incomes, and therefore demand levels, will be preserved.

Our conclusions

Whether the Great Shutdown leads to a Great Rebound in the UK, as hoped, hinges upon the preservation of overall demand levels. Throughout the crisis, the policy response from governments and central banks has been extraordinarily accommodative and, so far, there are few indications of an ensuing pullback in support. While trade-offs for such policies exist, the will of policymakers to continue these schemes should provide comfort to households and business as we navigate the next challenging phase of the Great Shutdown.

 

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