Letting Your Hair Down

Governments are re-starting their economies and a growing number of people are pushing to ease lockdown restrictions. All the ‘non-essential’ industries which have been in suspended animation for many weeks, will no doubt celebrate the opportunity to start on the path to normality (whatever that is). However, many sectors in the UK particularly hospitality, can only watch for now, wait their turn and pray.

UK car plants are resuming production with social distancing measures in place -but the car industry which supports an estimated 800,000 jobs in the UK faces uncertainties. The car industry is heavily reliant on global supply chains and ‘just in time delivery’ so there are concerns about component availability. In the UK, car showrooms officially remain closed although car dealers will be able to offer an online ‘click & collect’ service. If workers are worried about using public transport, could we see a pick-up in car purchases? On the other hand, while car finance deals are available will consumers have the confidence to make a ‘big ticket’ purchase given the uncertain economic outlook?

Housebuilders have re-started building and opened showrooms and estate agents are also open. However, house prices are expected to fall and chartered surveyors do not expect a recovery for some time. With 7.5million workers on furlough will consumers want to buy a house while there is job insecurity? For those able to work will some change lifestyle and move from the city to the countryside?

In Europe, the governments of southern countries such as Spain, Italy and Greece will be keen to get their tourist industry up and running given the importance to their economies. However, Spain has extended is 14-day quarantine period, but Italy is removing some flight restrictions. Discount airlines are keen to re-start flights but will older holidaymakers feel safe flying given the challenge of social distancing with air travel?

It is clear that lockdown has been easier to impose than to exit. The risk of a second wave of Covid-19 infections remains. As with stock markets its all down to confidence. Inevitably, there will be pent-up consumer demand, hairdressers being a prime example although they are at the back of the lockdown queue. Meanwhile, for manufacturers and housebuilders that are at the front of the queue -you can build it but will they come? (see China retail sales below!)

A case of letting your hair down, but not getting it cut.

What have we been watching?

Without a vaccine the risk of a second wave of Covid-19 infections remains. Just as markets started to warm to the prospect of more countries easing from lockdown and there was a reminder of the threat from a second wave. South Korea recorded the largest spike in new cases in a month after an outbreak linked to several bars and nightclubs in Seoul. In addition, Germany said that its ‘R’ infection rate had moved back above 1, just days after the country eased its lockdown restrictions. In China, Wuhan reported six new cases last week and plans are being drawn up to test the entire population of 11million people while Jilin, a city in north-east China with a population of 4million has imposed some lockdown measures after a cluster of Covid-19 cases. Meanwhile, the WHO said that a vaccine ‘seems for now the best way out’ but admitted it could be 4-5 years before the Covid-19 pandemic is under control.

Meanwhile, in the UK, PM Boris Johnson has told the public to use good, solid British common sense as critics claim the lockdown easing strategy is confusing and contradictory. A test developed by Roche to find out whether people have been infected with Covid-19 in the past has been approved given a 100% success rate in trials. This could be a game changer for the Covid-19 response by removing one variable in the calculations used to build an exit strategy. This does come with one caveat -no one knows if the antibodies are able to prevent re-infection.

In the US, President Trump is keen to get the economy going with his ‘Opening Up America Again’ plan. However, well respected infectious disease expert Dr Anthony Fauci warned senators that Covid-19 could spread further and economic damage could be greater if the country opens up too soon. Market sentiment was not helped by a further comment from President Trump about US-China trade relations. Jerome Powell, Chair of the Federal Reserve also warned of the dangers from a second wave of Covid-19.

In the UK, the economy shrank at the fastest pace since the financial crisis in the first quarter of 2020 due to lockdown measures. The economy contracted by 2% in the first quarter but March dropped by 5.8% on the previous month. Manufacturing output fell by 9.7% in March compared with the same time last year. This is only the beginning as lockdown didn’t come into effect until 23^rd March and the data is consistent with a contraction of up to 25% in the second quarter. Chancellor Rishi Sunak provided details of an extension to the furlough scheme which will remain at 80% but carry on for an extra four-months to the end of October. Some 7.5million workers are now covered by the scheme, an increase of 19% from last week. The Treasury has warned that Covid-19 could cost the UK over £300bn. This, together with the new Bank of England governor Andy Haldane declining to rule out the use of negative interest rates saw Sterling dip to $1.21.

There was further pain for UK airline and holiday operators as Health Secretary Matt Hancock said that many of us are unlikely to be able to take foreign holidays this summer due to Covid-19 (Spain has introduced a 14-day self-isolation lockdown for arrivals from overseas). However, there was better news for housebuilders and estate agents with the government announcing the re-opening of the housing market in England. However, the Royal Institution of Chartered Surveyors (RICS) survey suggested the majority of property professionals thought house prices could fall by more than 4% and would take almost a year to recover.

In Europe, Germany’s economy contracted by 2.2% in the first quarter of 2020 but proved more resilient than other countries as eurozone GDP contracted by 3.8%.

In the US, Federal Reserve Chair Jerome Powell warned that the country faces a slow and painful economic recovery without additional government relief. Further measures ‘would be costly but worth it. We know that long periods of unemployment leave a shadow. We also know that waves of bankruptcies can weigh on economic activity for years.’ Initial jobless claims for the week ended 9^th May were higher than expected at 2.98million taking total applications since mid-March to over 36million –that is bigger than the UK working population!

India announced a £216bn economic support package, equivalent to 10% of the country’s gross domestic product (GDP) to cope with its strict Covid-19 lockdown.

Japan’s economy contracted by 3.4% in the first quarter which follows the 7.3% decline in the fourth quarter.

China’s Producer Price Inflation (PPI) contracted by over 3% in April, the sharpest decline in four years, underlining the impact of weak demand. However, the lifting of lockdowns has provided a ‘shot in the arm’ for the car industry with new car sales up by over 4% in April. Demand for commercial vehicles jumped by 30% – a sign of more online shopping perhaps? Industrial production increased by almost 4% in April which was better than expected although total power output nudged up by just 0.3%. Fixed asset investment contracted by over 10% in the four months to April. Despite the resumption of factory activity, retail sales shrank by 7.5% in April.

Brent oil edged up to $33 reflecting the news that more countries were easing lockdown restrictions, coupled with the start of OPEC+ production cuts.

Finally, more examples of Covid-19 winners and losers. The fall in workers travelling into London and social distancing measures means that that Transport for London has required a £1.6bn government bail-out. To encourage car users to switch to bikes -the world’s largest car free zone is being created in central London. To further deter car drivers, from 1^st June the congestion charge will go up by 30% to £15. Great news for cyclists, not great news for ‘white van man’.

Read Last Week’s Alpha Bites – I Don’t Like Mondays

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Letting Your Hair Down

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