April Economic Update

The elephant in the room is Covid-19, also known as coronavirus. In a matter of weeks, it has upturned the proverbial applecart and brought the UK (and global) economy to a shuddering halt. It also exposed the fragility in our global supply chains and the risk of contagion into financial markets. The next few weeks will be critical to arresting the pandemic, but the panic and economic impact will take longer to play out, leading to significant long-term influences on investment portfolios and balance sheets. As the UK doubles on average every 3 days and the epicentre shifted to Europe, cargo volumes dropped as much as 20% in some ports, borders closed and a third of the world entered lockdown, planes stopped flying, public transit usage effectively halved, bond yields spiked, stocks entered a bear market, commodities, oil, everything really plunged, and investors ran for safety in gilts and government bonds.

In an effort to manage the economic pain, the Bank of England cut rates all the way down to 0.1%. Alongside, consumer price inflation dropped only slightly to 1.7% in February. The net result was a dramatic worsening of the real rate (the yield once adjusted for inflation) to -1.6% and a clear reversal of the improving trend of the last two years. That represents a significant headwind for treasury portfolios and all investors going forward.

The very high likelihood now is that the UK will be in a recession, and the economy will need significant support to cushion the aftereffects of this sudden shock to the system. Significant fiscal stimuli have been announced, but we expect more to follow, given the impact on business and consumer confidence and the likelihood of a cautious return to business as usual. Overall, the prospect of a lower still for longer environment has been reinforced, and normalisation again has receded into the distance. Inflation meanwhile has competing effects – the impact on oil may yield some falls, but the panic buying will also have pushed up inflation in key segments, while the pound has fallen strongly.

Brexit has receded from the mind of people for now, but is still present in the background and will exert its own influence. The retail glooms is likely reinforced, and many forecasters, including us, expect a significant rise in unemployment numbers as people fall back on the state and businesses look to repair the damage to their balance sheets. Some segments will become stronger, notably logistics, as online takes another step forward vs bricks and mortar, and supply chain resilience becomes a priority. Given that we will have lost half the year by the time this is all said and done, that leaves precious little time to find a deal to relieve the uncertainty of Brexit. The challenge for policymakers is significant.

Investor portfolios will find themselves both seeking to understand their resilience to future shocks, while looking for yield more vigorously than ever to a) make up for that falling real yield; and b) to repair the damage done in recent weeks to valuations. If there is one silver lining, it is that the fall in economic activity has dramatically shown the impact we have on the climate. While the climate emergency has dropped a little down the list, it is now more relevant than ever and support for some of the fiscal stimulus to go towards green infrastructure will be strong.

Dr Bob Swarup

Camdor Global Advisors

swarup@camdorglobaladvisors.com

Camdor Global Advisors is a specialist investment and risk advisory firm focused on providing insightful analysis, prudent advice and pragmatic solutions for today’s complex environment to its local authority clients. For more information, please click here .

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