Many countries around the world have eased lockdown measures allowing businesses to reopen and resume economic activity. Some positive signs are coming from economic data but there remains a significant level of uncertainty and measures could be reintroduced if the Covid-19 infection rate continues to rise again.
In July, Chancellor Rishi Sunak delivered a Summer Statement, dubbed a ‘mini-budget’, which included measures to stimulate the economy. This included a bonus for businesses that retained furloughed staff, a VAT cut in the hospitality sector until January 2021 and the Stamp Duty threshold rising from £125,000 to £500,000 until March 2021, in a bid to get the housing market moving.
One of the key areas the Chancellor didn’t discuss was how the cost of Covid-19, which is estimated to be £300 billion this tax year, will be recovered. It’s expected announcements will be made in the Autumn Budget later this year. However, a review into Capital Gains Tax has been ordered, signalling this is an area that could be affected.
The UK economy grew by 1.8% in May, far weaker than the 5.5% forecast by economists.
Data from July show a mixed picture. UK factories have warned of a ‘jobs bloodbath’ without further government support but the CBI has also stated that the fall in orders is slowing, leading to manufacturers being more upbeat.
The UK service sector also shows signs of recovery. The closely watched PMI index gave a reading of 47.1 in June, up from 29 the previous month, with a figure above 50 showing growth. June marked the reopening of non-essential shops. However, businesses still face challenges. The number of shoppers was still 53% lower than normal.
While some of the data points towards recovering economic activity, announcements from individual businesses suggest many are still struggling. It’s estimated that 649,000 people have lost their job during the pandemic. This includes some well-known household names that intend to cut jobs:
- John Lewis announced it will not reopen eight stores, putting 1,300 jobs at risk
- Pret a Manger shuts 30 shops, cutting 1,000 jobs
- Boots revealed it will cut 4,000 jobs across optician branches, head office and store roles
- Marks and Spencer cuts 950 jobs
- Tui is set to shut 166 stores across the UK and Ireland
Unsurprisingly, the travel market continues to be severely hampered by the pandemic. International travel is not expected to fully recover for several years. In addition, the Competition and Markets Authority (CMA) received more than 17,500 complaints about package holidays refunds, highlighting the pressure businesses within the industry are facing.
Car manufacturing is another sector that has been significantly affected. Car sales are down 48.5% so far this year, making the worse fall in the industry for almost 50 years.
The Office for Budget Responsibility (OBR) has warned recovery could take years. In addition to the impact of Covid-19, Brexit deadlines are also looming, which could have an impact on economic growth. This month, the EU warned that UK firms will face trade barriers after Brexit.
The European Commission forecast a deeper eurozone recession, warning the eurozone will shrink by 8.7% this year. Germany, Spain and France all recorded deep contractions for the second quarter too.
The European Central Bank is bracing for a second wave of coronavirus affecting economic activity. The bank has left its rates and stimulus package unchanged, opting to wait and see how the situation progresses.
EU leaders agreed on a historic stimulus package too. The agreement paves the way for the European Commission to raise billions of euros on capital markets on behalf of all 27 EU states. Leaders hope the €750 billion recovery fund will help with the recovery.
But there are positive signs in Europe too. There was a record surge in eurozone retail sales and business activity is on the rise for the first time since February.
The headline figure from the US this month is the GDP. During the second-quarter GDP plunged by a worst-ever 32.9% due to lockdown restrictions. No other slump over the past two centuries has caused such a sharp drop. However, the economy still beat expectations, with economists previously predicting a decline of 34.7%.
With US elections nearing, the job market continues to be an important battleground for President Donald Trump. The latest figures reveal 4.8 million jobs were added in June, beating expectations of three million new jobs. However, ongoing shutdowns could see layoffs rise in the coming months. In fact, weekly jobless claims figures show a rise. Figures for the last week of July show 1.434 million jobless claims were made.
The service sector, which makes up two-thirds of the US’s economic activity, is showing signs of recovery though. The Institute for Supply Management said its activity index gave a reading of 57.1 in June, with a reading over 50 indicating growth. However, bars, restaurants and other service sector businesses could face additional lockdowns and restrictions in the coming weeks, affecting recovery.
The ongoing trade war with China continues to have an impact on business and stock. Tensions have continued to escalate, with tariffs continuing to impress tax on UK companies and consumers, as well as creating more red tape.
China continues its recovery following an economic hit due to the pandemic. The country’s service sector PMI hit a ten-year high in June, rising from 55 in May to 58.4. The optimism in the Chinese economy led to a surge in the markets too. It also reported that GDP grew by 3.2% in the second quarter when compared to a year ago, making it by far the best-performing big economy.
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Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.