Closing summary
Time for a recap.
The Bank of England has warned that UK unemployment will spike at 2.5m by the end of the year, as firms cut jobs due to the shock of Covid-19. In its latest forecasts, the Bank predicts the jobless rate will almost double to 7.5%, and only fall slowly in 2021.
The bank predicts a ‘material’ jump in unemployment, with more than one million jobs expected to be lost in the second half of this year.
It says:
Employment appears to have fallen since the Covid-19 outbreak, although this has been very significantly mitigated by the extensive take-up of support from temporary government schemes.
Surveys indicate that many workers have already returned to work from furlough, but considerable uncertainty remains about the prospects for employment after those support schemes unwind.
The Bank is also less pessimistic about the economic shock, having seen growth pick-up faster than it expected. It now predicts GDP will shrink by 9.5% this year - a major fall, but no as bad as it thought in May.
But...it also fears the recovery will take longer, with the UK not expected to reach its pre-Covid level until the end of 2021.
The Bank is also examining whether it could, or should, cut UK rates into negative territory.
Professor Costas Milas of Liverpool University tells us:
In reality, the type of the recovery the Bank of England seems to predict is a “square root one” rather than a V-shaped one. Irrespective of the alphabetical or mathematical details of the shape of the recovery, the main point is that this fairly slow recovery is built on on the assumption that the UK policy rate will turn negative to -0.1% and remain negative until the third quarter of 2023!
Given the possible distortionary impact of negative interest rates on the economy (negative interest rates will shake the confidence of consumers/depositors in the economy), the main message from the BoE’s report is: “do not go negative!”
Governor Andrew Bailey warned that the UK economy faces some ‘very hard yards’ in future.
UK builders are already cutting staff, with one in three saying they lowered headcount last month. Pub chain Wetherspoons is axing over 100 managerial positions.
Over in America, the number of people filing new unemployment claims has dropped to 1.18m. Economists say the initial claims figure is still worryingly high.
European markets have fallen today, with the UK’s FTSE 100 currently down 1.2%. Mining companies Glencore is the top faller, down 7%, after axing its dividend.
Nasdaq creeps to new record high
The drop in US initial jobless claims seems to have reassured traders in New York.
The tech-heavy Nasdaq index ticked higher at the start of trading, up 5 points to a new record high of 11,003.
The Dow crept a little higher too, up 3 points at 27,204, as investors hope for progress towards a new US stimulus package.
That’s the Dow’s highest level in around eight weeks.
Chris Lu, former United States Deputy Secretary of Labor, thinks the markets are wrong to ignore the plight in the jobs market:
This is messed up:
— Chris Lu (@ChrisLu44) August 6, 2020
1.2 million new jobless claims is 500,000 higher than the worst week of Great Recession
31 million are on unemployment. Benefits have been cut, so they can't afford rent and groceries
Temporary layoffs are becoming permanent
And yet the stock market goes up
Full story: US jobless claims over 1m again
Here’s our US business editor Dominic Rushe on the US jobless data:
Another 1.18 million people filed for unemployment benefits last week as economists worry the expiration of enhanced unemployment benefits will lead to a sharp drop-off in household spending and set back the US economy’s near-term recovery.
Claims dipped last week after two weeks of rises but the latest figure from the department of labor marked the 19th week in a row that claims have topped 1m. Before the coronavirus pandemic gripped the US, the record for weekly claims was 695,000 in October 1982.
The figures come ahead of Friday’s monthly snapshot of the job market. Economists expect the unemployment rate to have dipped to 10.6% in July from 11.1% in June, a significant drop but still three times the pre-pandemic level....
If you ignore seasonal adjustments, the number of new US unemployment claims actually fell below one million last week (rather than 1.18m, seasonally adjusted).
However, as Ben Casselman of the New York Times flags up, both numbers ignore ‘gig economy’ workers.
Some 656,000 filed for help through the Pandemic Unemployment Assistance programme last week (as they aren’t eligible for initial claims).
Another 1.6 million Americans filed new claims for unemployment insurance last week. That's 984k regular state claims (not seasonally adjusted) plus 656k under the Pandemic Unemployment Assistance program. Still extremely elevated, but falling again.https://t.co/8yitQ4G6pk pic.twitter.com/0hEMZ1BgMy
— Ben Casselman (@bencasselman) August 6, 2020
Note that on a seasonally adjusted basis, there were 1.2 million claims, which would make this the 20th straight week over a million. pic.twitter.com/hRgc1XrCfp
— Ben Casselman (@bencasselman) August 6, 2020
US unemployment: snap reaction
Economists are encouraged that the number of Americans seeking jobless benefit had fallen.
But they’re also concerned that more than a million people filed fresh jobless claims - showing that some US firms are still cutting jobs as the pandemic rages.
Kathy Jones of Charles Schwab says today’s figures show ‘slight improvement’:
Jobless claims down a bit and below expectations at 1.19 vs 1.43 mil with continuing claims down also at 16.1 from 16.9. Still very high numbers but slight improvement.
— Kathy Jones (@KathyJones) August 6, 2020
The Washington Post’s Heather Long fears that some jobs aren’t coming back:
BREAKING: 1.2 million filed NEW unemployment claims last week, a decline of 249,000 from the prior week.
— Heather Long (@byHeatherLong) August 6, 2020
It's the lowest level since the crisis started but the 20th week of over a million jobless claims.
Bottom line: A lot of layoffs are becoming permanent at this point.
Robeco’s Jeroen Blokland shows the unprecedented spike in jobless claims this year (smashing the previous record of under 700,00 new claims in a week).
US initial jobless claims totaled 1.19 million last week, the lowest level since the #Covid19 outbreak. pic.twitter.com/2VY1m8J9Q8
— jeroen blokland (@jsblokland) August 6, 2020
US jobless claims falls to 1.18m
Newsflash: The number of Americans filing new claims for unemployment benefit has dropped sharply.
US initial jobless claims dropped to 1.186m in the week to 1st August, much lower than the 1.4m which economists expected.
That’s the lowest reading since March - when initial claims started to hit record highs during the pandemic.
The number of ‘continued claims’ (Americans signing on for at least the second week running) also fell, from 16.9m to 16.1m.
This suggests an improvement in the US labor market, although the totals are still painfully high:
🇺🇸 US JOBLESS CLAIMS FELL TO 1,186,000 AUG 1 WEEK (CONSENSUS 1,415,000) FROM 1,435,000 PRIOR WEEK (PREVIOUS 1,434,000)
— PiQ (@PriapusIQ) August 6, 2020
US CONTINUED CLAIMS FELL TO 16.107 MLN JUL 25 WEEK (CON. 16.720 MLN) FROM 16.951 MLN PRIOR WEEK (PREV 17.018 MLN) pic.twitter.com/t7HNyaKktI
Reaction to follow....
BoE governor Andrew Bailey has warned that “some parts of the UK economy” will struggle to recover from the economic shock of Covid-19.
In an interview with Sky news, he cites those businesses which involve people consuming at very close quarters, such as restaurants and bars. Here’s a clip:
"There will be some parts of the economy that won't be viable going forwards."
— SkyNews (@SkyNews) August 6, 2020
Andrew Bailey, Governor of the Bank of England, says it is "reasonable" to think there will be "structural change" in the economy after the #coronavirus.
Read more: https://t.co/fJ86AxlYB8 pic.twitter.com/AsjkZAhR9n
Rachel Oliver, head of campaigns and organising at Positive Money, is also challenging the Bank of England to clean up its game:
“In March Andrew Bailey told us that decarbonising the Bank’s policies was a priority. But he’s since gone back on his word, funneling billions of pounds towards companies wrecking our planet and laying off workers. We’re here to encourage him to make the most of this opportunity for a green recovery so that the Covid crisis isn’t followed by an even bigger climate crisis.”
Greenpeace is also concerned that the Bank of England is supporting companies who are contributing to the climate crisis.
Charlie Kronick, Senior Climate Advisor, Greenpeace UK, says the Bank should heed NEF’s warning that its corporate bond-buying stimulus programme is boosting polluters (as covered earlier).
This report makes it increasingly clear: without conditions on its loans to protect jobs and the climate, the Bank is failing in its duty – not just to protect those jobs and the environment – but ultimately to protect the UK’s financial stability.
Investment decisions taken now will impact emissions for decades. There’s simply no excuse for propping up companies which threaten our climate.”
NEF’s report (online here) found that carbon-intensive sectors reflect approximately 57% of the value of the bonds purchased by the BoE – despite only contributing to 13.8% of overall UK employment and 19% to gross value added.
Approximately 57% of the value of the bonds purchased by the Bank are from the most carbon intensive sectors, but they only represent 13.8% of overall UK employment and contribute 19% to GVA (a metric used to measure the economic contribution of different sectors).
— Frank van Lerven (@Frank_vanlerven) August 4, 2020
5/16 pic.twitter.com/Xw9GDlG2CX
In other monetary policy news, the Reserve Bank of India left interest rates on hold today at 4%.
That surprised analysts, who had expected a cut to 3.75% due to the economic damage caused by Covid-19.
Central bank chief Shaktikanta Das cited the risk of rising inflation, from factors such as higher food prices and supply chain disruption.
Our economics editor, Larry Elliott, say the Bank of England is thinking the once-unthinkable - could it impose negative interest rates in the UK?
He writes:
In the past, notably during the financial crisis of 2008-09, Threadneedle Street has publicly rejected the use of negative rates, warning that they would make banks less profitable and potentially drive some of them to the wall.
But as the Bank’s governor, Andrew Bailey, noted on Thursday, life has moved on. Banks are less vulnerable than they were a decade or so ago, other central banks, including the European Central Bank and the Bank of Japan, have used them, and estimates of how low interest rates can go have moved down.
“Ten years is a long time in monetary policy,” Bailey said in a nod to Harold Wilson.
The seriousness with which negative rates are being considered can be judged by the fact that the Bank devoted four pages of its latest monetary policy report (MPR) to weighing up the pros and cons. You don’t do that if you are trying to kick the idea into the long grass.
Bailey’s response to a question about negative rates at his MPR press conference was also revealing. “This is the most extensive assessment we have ever done,” the governor said. “It is sensible to have negative interest rates in the tool box but we are not planning to use them at the moment.”
The key words there are “at the moment”.....
More here:
Markets fall deeper into the red
Back in the City, the FTSE 100 has just sunk back below the 6,000-point mark.
That’s a loss of 117 points, or nearly 2% today, wiping out much of this week’s recovery.
Other markets are also in the red, with Germany’s DAX down a more modest 0.4%.
There are several factors pushing the Footsie down.
- The pound has strengthened against the dollar and the euro, thanks to the Bank of England’s improved forecasts. That pushed down the value of overseas earnings made by multinationals.
- Mining stocks are in retreat, after Glencore scrapped its dividend this morning
- Oil companies are also down, with crude losing around 1% today.
AJ Bell investment director Russ Mould sums up the morning:
“The FTSE 100 gave up a good portion of its recent gains on Thursday morning as investors weighed the latest decision on interest rates from the Bank of England,” says
“The Bank unsurprisingly keeps its powder dry, probably eyeing the end of the furlough scheme as a good point to reassess given the impact this might have on household finances.
“Concern over the global economic outlook hit shares in resources firms with Glencore the top FTSE 100 faller as it scrapped a previously deferred dividend to bolster its balance sheet amid a slump in commodities.
The economic picture is looking brighter in Germany.
German factory orders surged by 27.9% month-on-month in June, following a 10.4% rise in May. That’s twice what economists expected, and suggests Germany is recovering from its slump earlier this year.
UK pub chain Wetherspoon is cutting a third of its head office staff, blaming the slump in the sector this year.
Press Association has the details:
Wetherspoon has written to its head office staff to say that nearly a third of them risk losing their jobs amid a round of cuts at the pub chain.
The company said that 110 to 130 of the 417 roles in its head office could be axed as it scales back its expansion.
Chief executive John Hutson said that all head office staff, including those who are regionally based, will be affected.
Those in Northern Ireland and the Republic of Ireland will escape the cuts.
“The decision is mainly a result of a downturn in trade in the pub and restaurant industry generally , a reduction in the company’s rate of expansion and a reduction in the number of pubs operated from 955 in 2015 to 873 today,” he said in a statement on Thursday morning.
Wetherspoon has written to its head office staff to say that nearly a third of them risk losing their jobs amid a round of cuts at the pub chain https://t.co/khvyCig2Kn
— PA Media (@PA) August 6, 2020
One in three UK building firms cut jobs last month, in another sign that the labour market is weakening.
Data firm Markit reports that construction firms accelerated their layoffs in June, due to anxiety about the economic outlook.
In its latest healthcheck on the sector, Markit says:
Worries about the speed of recovery contributed to a sustained decline in staffing numbers during July. The latest data signalled a sharp rate of job shedding, with around one-in-three survey respondents (34%) reporting a fall in employment.
Markit also found that the UK building sector returned to growth last month. Its construction PMI, which measures activity, jumped to 58.1 in July, from 55.3 in June. That shows the fastest growth in five years - but not enough to prevent job cuts....
Climate activists lobby Bank of England
Climate change protesters gathered outside the Bank of England this morning, demanding that the central bank stops supporting industries which drive global heating.
A report this week found that the Bank is effectively subsidizing polluting industries through its stimulus programme.
Its Corporate Bond Purchase Scheme (CBPS) has bought up bonds from many polluting sectors such as energy production and manufacturing, according to a report led by the New Economics Foundation (Bloomberg has more details here).
NEF found that carbon-intensive sectors are over-represented in the Bank’s list of eligible bonds for the programme, even though they make a relatively low contribution to UK employment and economic growth.
CBPS is meant to push down the cost of borrowing for companies -- so it effectively makes it cheaper for dirty industries to keep running.
The Bank of England has spoken about the need to tackle the climate crisis, but critics argue that it is failing to match those words with deeds.
As NEF’s report put it:
The CBPS is not only at odds with government climate targets but also previous BoE climate commitments. Indeed, by its own admission the Bank has stated that CBPS is aligned with 3.5°C of warming by the end of the century.
Moreover, just two weeks before announcing the expansion of the CBPS, governor Andrew Bailey suggested that excluding fossil fuels and realigning the Bank’s corporate bond portfolio with the government’s climate goals is a ‘perfectly sensible thing to do’.
More than ever, an alternative framework for the CBPS is both urgent and necessary – especially if the Bank plans to expand the CBPS in the future. As it stands, the CBPS is a missed opportunity to propel investments that are supportive of a green recovery and the transition towards a low-carbon economy.
Updated
BoE's Bailey: Very hard yards ahead
Bank of England governor Andrew Bailey has told reporters that the UK faces some ‘very hard yards’.
Speaking at a press conference to discuss the Monetary Report, Bailey said the forecast that unemployment nearly doubles to 7.5% is a “very bad story”.
But he also predicted it would fall back over time (back to 4.5% by the end of 2022, according to today’s forecasts).
With GDP expected to shrink by 9.5% this year, Bailey said the BoE was ready to provide more stimulus if needed, having left policy unchanged today.
“There are some very hard yards, to borrow a rugby phrase, to come. And frankly, we are ready to act, should that be needed.”
But he insisted the Bank had no plans to impose negative interest rates, even though it has identified them as part of its ‘toolkit’ of options (as explained here).
James Smith of the Resolution Foundation has tweeted the key points from the Bank of England’s monetary policy report (released at 7am, if you’re just tuning in).
He also points out that the Bank’s forecast of unemployment hitting 2.5m is relatively optimistic, compared to the Office for Budget Responsibility’s projections.
Key takeaway from this morning is the MPC’s updated view on the impact of Covid-19 on the economy.
— JamesSmithRF (@JamesSmithRF) August 6, 2020
Here they marked up their forecasts significantly relative to May, with GDP now expected to contract by 9.5% this year, compared with 14% in May. pic.twitter.com/SBQ4q2dadk
But make no mistake this is still a bleak projection: with the Bank forecasting the weakest year of growth since 1921, although stronger than @OBR_UK. pic.twitter.com/HHpt9w76tz
— JamesSmithRF (@JamesSmithRF) August 6, 2020
And based on the Bank’s nowcast for Q2, next week’s GDP release is expected to show a fall of over 20% in the first half this year.
— JamesSmithRF (@JamesSmithRF) August 6, 2020
That is the largest hit to GDP for countries with published data up to 2020 Q2 (taken from the OECD database). pic.twitter.com/nAFK4MPXxy
Perhaps the most revealing forecasts are for unemployment where the outlook is particularly uncertain.
— JamesSmithRF (@JamesSmithRF) August 6, 2020
As shown below, this troubling outlook for activity is expected to lead to a sharp rise in the unemployment rate which peaks at 7.5%, lower than the 9% peak expected in May. pic.twitter.com/ZT5403W3bK
That is much more optimistic than the OBR’s Central Scenario which had the unemployment rate rising to 11.9% (matching the 1980s all-time high).
— JamesSmithRF (@JamesSmithRF) August 6, 2020
All this highlights the uncertainty around the outlook for unemployment - there is clearly a risk that the rise could be very large.
TUC General Secretary Frances O’Grady is urging the government to abandon its plan to end the furlough scheme in October, to prevent unemployment spiking.
O’Grady says chancellor Rishi Sunak must heed the Bank’s warning that unemployment will jump to 2.5m by the end of this year:
“The threat of mass unemployment has not gone away. Ministers must act now to save jobs.
“That means extending the job retention scheme for businesses in hard hit sectors like retail, manufacturing, and aviation. Many companies have a viable future but need longer-term support to get back on their feet.
“And the government must invest now to create the jobs we need for the future in green industries, social care and across the public sector.
“The more people we can keep and get into work the faster our economy will recover.”
Bank of England: unemployment to hit 2.5 million
The Bank of England has spelled out quite clearly that unemployment is probably going to hit 2.5m this year -- the highest in seven years.
As we explained earlier, that would mean the jobless total would almost double by Christmas, from the current level of 1.35 million people out of work and looking for a job.
Today’s Monetary Policy report warns that some firms will slash jobs, while others will be reluctant to take on new staff.
The Bank says:
In the MPC’s projections, unemployment rises to around 7½% by the end of the year as some workers are made redundant and hiring remains subdued.
That would represent around 2½ million people out of work and searching for jobs (Chart 4.2), the highest total since 2013, and a clear sign of spare capacity in the economy.
Getting a new job will also be hard, the Bank fears:
The MPC judges that unemployment is likely to decline only gradually from this peak. Firms may be reluctant to make hiring decisions while uncertainty is high and the differential impact of Covid-19 on economic activity across sectors is likely to increase the mismatch between vacancies and those looking for work.
The pandemic has had a profound effect on the UK labour market. Social distancing rules have meant that businesses have had to adapt working practices and some have been shut for a time since March. The reduction in activity has also reduced firms’ demand for labour. The number of vacancies fell to a record low in Q2) and existing workers worked many fewer hours.
At one point, around a third of private sector employees were furloughed as part of the Coronavirus Job Retention Scheme (CJRS): this led to the sharpest fall in hours worked on record. Some workers have had their pay cut or been made redundant.
Updated
ITV: The worst is over, but uncertainty looms
UK broadcasting company ITV has given a timely reminder of the turmoil in the UK economy, as my colleague Mark Sweney reports:
Carolyn McCall, the chief executive of ITV, said that while the worst is over the ongoing uncertainty in the market meant the company would not issue performance guidance for the remainder of this year.
“This has been one of the most challenging times in the history of ITV,” she said.
“While our two main sources of revenue - production and advertising - were down significantly in the first half of the year and the outlook remains uncertain, today we are seeing an upward trajectory with productions restarting and advertisers returning.”
The broadcaster said that advertising revenue significantly improved in July, down 23%, with analysts estimating August and September will show further improvement.
ITV Studios, which makes shows from Coronation Street to Love Island, has now re-tarted 70% of the 230 shows that were put on hold as the coronavirus pandemic shut down film and TV production across the UK.
The company’s share price has fallen considerably during the crisis, almost halving to 59p over the last year, raising speculation that ITV could be a takeover target.
“We have been speculated as an acquisition target for about 12 years, maybe 15, I don’t think there has been a year or a month that passes by that that doesn’t happen so we don’t comment on that,” said McCall, on a call with media.
“We are doing well on our own and the share price is not reflective of the performance of the company or indeed the value of the company. We have very strong foundations... we have the ability I think to build the business and create value going forward.
The company said that its streaming services - ITV Hub and the BritBox joint venture - have performed well with viewers under lockdown. BritBox and ITV Hub+, the paid-for tier of ITV Hub, both increased subscriber numbers. The free ITV Hub service saw online viewing rise 13% to 266m hours, and registered users rise 9% to 32m. BritBox lost £23m in the first half of the year.
Updated
The Bank of England estimates that most furloughed workers will return to work as the economy picks up -- but there will still be a sharp rise in unemployment.
It explains:
Some firms, especially those in the worst-affected sectors, are likely to make workers redundant if sales do not pick up sufficiently quickly. Many firms in highly consumer-facing sectors, manufacturing and construction expect to reduce their employment materially in Q3 and Q4.
Some of these industries are labour-intensive, employing more workers per unit of output than average. This means the total fall in employment will be higher than if all industries were reducing their workforces by similar percentages.
These charts, from the Monetary Report, show how customer-facing firms, such as hotels and restaurants, expect to make the deepest job cuts:
Why UK unemployment could hit 2.5m
The Bank of England’s new forecasts suggest that at least a million people will lose their jobs in the UK due to the pandemic.
Currently, there are over 34m economically active people. If unemployment peaks at 7.5% at the end of this year, as the Bank believes, that would imply an unemployment total of 2.5 million.
As of last month, 1.35m people are currently classed as unemployed (giving a jobless rate of 3.9%). But that total seems set to rise sharply, as the government’s job retention scheme winds down.
The Bank’s agents have spoken to businesses around the country, and concluded that some began cutting jobs once the government’s furlough scheme became less generous.
Today’s report explains:
Contacts reported a deterioration in the employment outlook, with the rate of redundancies having increased in June and July, ahead of the start of mandatory employer contributions to the Coronavirus Job Retention Scheme (CJRS) in August.
As this chart shows, firms have slashed their investment and hiring plans:
The Bank fears that this means around one million employees will be laid off in the second half of 2020:
The unemployment rate is expected to peak at around 7½% in Q4, based on survey evidence, high-frequency indicators, and the historical relationship between unemployment and output.
This projection takes into account the expected sectoral pattern of output and, in particular, that the initial recovery in output is likely to be slower in more labour-intensive areas of the economy.
The forecast is consistent with most furloughed workers returning to work by the end of the year. The number of people in employment is expected to fall by more than 3% in the second half of the year, however.
As of May, there were around 33m in employment, so this suggests a cut of over 1m jobs.
Updated
Bank: UK suffered sharper slump than some rivals
The slump in the global economy in the last quarter was four times as bad as in the financial crisis more than a decade ago, the Bank believe.
It estimates that UK-weighted world GDP fell by around 9% in Q2 -- with major contractions in the US and Europe.
The BoE adds:
This is over four times larger than any quarterly fall recorded during the financial crisis. The severity of the contraction reflects social distancing measures being widespread across the UK’s major trading partners for a large part of the quarter.
That’s less severe than the estimated 21% plunge suffered in the UK last quarter, because the Covid-19 lockdown was lifted more slowly.
The Bank explains:
The fall in UK activity in Q2 is expected to have been larger than in some other countries (Table 2.A). That mainly reflects differences in the timing of lockdown measures, which were in place for a larger part of Q2 in the UK than in other economies.
The mobility indices recovered more slowly in the UK than the US and euro area (Chart 2.2), although the lifting of restrictions may provide more scope for recovery in the UK in Q3 .
Full story: Bank sees unemployment doubling, but slump less severe
Here’s our economics correspondent Richard Partington on the Bank of England’s latest assessment of the UK economy:
The Bank of England has said Britain’s economy is recovering more quickly than initially feared from the coronavirus pandemic as consumer spending rises, despite warning of significant risks to jobs and growth.
Leaving interest rates on hold at a record low of 0.1%, Threadneedle Street said Britain’s economy would shrink by a fifth in the first half of this year as a result of lockdown measures imposed in March. Against a backdrop of rapidly rising job losses across the country, it also warned unemployment would double by the end of the year.
However, it said the early signs for the economy as lockdown measures are gradually relaxed were more promising than it had previously anticipated, as consumer spending bounces back close to pre-pandemic levels.
Suggesting the scale of the shock to the economy could be smaller than first feared, the Bank said it expected GDP to plunge by 9.5% this year - the worst performance in 99 years. Threadneedle Street had previously warned that GDP could collapse by 14% this year in the biggest economic shock for three centuries.
Pound rallies after Bank forecasts
The pound has rallied this morning, as traders digest the Bank of England’s latest forecasts.
There’s some relief that the Bank thinks the slump in April-June was ‘less severe’ than feared.
This has lifted sterling by half a cent against the US dollar, to $1.316 - close to a five-month high.
Shares are down though, with the FTSE 100 losing 52 points to 6052. Mining and commodity company Glencore is the top faller, down 4%, after scrapping its dividend this morning due to the cost of Covid-19.
Bank: We're looking at whether negative interest rates
The Bank of England also says it is “currently considering” whether it could possibly impose negative interest rates in the UK.
Four pages of today’s report (starting on p12) explain that the Bank is examining whether the ‘effective lower bound’ for interest rates could be below zero. In other words, whether a negative policy rate could provide economic stimulus.
Other central banks have already taken this step - including in Japan and the eurozone.
It effectively means that commercial banks are charged for leaving money with the central bank - to encourage them to lend. In practice (so far, anyway), it hasn’t led to household savings rates turning negative.
The Bank of England hasn’t made its mind up yet. It’s trying to weigh up the impact on the financial system, economic confidence and bank profits, as well as the impact on savers.
It says:
The MPC is currently considering whether the ELB for Bank Rate could be below zero; that is whether a negative policy rate could provide economic stimulus.
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 will continue to keep under review the appropriateness of a negative policy rate alongside all of its policy tools.
Bank of England on negative rates pic.twitter.com/RBh03fBU0W
— Equals FX (@equalsfx) August 6, 2020
Updated
The Bank’s forecasters predict that UK inflation will fall closer to zero this year:
After declining sharply to 0.6% in Q2, CPI inflation is expected to fall somewhat further below the MPC’s 2% target over the second half of 2020.
Lower energy prices continue to weigh on inflation over coming months. In addition, the Government’s announced cut to VAT will act as a drag on inflation over the second half of the year.
This fan chart, from the Bank’s new Monetary Report, shows the forecasts (the darker colours show higher probability)
High online spending has helped to cushion the shock of the Covid-19 slump, the Bank adds:
The recovery in UK output has been somewhat more rapid than was assumed in the MPC’s illustrative scenario in the May Report.
That partly reflects lockdown measures being eased earlier than had been assumed. It also reflects activity having been stronger than assumed under lockdown, partly due to greater online spending.
Although grim, the Bank of England’s unemployment forecast is less dire than three months ago, Reuters points out:
Unemployment was expected to peak at 7.5% at the end of this year, almost double the most recent rate but lower than the BoE’s previous estimate of just under 10%.
The overall economy now looked on course for a 9.5% drop this year - the worst performance in 99 years - compared with a 14% plunge in the BoE’s May scenario, which would have been the worst in more than three centuries.
But GDP is set to rebound by 9% next year, weaker than the 15% surge in May’s scenario and the BoE said there were bigger risks of a slower recovery than a faster one.
Bank: Covid slump will be less severe, but last longer
The Bank of England is warning that the UK recovery from the pandemic will take longer than it thought three months ago -- but the downturn will also be less severe.
The MPC’s new ‘central projection’ is that UK GDP does not return to its pre-Covid 19 size until the end of 2021. Back in May, it hoped that this would occur in “the second half of 2021”.
In today’s report, it warns that ‘health concerns’ will drag on the recovery:
In the MPC’s central projection, GDP continues to recover beyond the near term, as social distancing eases and consumer spending picks up further. Business investment also recovers, but somewhat more slowly. Unemployment declines gradually from the beginning of 2021 onwards. Activity is supported by the substantial fiscal and monetary policy actions in place.
Nonetheless, the recovery in demand takes time as health concerns drag on activity. GDP is not projected to exceed its level in 2019 Q4 until the end of 2021, in part reflecting persistently weaker supply capacity. Given the scale of the movements in output, as well as the inherent uncertainty over the factors determining the outlook, the evolution of the balance between demand and supply is hard to assess.
But importantly, the Bank is also suggesting that the recession has been a little less severe than feared (although still very tough).
Output rose modestly in May, and is expected to have recovered to a greater extent in June. Nonetheless, GDP is expected to have fallen by 21% in Q2 as a whole, and by 23% relative to 2019 Q4.
The fall in output in Q2 is expected to have been less severe than was assumed in the illustrative scenario in the May Report. In that scenario, it was assumed that restrictions would be gradually unwound between early June and late September, but they were lifted earlier.
The Bank of England’s economists also fear that unemployment will remain high next year.
In today’s Monetary Report, they warn:
Labour market slack persists over the first half of the forecast period, as unemployment is judged likely to decline only gradually after peaking in Q4.
The gradual decline in part reflects an expectation that hiring will pick up relatively slowly, consistent with uncertainty affecting companies’ demand for labour. In addition, the MPC judges that there is likely to be some reduction in the efficiency with which people can find jobs. That tends to happen as unemployment rises, as some people take time to find new jobs, and their skills erode.
Moreover, in the present conjuncture, the dispersed effects of Covid-19 on economic activity across sectors are judged to be likely to result in a greater degree of mismatch than usual, given differences between the sectors from which workers have been made unemployed and the sectors in which firms are posting vacancies.
Introduction: Bank of England decision
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Unemployment is on track to rise sharply by the end of the year as the Covid-19 pandemic hits the UK economy.
So warns the Bank of England this morning, which has also just voted to leave UK borrowing costs at record lows.
Announcing the decision, the Bank’s monetary policy committee warns:
Employment appears to have fallen since the Covid-19 outbreak, although this has been very significantly mitigated by the extensive take-up of support from temporary government schemes. Surveys indicate that many workers have already returned to work from furlough, but considerable uncertainty remains about the prospects for employment after those support schemes unwind.
In the near term, the unemployment rate is projected to rise materially, to around 7½% by the end of the year, consistent with a material degree of spare capacity.
It’s a timely reminder, given the swathe of job cuts, store closures and company collapses which the UK economy has suffered in the last few months.
The unemployment rate is currently just 3.9%, with the government’s furlough scheme helping employers to keep staff on.
As well as leaving interest rates at just 0.1%, the MPC also voted unanimously to keep its quantitative easing programme at £745bn.
The Bank also warns that the UK economy probably shrank extremely sharply this year, but now appears to be picking up again.
UK GDP is expected to have been over 20% lower in 2020 Q2 than in 2019 Q4. But higher-frequency indicators imply that spending has recovered significantly since the trough in activity in April.
Detail and reaction to follow...
Also coming up today
India’s central bank is also setting interest rates today. We get a new healthcheck on building firms in the UK and the eurozone this morning.
Plus, the latest weekly US unemployment figures are out - expected to show that 1.4m people filed new jobless claims last week.
The agenda:
- 7am BST: Bank of England interest rate decision, and Monetary Policy Report
- 7am BST: German factory orders for June
- 7.15am BST: Bank of India’s interest rate decision
- 8.30am BST: Eurozone construction PMI report for July
- 9.30am BST: UK construction PMI report for July
- 1.30pm BST: US weekly jobless report
Updated
