The economic impact of the pandemic has emerged for Great Britain, although there are a few signs of the outbreak beginning to stabilize. The record contraction in GDP, a sharp fall in inflation and weak employment indicators show that the BOE must maintain a very expansive monetary policy stance.
UK economic activity has experienced a great influence from lockdowns and other restrictive measures. Industrial output dived -24.4% y / y in April, compared with consensus of -19.3% and -8.2% in March. The main CPI slowed to +0.9% y / y in April, from +1.5% the previous month. Core CPI fell to +1.4% y / y, from +1.6% in March.
Preliminary indicators for May 2020 show that the number of employees in the UK based on wage registers fell by more than 600k compared to March 2020. Claimant count continues to increase, raising the country’s credit as part of the UK government’s response to the coronavirus. Meanwhile, the number of vacancies in May has fallen to a record low. Labor force survey data (LFS), which covers the period to the end of April 2020, shows weak employment rates. The biggest change was seen in the number of people temporarily leaving work including leave, which rose by 6 million at the end of March to April, which caused a large drop in working hours.
Growth in the average wage of employees slowed, especially in April 2020, and the first three months to April saw a decrease in total real payments for the first time since January 2018. Wage payments declined substantially in the low wage industry, particularly accommodation and food service activities. The UK employment rate in the three months to April 2020 was estimated at 76.4%, 0.3 percentage points higher than a year earlier but 0.1 percentage points down on the previous quarter. The UK unemployment rate for the three months to April 2020 was estimated at 3.9%, 0.1 percentage points higher than a year earlier but largely unchanged on the previous quarter. The total number of weekly hours worked in the three months to April 2020 was 959.9 million, down a record 94.2 million (8.9%) hours on the previous year. The final reading of the Markit /CIPS composite PMI added +1.1 points to 30. This shows that the economy remains in a deep contraction. Source: National Statistics
UK gross domestic product (GDP) fell 1.6% y/y in Q1 2020, the biggest decline since Q4 2009 and compared with market expectations of a 2.1% decline. There was widespread disruption to economic activity due to the pandemic and government efforts to contain it in the second half of March. Q2 2020 GDP is projected to experience a sharp decline in the range of 23% due to the impact of lockdowns and closed business activities.
The BOE has cut bank interest rates -65 bps to 0.1% in March and voted unanimously to keep the main bank interest rates at a record low of 0.1% on May 7, 2020, in line with market forecasts. In addition, the BoE increased the size of its asset purchase facility (QE) by + 200 billion pounds to £645 billion. Other funding facilities and open market operations were also launched to inject sufficient liquidity to the market.
The MPC will announce the latest policy decision after their meeting on Thursday, tomorrow. Perhaps interest rates will remain unchanged, although there is a strong possibility that the BoE will increase its bond purchase program for the second time since the beginning of the pandemic. While April figures marked the worst decline, it is likely that banks will see continued policy accommodation as needed, because the recovery is likely to be gradual.
The UK-EU trade negotiations do not seem to have progressed at all. It is hoped that the BOE will add more stimulus through the expansion of its QE program at the BoE meeting. The QE program will reach its capacity of £645 billion by the end of July due to the current buying rate, therefore an increase in stimulus will be needed for now to ensure businesses and households have access to cheap funding. There is an estimated increase in the purchase of assets worth £100 billion, which will bring the program to a total of £745 billion according to estimates. Let’s see how they decide at the meeting tomorrow.
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Ady Phangestu
Analyst – HF-Indonesia
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