UK macro
Heteronomics
Fri 12 Jun 2020 - 14:00
Summary
Phil is more pessimistic than consensus on the outlook for the UK recovery in that it will be more drawn out and less complete than currently priced in. There will be lasting behavioural changes caused by COVID. An example of which is the expected diminution of the “grey pound” as the older more vulnerable members of society travel and spend less. Company balance sheet damage will be another factor weighing on growth as there is an opportunity cost associated with the use of government funds to shore up cashflow which reduces funds for spending on the business post COVID. Even if the depths of the depression, in the short term, are unlikely to be as bad as feared, behavioural changes, balance sheet damage and underutilisation of resources will prevent a return to the previous level trend in GDP. In terms of UK inflation, Phil noted the data slowed sharply in April, the 110bp fall in the RPI was only 2bp more than he expected. The depth of the decline and duration below-target provides the BoE with a clear dovish path, despite less bleak activity data. Phil sees an increase in the bank’s QE programme as highly likely on 18 June. The £100bn dissents from May mark the lower bound on the announcement. Markets are pricing a risk of negative rates, although the BoE remains unlikely to deliver on that (would not be stimulative). Short-dated gilt purchases arguably have a negligible effect now, while exposing fiscal risks. The BoE could get more bang for its buck by operationally shifting its target buckets up to 5-10y, 10-20y and 20+ (from 3-7, 7-20, 20+). With regards to Brexit, there are likely to be fudge factors such as a technical extension attached to a new deal.
Topics
Structural adjustments and balance sheet leverage will weigh on the UK's future growth prospects, potentially more than elsewhere
Although the depths of the depression are unlikely to be as bad as feared, the market has little sensitivity to that metric
Heavy Gilt issuance should keep being absorbed by the BoE, which is smoothing the hit for society, consistent with its remit
A £100bn QE increase is the minimum that the BoE is likely to announce on 18 June. Another rate cut could occur later in the year, but a negative Bank rate remains unlikely
A no-deal Brexit is possible, but various fudged fixes are much more likely. The costs of it occurring would depend on the extent that Covid returns next Winter, but should anyway be less than they previously seemed.
