This week saw the announcement that UK GDP fell by 20.4% in the second quarter of the year, its largest quarterly slump and worst recession on record. While the result seems shocking, the good news is the report was better than originally anticipated by the Office for Budget Responsibility.
The result makes the UK one of the economically worst affected countries in the world to date this year, with only Spain worse off amongst the peer group in the chart below:
Despite this, the good news is that the economy has begun to recover, with upwardly revised monthly GDP growth of 2.4% in May and nearly 9% in June pointing towards greater optimism. Nevertheless, output is still 17% lower than pre-crisis, and the ending of the furlough scheme is expected to bring permanent job losses.
Many millions are still classed as ‘temporarily’ away from paid work, but with major sectors only operating at limited capacity for the foreseeable future it will be financially unviable for many employers to cover all of their employees’ costs:
France became the latest country to be hit by UK quarantine rules as thousands of British holidaymakers rushed to beat the deadline to avoid a 14-day quarantine requirement. Eurotunnel trains sold out and air fares were reportedly up to six times more than normal. France reported just over 3,000 new coronavirus cases on Sunday 16th August, and 1 fatality. To date, whilst the trend in new cases has risen, deaths have remained extremely low.
Elsewhere, New Zealand’s Prime Minister has delayed the country’s general election by four weeks until October 17th as a community outbreak of Coronavirus in Auckland grew to 58 cases. The city has been locked down again until 26th August, with social distancing rules and limits on gatherings being reimposed on the rest of country until the same date.
The country’s GDP for the second quarter is expected to be around the -15% mark – one of the poorer global figures – and whilst they could have been expected to recover more quickly than others having apparently stamped the virus out, more recent events perhaps suggest otherwise, highlighting the conundrum faced by global Governments in their responses.
Despite slowing economic data, developed market equities were generally positive in Pound terms, with Japan gaining most (3.83%) followed by Europe (1.39%) and the UK (1.31%). The US eked out a small positive return of 0.25% even as retail sales data disappointed and negotiations on a new stimulus package remained deadlocked.
Emerging market equities were slightly weaker, falling by 0.05%, while precious metals prices recorded a fall; the price of silver fell by nearly 6% during the week, including a near-11% fall on Tuesday 11th August, and that of gold fell by 4.28% albeit with less volatility.
These falls were in part caused by aforementioned short term excess build-ups but were catalysed by rising bond yields in response to weaker demand for US government debt and, optically, more positive sentiment as Russia made its successful vaccine announcement. UK Gilts fell by nearly 2% during the week and Index-Linked Gilts by nearly 3.5%.
Looking forward, though we feel that the easy macroeconomic gains have now been made, we believe that unprecedented monetary and fiscal policy support and the continued reopening of global economies should continue to support risk assets. Global Governments and central banks have made it abundantly clear that they will continue to backstop the recovery to extraordinary lengths, and there is much firepower still in reserve. This, in combination with the regular emergence of better treatments for and understanding of the virus, leaves us still with a cautiously positive outlook.
Market views by Ollie Stone – Head of Portfolio Management and Fairstone Private Wealth Ltd (17th August 2020)