A Shot in the Arm

With clear signs that a second wave of Covid-19 has taken hold across Europe it looks as if we are in for a tougher fight against the virus than originally envisaged. However there has been some encouraging vaccine news in recent days and SAGE expert Jeremy Farr is now predicting that a Covid-19 vaccine will be ready within the first three months of 2021.

While for most people, Covid-19 is a brief and mild virus, a minority are left struggling for months and are now being diagnosed with ‘Long Covid’. These patients will now be offered specialist help at clinics across England. However, the head of NHS, Sir Simon Stevens has warned that ‘tens of thousands, probably hundreds of thousands of patients may be affected by ‘Long Covid’.

Some sectors of the UK economy, have adapted and benefited from the Covid-19 crisis with the acceleration in the structural shift to online shopping the stand-out winner. Equally, there are many sectors which are looking like ‘Long Covid’ victims -some may take much longer to return to normal while some might never return to full health. The government’s new three tier system creates further uncertainty. No wonder that a whole range of different sectors are calling upon the government to provide further financial support from hospitality to public transport.

Looking beyond the current situation, the long-term economic cost of Covid-19 will be painful. The Institute of Fiscal Studies suggests that tax rises of £40bn a year are ‘all but inevitable’ to prevent UK government debt spinning out of control. How this will be raised, is likely to be a real challenge and require consideration of alternative and potentially innovative sources of revenue for HMRC.

What have we been watching?

Investors tried to remain in a positive frame of mind despite rising Covid-19 cases and more lockdown restrictions helped by encouraging vaccine news particularly from Pfizer.

The betting odds of a Democratic clean sweep or ‘blue wave’ in the US presidential election – winning the White House, Congress and Senate now stand at over 60%. A prevailing market narrative a few months ago was that a ‘blue wave’ would be negative for US equities particularly the big internet companies but this has completely flipped in the past two weeks as investors hope it will lead to an even greater US economic stimulus support package. However, bond yields having been starting to rise to reflect the likelihood of a larger federal budget deficit. In the meantime, US Treasury Secretary Steve Mnuchin confirmed that additional fiscal stimulus is unlikely to be agreed before the election.

Markets were supported by positive Chinese economic data although geo-political tensions also re-surfaced as stories emerged that China is to ban imports of Australian coal as relations between the two countries continue to sour following the call for an investigation into the Covid-19 outbreak. China has also passed a new law restricting the supply of ‘Rare Earth Elements’ – key for smartphones and electric vehicles – to some foreign countries and companies.

Covid-19 and the spectre of more lockdowns continued to overshadow markets. However, there was good news from Pfizer which said it was seeking authorisation of its Covid-19 vaccine in mid-November. UK politicians are in a lockdown battle, with Keith Starmer calling for tighter lockdown restrictions, some Conservative MPs voting against pub lockdowns and PM Boris Johnson conceding that a ‘circuit breaker’ may be necessary if the tier system fails to work. SAGE say they recommended a UK lockdown to the PM three weeks ago! London has now moved to tier 2 restrictions. A rise in new Covid-19 cases is being seen across Europe and a number of governments are imposing stricter lockdown measures, including the Netherlands and Czech Republic, while France has introduced a stricter curfew in 9 cities. The WHO says the rise in European cases ‘raises great concern’.

The EU has been given the green light by the World Trade Organisation (WTO) to hit nearly $4bn of US goods with tariffs in retaliation for illegal state aid to Boeing. The dispute over aircraft subsidies between the US and EU over Boeing and Airbus is one of the longest running WTO trade disputes. Hopefully, the WTO ruling will be a cue for the two sides to come together and agree subsidy rules for the airline sector.

The International Monetary Fund (IMF) is forecasting a somewhat less severe recession than it predicted in June but has lowered its growth outlook for 2021. The IMF expects the global economy to contract by 4.4% but expects it to rebound 5.2% in 2021. China is the only major nation forecast to grow this year with the IMF forecasting growth of 1.9%.

Boris Johnson’s Brexit deadline of 15^th October came and went with the next back-stop the European Commission’s 31^st October deadline. In the Brexit ‘game of bluff’ PM Boris Johnson said that talks are over unless the EU changes its position but both sides are still in contact by phone. While the perceived probability of ‘no deal’ will persist through October, the market still clings to hope that a ‘thin’ zero-tariff/zero -quota Brexit trade agreement might be struck by early November. It still feels like a deal at one minute to midnight!

In the UK, retail sales grew at 5.6% annually in September, the fastest pace in over a decade amid signs that consumers have already begun their Christmas shopping. UK grocery sales have also increased strongly in recent weeks as consumers purchased more alcohol to drink at home as the eating out sector was hit by more restrictions. The unemployment rate surged to its highest level in over three years with about 60% of the fall in the 16-24 age group reflecting the impact on the hospitality and travel sectors. Credit rating agency Moody’s downgraded UK government debt from Aa3 to Aa2, with its outlook changed from stable to negative due to Brexit and Covid-19. Despite optimistic comments from some colleagues, Andrew Bailey, governor of the Bank of England suggested that risks to the UK economy remain ‘heavily skewed to the downside’.

Eurozone industrial production remained weak in August.

China’s trade data for September underlined the continued boost from the economy’s re-opening with a 13% increase in imports. Exports also increased by 9.9% as overseas markets eased lockdown measures. China’s economy grew by 4.9% in the third quarter, continuing the recovery path from Covid-19 lockdowns albeit growth was a little below expectation.

Finally, China aspires to be a leader in digital currencies. Last week The Peoples’ Bank of China issued about £1m worth of digital currency to 50,000 people in the Shenzen area via a lottery as part of a trial to test its new Digital Currency Electronic Payment (DCEP) system. The DCEP is not a crypto-currency but a digital version of China’s official currency and backed by the central bank. Surveys show that 80% of consumer payments are currently made through Tencent’s WeChat Pay or Alibaba’s Alipay.

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A Shot in the Arm

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