Time for a recap.

Chancellor Rishi Sunak has warned that there are tough choices ahead to address the increase in borrowing caused by the pandemic.

Appearing before the Treasury Committee, Sunak said he agreed with the Office for Budget Responsibility that the UK public finances are not on a sustainable trajectory.

Sunak told MPs that the UK can’t ‘tax its way to prosperity’, while also warning that public services need to be financed.

Yesterday, the OBR predicted the UK will rack up its biggest budget deficit in peacetime, at over £300bn this year. Sunak said he is keen to get the public finances into line in the medium term, warning that interest rates won’t remain at such record lows forever.

[Not that there’s an immediate crisis, with investors paying to lend to the UK this morning]

The chancellor said the shock of the pandemic, relatively soon after the financial crisis, has implications for fiscal policy.

This is the second ‘once in a generation’ shock we had in 10 years, and that therefore makes you think, you know, (that) what you do with public finances in ‘good’ times may need to be a bit different.”

The chancellor tried to calm reports that he’s planning a raid on the wealthy by changing Capital Gains Tax, having just ordered a review.

Sunak was speaking as some UK firms began to pass his VAT tax cut on:

He also warned struggling UK businesses not to expect a bailout. Taxpayer’s cash will only be used to rescue firms in exceptional circumstances, for companies with a strategic importance.

“I’m not completely persuaded of the scale of the problem at the moment.

The simple reason is that we know corporate debt levels in the UK were in a relatively healthy place coming into this crisis,”

And striking a prudent tone, he added:

It’s not something I think governments should get into the business or habit of doing.

It’s not my money, it’s taxpayers’ money.”

The chancellor also faced criticism for not providing more support for women, and for not even mentioning childcare once during last week’s Summer Statement.

But he insisted that his latest £30bn package, including VAT cuts for hospitality, would help women workers.

Sunak also conceded that his blanket £1,000 bonus for companies who bring back furloughed workers could be inefficient. He also agreed that the temporary Stamp Duty tax cut would end up in the pockets of people who would have bought or sold a house anyway - but insists it’s still worth it, to get the economy motoring.

He also disappointed MPs who urged him to help the estimated million people who are excluded from his efforts to support self-employed workers, saying he was looking to the future.

In other news today:

• Bank of England policymaker Silvana Tenreyro has predicted the UK will experience an ‘incomplete V-shaped’ recovery
• UK inflation has crept up to 0.6% in June, lifted by a jump in computer game prices.
• Stock markets have rallied, on reports of encouraging progress in the search for a Covid-19 vaccine.
• Burberry is cutting 500 jobs worldwide, including 150 in its UK head offices, as part of plans to slash costs by £55m
• Apple has won a landmark court battle with the European Union over whether or not it owed Ireland €13bn of unpaid taxes.

Finally, Mel Stride MP asks Rishi Sunak what his ‘realtime data’ is showing, about how people are reengaging with the country.

It’s sadly too early to tell, the chancellor replies.

He says that around the world you’ve seen an initial jump, then a drop back,then a slow and steady build, at different rates in different countries (or even in different States in the US).

In the UK, activity is still “quite a bit down on last year” since the economy reopened, Sunak says, adding that ‘habits have changed”.

And he plugs his “eat out to help out” scheme, saying the subsidised meal deal is designed to generate a behavioural change, given the UK economy is heavily reliant on consumer spending and consumption.

Without confidence, we don’t have that consumption.

And that’s the end of the hearing.

Steve Baker MP now challenges Rishi Sunak over yesterday’s fiscal sustainability report from the Office for Budget Responsibility. It predicted Britain’s budget deficit will hit a peacetime record this financial year (someway north of £300bn).

Q: The public finances are not on a sustainable trajectory, are they?

Rishi Sunak agrees that they are not. That’s been the conclusion of every report the OBR have done.

The government is right to borrow now, given the crisis, but it’s important to have sustainable public finances in the medium-term, the chancellor says prudently.

He warns that interest rates won’t necessarily stay as low as they are today, and there’s an issue of whether it’s fair to pass debt onto future generations.

We seem to be having these ‘once in a generation’ crises with greater regularity, Sunak says wryly. It’s the second one in barely a decade (a point the OBR also made yesterday).

The chancellor has repeatedly resisted commenting on future tax changes -- but he did warned of tough choices ahead earlier in the session:

Steve Baker then asks chancellor Sunak as to whether the UK is already at its ‘taxable limit’.

Rishi Sunak sways away from this, but puts his finger on the dilemma the government faces:

Fundamentally we don’t tax our way into prosperity. We want people to share more of their own money.

But we also have a lot of demands on public services, and they need to be funded.

Conservative MP Julie Marson challenges Rishi Sunak about rising debt levels among UK firms due to the pandemic.

Q: Are you comfortable with the idea of bailouts, and picking winners?

I’m not, the chancellor replies firmly, declaring:

It’s not something I think the government should get into the habit of. It’s not my money, it’s the taxpayer’s money.

As such, a bailout for a struggling UK firm who can’t arrange a private sector rescue should be “exceptionally rate”, Sunak insists. There should be a high bar -- only when a company has strategic value and has a sustainable future.

And if we reach this “last resort”, existing investors should also share the burden - with no “free ride” on the taxpayer.

Felicity Buchan MP then asks Rishi Sunak why he’s launched a review of Capital Gains Tax.

The chancellor plays an extremely straight bat (hopefully England’s cricketers are watching).

He insists that it’s a “business as usual practice” to ask the Office for Tax Simplification to check that a particular measure is up to date.

In recent years, the OTS have examined various measures, including inheritance tax, tax relief, and stamp duty, Sunak says, suggesting that CGT is the “next one on the block”.

Capital gains tax is about the only one they’ve not looked at over the last few years.

But, that might not calm suspicions that the Treasury is considering reforming CGT, to raise more revenue from tax payers when they sell second homes, shares, or even works of art.

Q: Why was there no mention of childcare in your summer statement, given women have been badly affected by the lockdown?

Sunak says many sectors didn’t get a mention in his 22 minute statement.

He agrees that women are disproportionately likely to work in hospitality, so they should benefit from the ‘eat out to help out’ scheme.

And on childcare, he says nurseries received a 12-month holiday on business rates, and childcare providers are getting all their government funding even if they’re closed.

That equates to 50% of revenue, he says.

The Chancellor of the Exchequer, Rishi Sunak, is appearing before parliament’s Treasury committee now.

You should be able to see a live feed at the top of his blog.

Mel Stride MP, chair of the committee, begins asks Sunak whether he’ll need to raise taxes to address the UK deficit, which is likely to exceed £300bn this year due to the cost of the pandemic.

Disappointingly, Sunak declines to comment on future fiscal policy.

He says “strong sustainable public finances are important”. But, the exact shape of the fiscal response must wait for a future budget.

Stride presses him on the Conservative’s manifesto pledge to keep the pensions ‘triple lock’. Does Sunak agree with prime minister Boris Johnson, who said in late May that he’d keep his manifesto promises?

Sunak replies that he always agrees with the PM... but he won’t comment on future tax policy now.

Just in: Goldman Sachs has just beaten market forecasts by reporting that earnings rose in the last quarter despite the pandemic.

Goldman posted diluted earnings per common share (EPS) of $6.26 for the second quarter of 2020, up from $5.81 for the second quarter of 2019 and $3.11 for the first quarter of 2020.

Net revenues in the quarter were 41% higher than a year ago, at $13.30bn - the second best in its history, as the Wall Street bank benefited from the pick-up in the markets since March.

Goldman says economic indicators “generally improved” during the quarter as economies began to reopen and central banks and governments announced stimulus programmes - lifting asset prices.

Investors are impressed - sending Goldman’s shares up 4% in pre-market trading.

David Solomon, Goldman’s chairman and CEO, says:

Our strong financial performance across our client franchises demonstrates the inherent benefits of our diversified business model. The turbulence we have seen in recent months only reinforces our commitment to the strategy we outlined earlier this year to investors.

While the economic outlook remains uncertain, I am confident that we will continue to be the firm of choice for clients around the world who are looking to reshape their businesses and rebuild a more resilient economy.”

European stock markets are pushing higher today, lifted by hopes that a Covid-19 vaccine will be successfully developed.

Industrial stocks, healthcare firms, miners and consumer goods and service providers are leading the rally, pushing the EU-wide Stoxx 600 index up by 1.2%.

In London, the FTSE 100 is up 80 points or 1.3% at 6260, its highest level in just over a week. Airline group IAG is the top riser, up 5.4%, with jet engine maker Rolls-Royce gaining 3.7%.

AstraZeneca, the pharmaceuticals giant, has gained 3.7% in London.

Stocks have pushed higher in the last few minutes, after ITV’s political editor Robert Peston tweeted that he’s heard “positive” developments from Oxford’s vaccine trial.

He writes:

I am hearing there will be positive news soon (perhaps tomorrow) on initial trials of the Oxford Covid-19 vaccine that is backed by AstraZeneca and supported by tens of millions of pounds of government money.

The first data is due be published in the Lancet.

Apparently the vaccine is generating the kind of antibody and T-cell (killer cell) response that the researchers would hope to see.

That said, the efficacy will only be properly established in the large phase III programme that is under way in the viral epicentre of Brazil, to deliver a large database that assesses safety as well as efficacy.

One source told me: “An important point to keep in mind is that there are two dimensions to the immune response: antibodies and T-cells..

“Everybody is focussed on antibodies but there is a growing body of evidence suggesting that the T-cells response is important in the defence against coronavirus.

Investors were already in optimistic mood after US biotech firm Moderna had reported that its potential vaccine to prevent Covid-19 produced a “robust” immune response in all 45 patients in its early stage human trial.

CNBC has the details:

After two vaccinations, the vaccine elicited a “robust” immune response in all participants in all dose cohorts, Moderna said. The company said the levels of neutralizing antibodies in patients in the high dose group were fourfold higher than in recovered Covid-19 patients.

A working vaccine would address the big fear in the City - a new wave of Covid-19 cases and deaths this winter that could force governments to impose lockdowns again.

Bond market action!

The UK has just sold a three-year government bond at the lowest ever interest rate, with investors paying more than the value of the debt.

The United Kingdom Debt Management Office sold £3.25bn of three-year gilts at an average yield of -0.069%. That means investors who bought it, and hold until it matures in September 2023, will make small loss.

That suggests pessimism about the prospect for UK growth and inflation, and some confidence that the Bank of England will keep pumping money into the economy through its QE scheme [which buys gilts from investors].

It also shows strong appetite for UK government bonds - handy, when the Covid-19 pandemic is driving the national debt dramatically higher, meaning a likely deficit of over £300bn this year.

More details here.

Silvana Tenreyro has also cited evidence that pandemics lead to lower inflation.

She tells her webinar with the London School of Economic that research going back to the Middle Ages shows that epidemics of infectious disease tend to push the cost of living down (as well as making life much more unpleasant, of course):

Jordà, Singh and Taylor (2020) use data from pandemics going back to the Black Death to estimate the average impact on equilibrium interest rates. They look at long-run impacts, which should be less susceptible to the impact of monetary policy, and find that pandemics tend to reduce r* or the equilibrium interest rate. If Covid-19 has the same effect, it would imply lower levels of interest rates than before would be consistent with meeting the inflation target.

Forthcoming work by Bank staff, using a similar method, uses historical inflation data from the UK (Chart 1) and seven other countries to estimate the response of inflation to pandemics (Bonciani and Braun, forthcoming). The results suggest that these episodes typically led to persistent declines in inflation (Chart 2).

Bank of England policymaker Silvana Tenreyro has just declared she’s prepared to push for fresh stimulus to protect the UK economy from the Covid-19 pandemic.

Speaking on a webinar, Tenreyro warned that a strong V-shaped recovery is unlikely - she predicts an incomplete ‘V-shaped’ trajectory.

Tenreyro, an external member of the Bank’s Monetary Policy Committee, says:

Assuming prevalence gradually falls, my central case forecast is for GDP to follow an interrupted or incomplete ‘V-shaped’ trajectory, with the first quarterly step-up in Q3. We are already seeing indications of a sharp recovery in purchases that were restricted only because of mandated business closures.

But I think that this will be interrupted by continued risk aversion and voluntary social distancing in some sectors, remaining restrictions on activities in others, and in general, by higher unemployment.

An “incomplete V” sounds more like a square root sign -- implying the economy would not return to its pre-crisis levels fast. Many economists agree, including the independent Office for Budget Responsibility, whose central forecast shows the lost output won’t be recovered until the end of 2022.

As such, Tenreyro is signalling that she could vote for another stimulus package soon to lift inflation higher (such as buying more government debt through the Bank’s QE programme).

At our June MPC meeting, I thought that on balance and absent additional policy stimulus, demand would remain weaker than supply for some time, generating continuing disinflationary pressures.

To counteract those pressures and bring inflation back up towards our 2 per cent target, I voted to loosen monetary policy by expanding the stock of asset purchases by £100 billion. As with the rest of the committee, I remain ready to vote for further action as necessary to support the economy and ensure inflation returns to target.

Despite the pick-up in consumer prices in June, City economists don’t expect inflation to keep rising.

Paul Dales of Capital Economics predicts that inflation could fall below zero this summer, as retailers try to lure anxious consumers to spend.

Inflation in all major core categories except restaurants and hotels fell, with the increase in clothing inflation (from -3.1% in May to -2.2% in June) and the rise in recreation and culture inflation (from +2.0% to +2.6%) making the largest contributions. We are not convinced either will be sustained.

We suspect that after the initial release of pent up demand once non-essential retailers opened in mid-June, retailers will have to use heavier discounts to get people through the doors. And a large part of the rise in recreation and culture was due to a jump in games, toys and hobbies inflation from +1.0% to +7.9%, which bounces around at the best of times.

Samuel Tombs of Pantheon Economics also predicts CPI will fall back:

KPMG chief economist Yael Selfin points out that inflation is still well below the UK’s target of 2% - meaning central bankers could launch more stimulus measures.

Muted inflation paves the way for further action from the Bank of England as economic activity remains anaemic

Vegetables became a little cheaper last month.

Deliciously, that includes expensive crisps - meaning gamers can offset rising console prices by tucking in.

Today’s inflation report shows that food and non-alcoholic beverage prices fell by 0.6% this year, compared with a rise of 0.1% a year ago.

The ONS says:

The effect comprised small movements from a variety of product groups, with the largest (of 0.03 percentage points) coming from vegetables. The largest individual downward contribution in this category came from premium potato crisps, reversing the upward contribution observed between April and May.

Restaurant and hotel prices also fell -- which the ONS partly attributes to “muffins and individual cakes”.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Inflation across the UK has risen for the first time since the Covid-19 pandemic began, as the lockdown pushed up the cost of computer games and forced clothes retailers to delay the usual summer sales season.

The Office for National Statistics has just reported that consumer prices rose by 0.6% in June, compared to a year ago. That surprised economists who expected a fall to 0.4%. It’s the first increase in the CPI since January.

The ONS says:

• On clothing....the upward contribution to the change in the rate between May and June comes from across almost the full range of men’s clothing, while women’s clothing shows a more mixed picture across the different products but with the overall effect still upward.
• For computer games and computer games consoles, Prices in this category overall rose by 1.8% this year, compared with a fall of 4.7% a year ago.

This shows the impact of the coronavirus lockdown on the UK economy. In normal times, clothing retailers would have been holding summer sales in June - rather than gingerly reopening.

The ONS explains:

Price movements this year have not followed the normal seasonal pattern. In recent years, prices have generally risen between January and May before the summer sales season starts in June

And on computer games, the ONS suspects that prices may have risen as people scrambled to find entertainment during the lockdown:

It is possible that prices have been influenced by the coronavirus (COVID-19) lockdown changing the timing of demand and the availability of some items, particularly consoles. However, it is equally likely to be a result of the computer games in the bestseller charts.

Price movements for computer games can often be relatively large depending on the composition of these charts.

More details and reaction to follow....

Also coming up today

One of the Bank of England’s external members, professor Silvana Tenreyro, is speaking about the impact of Covid-19 on the UK economy this morning (as it suffers its worst slump in centuries)

European stock markets are set for a strong session, on hopes that the coronavirus crisis will ease.

Last night, US biotech firm Moderna reported that its potential Covid-19 vaccine had produced immune responses in patients in the early stage trial.

New manufacturing output data and oil inventory figures from the US will show how its economy is faring.

Luxury goods maker Burberry, online fashion site ASOS and electricals retailer Dixons Carphone are all reporting results (more on that shortly too)

The agenda

• 7am BST: UK inflation report for June
• 9am BST: Bank of England policymaker Silvana Tenreyro gives a speech on: Covid-19 and the economy: what are the lessons so far?
• 2.15pm BST: US industrial production for June
• 3.30pm BST: US weekly oil inventory figures