Economic Update

• The global economy continues to recover from the lockdowns that were imposed in many countries during the spring.  Yet in Europe economic activity is declining again in the face of a ferocious second wave of infections. Elsewhere, China’s economy has more than made good the losses of output seen in the early months of this year, while both India and Brazil are enjoying strong recoveries.

•  President Biden’s ability to implement radical policy measures will be limited by the failure of the Democrats to take control of the Senate.  They do, however, have an outside chance of doing so if they can win two run-off votes in Georgia on 5th January.  In any event, the first priority for the Biden administration will be to tackle the Coronavirus pandemic, given that the United States, like Europe, has seen a second wave of infections.

• Globally, the impact of a Biden presidency will stem mostly from how much fiscal stimulus he can get through the Senate, and what that means for US growth and monetary conditions. There will also be implications from likely changes in the approach to immigration, trade, climate and foreign policy.  A quick U-turn on trade policy towards China is, however, unlikely.

• With England back in lockdown, the UK’s economic recovery has gone into reverse.  GDP is expectedto decline by around 7.5% in November, by 2% in the final quarter, and by 11% for 2020 as a whole.

• The UK’s final extrication from the EU will dent economic activity in the early months of next year.  The economy is therefore unlikely to exceed October’s level of output until the spring.  Thereafter, progress will depend on the speed with which vaccines and rapid tests are rolled out. A return to pre-Covid GDP is now not expected until early in 2023.

• The decision to prolong the Jobs Retention Scheme until March will reduce the scale of job losses in the next few months.  Instead, the pain will be deferred into next year, with the unemployment rate expected to peak at 6.7% in the second quarter of 2021.

• The chances that UK Bank Rate will be cut into negative territory have increased in the light of the latest restrictions.  But, for practical reasons, any move in this direction cannot take place for several months. Even if a trade agreement is concluded with the EU sterling is expected to remain under pressure on account of the UK’s weaker fiscal outlook.