Economic Uncertainty Prompts Government Response

James Rowbury, Investment Research Coordinator, Redmayne Bentley

Global markets showed signs of volatility last week as worries over a surge in Coronavirus cases in the UK and across Europe intensified. Following the reinstatement of some COVID-19 measures and the increasing possibility of a second national lockdown, the FTSE 100 lost 2.78%. On the other hand, the US S&P 500 tumbled 3.3% as investors grew increasingly worried about the depressed level of political agreement between both parties and a lack of a Coronavirus aid package.

Following the government’s reinstatement of measures to stop the spread of the virus, Chancellor Rishi Sunak announced his ‘winter economy plan’. The Job Support Scheme is due to replace the furlough scheme once it comes to an end on 31st October. According to the Office for National Statistics (ONS), there are nearly three million workers who are on partial or full furlough leave, sparking many fears that once the scheme ends, firms will make mass job cuts. The new Job Support Scheme will require both the government and firms to top up workers’ wages, covering up to two-thirds of their hours for the next six months. However, in order to qualify for the scheme beginning on 1st November, employees will be required to work for at least a third of their normal hours. Though not as generous as the previous furlough scheme, the hope is that the support plan will prop up struggling households, but it relies heavily on businesses to keep operating, even if at a reduced capacity.

The reintroduction of tighter Coronavirus restrictions has weakened the rise in manufacturing sentiment, which was seen over the Summer. The IHS Markit/Chartered Institute of Procurement & Supply flash composite Purchasing Managers’ Index (PMI) figure fell to 55.7 points in September from 59.1 in August. The reading remained above 50, indicating that the private sector continued to expand, though at a slower rate than seen in August. The composite reading was dragged down by the UK’s dominant services sector, with a PMI slipping to a three-month low of 55.1 from 58.8 in August. The new data came a day after the UK government warned that Britain could face another lockdown if the new restrictions fail to ease rising infection rates. According to UK economist Samuel Tombs, the current Eurozone data provides a guide to the UK’s likely economic position in a few weeks’ time. As such, the Eurozone PMI registered 50.1 in September with the flash PMI activity index falling with a contraction to 47.6 points.

In July and August, spending rose sharply as consumers enjoyed the easing of restrictions and the ‘Eat Out to Help Out’ scheme, however, following a surge in COVID-19 cases and the end of the government’s incentive scheme, growth has now slowed again. Through our forward-looking lens, we would expect this reading to tail off slightly as we enter a period of lower growth, but much of this depends on the severity of restrictions to the UK economy in the coming months.

Last Tuesday, the US House of Representatives overwhelmingly voted to ban all imports from China’s Xinjiang region, focused on stopping what lawmakers say is systematic forced labour on the Uighur community. Despite opposition by many US businesses, the act passed 406-3 in a sign of increasing outrage over Xinjiang, where activists believe that over one million Uighurs and other Muslim-Turkic-speaking people have been held in camps. House Speaker, Nancy Pelosi, stated that most products which are made from forced labour end up in American stores and homes and therefore it was vital for the US to send a clear message to Beijing that the abuses must end immediately. Nevertheless, the Uighur Forced Labour Prevention Act still needs to be approved by the Senate, which may have insufficient time before the November 3rd elections.

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