Graeme Wearden 

Bank of England policymaker warns of rising economic risks and job losses – as it happened

Rolling coverage of the latest economic and financial news, as MPC member Gertjan Vlieghe says UK may need more stimulus to fight Covid-19 crisis
  
  

The City of London near Bank Junction and the Bank of England.
The City of London near Bank Junction and the Bank of England. Photograph: Antonio Olmos/The Observer

Time for a quick recap.

A Bank of England policymaker has warned that UK interest rates may need to be cut below zero, as the economy reels from rising Covid-19 cases.

MPC member Gertjan Vlieghe predicted a jump in unemployment once the furlough scheme ends, which could push joblessness over the Bank’s 7.5% target. He warned:

The fact that redundancies are rising sharply and the number of vacancies is only at around 60% of its level at the start of this year makes it difficult to see a scenario where all of the remaining furloughed workers are reintegrated seamlessly into the labour force.

There is huge uncertainty about the scale of job losses, in both directions, but in my view, the risks are skewed towards even larger losses, implying even more slack in the economy than in our central projection.

Vlieghe also dampened hopes of a rapid rebound in the economy, pointing out that the slump is still deeper than after the financial crisis, despite the summer recovery.

Google has been hit by a major antitrust lawsuit. The US DoJ accused the search giant of illegally thwarting competition to maintain a monopoly on the search and search advertising business.

Stock markets are edgy, as US lawmakers continue to negotiate the details of a possible stimulus package. Donald Trump has claimed he wants to do a bigger package than the Democrats, even though the Republicans have yet to match Nancy Pelosi’s $2.2trn proposal.

Airline stocks have jumped, after a new one-hour Covid-19 test was introduced at Heathrow. The scheme is designed for passengers flying to countries, such as Italy and Hong Kong, which require pre-departure checks.

Demand for ‘sexual wellbeing products’ has jumped, as the easing of lockdown restrictions has allowed a pick-up in social interactions.

Consumer goods manufacturer Reckitt Benckiser also reported a surge in sales of cleaning products, but also predicted less demand for baby formula milk next year, as the pandemic is likely to push the birth rate down.

And finally... Children and young people are at risk of becoming a “lost generation” because of the UK government’s pandemic policies, according to members of the government’s Sage committee of scientific experts:

European market close

One of the less exciting days in the City has ended with the FTSE 100 broadly where it started.

The blue-chip index has closed just 4 points higher at 5889, up 0.08%.

Airline and aerospace engineering firms had a good day, thanks to the rollout of new fast Covid-19 tests at Heathrow. IAG surged 6.8%, easyJet gained 5.6%, Melrose picked up 3.7% and Rolls-Royce finished 3.1% higher.

Exhibitions group Informa (+4.6%) and hotel operator Whitbread (+2.6%) were also in the risers, on hopes of a pick-up in travel soon.

European markets sagged, though, partly because the euro strengthened against the US dollar (on hopes of a stimulus breakthrough on Capitol Hill). The Stoxx 600 index lost 0.2%, with Germany’s DAX losing 0.75%.

DoJ takes on Google with antitrust lawsuit

More than 20 years after its titanic clash with Microsoft, America’s Department of Justice has launched a massive new antitrust case - this time against Google.

The DoJ, flanked by 11 US states, filed an antitrust case against Google today, accusing the Alphabet-owned search giant of illegally using its market power to fend off rivals, and unfairly dominate the online search and search advertising markets.

The lawsuit claims:

Two decades ago, Google became the darling of Silicon Valley as a scrappy startup with an innovative way to search the emerging internet.

That Google is long gone. The Google of today is a monopoly gatekeeper for the internet, and one of the wealthiest companies on the planet, with a market value of $1 trillion and annual revenue exceeding $160 billion.

For many years, Google has used anticompetitive tactics to maintain and extend its monopolies in the markets for general search services, search advertising, and general search text advertising—the cornerstones of its empire.

The DoJ accuses of Google of unlawfully blocking out competitors, saying it spends “billions of dollars each year” to ensure mobile phone manufacturers, wireless operators and web browsers give default status for its general search engine, at the expense of rivals.

The lawsuit also claims that Google has created “continuous and self-reinforcing monopolies” in multiple advertising markets, by sharing some of its tens of billions of ad dollars with distributors in return for commitments to favour Google’s search engine.

It concludes:

Google is now the unchallenged gateway to the internet for billions of users worldwide.

As a consequence, countless advertisers must pay a toll to Google’s search advertising and general search text advertising monopolies; American consumers are forced to accept Google’s policies, privacy practices, and use of personal data; and new companies with innovative business models cannot emerge from Google’s long shadow.

For the sake of American consumers, advertisers, and all companies now reliant on the internet economy, the time has come to stop Google’s anticompetitive conduct and restore competition

Since starting off as a simple, but powerful, search engine in the late 1990s, Google has become a huge advertising platform and also branched into cloud computing, mobile phone operating systems, online video, email, instant messaging, online photos, smart speakers, artificial intelligence.... typically by either acquiring rivals or by offering a competing service.

Google, which has already been fined for breaking EU antitrust rules, has rejected the DoJ’s case, insisting that its services succeed on their own merits....

Today’s lawsuit by the Department of Justice is deeply flawed. People use Google because they choose to -- not because they’re forced to or because they can’t find alternatives.

Wall Street is pushing higher...., even though there’s no progress on the stimulus front yet.

Consumer goods group Procter & Gamble (+2.2%), credit card firm American Express (1.4%) and sportswear group Nike (+1.4%) are among the risers. That’s lifted the Dow by 0.8% today, or 233 points to 28,428.

Full story: Bank of England policymaker backs negative interest rates

My colleague Phillip Inman has written up Gertjan Vlieghe’s comments about the need to stimulate the UK’s weak economy, as unemployment pushes sharply higher:

Negative interest rates in the UK edged closer on Monday after a Bank of England policymaker warned the central bank would need extra firepower to boost the economy following the surge in Covid-19 cases.

In a gloomy assessment of the next few months, Gertjan Vlieghe, who sits on the monetary policy committee, the bank’s interest rate setting body, said the second wave of Covid-19 was holding back consumer spending and suppressing business investment, which would push unemployment higher.

Vlieghe said there was a strong risk that the broad-based recovery since the summer would suffer a setback and that the central bank would need to inject further funds into the economy before the end of the year....

Here’s the full story:

Wall Street has opened a little higher, as traders cling to hopes of a US stimulus deal.

President Donald Trump has fanned the flames of optimism, telling Fox News that he wanted a big deal, and would get doubters on his own side online:

“I want to do it even bigger than the Democrats.

“Not every Republican agrees with me, but they will.”

However, the market reaction is quite muted. The Dow Jones industrial average has risen by 0.6%, or 169 points, to 28,365, having lost 410 points last night.

The tech-focused Nasdaq has gained 52 points, or 0.45%, to 1,531.

Brad Bechtel of Jefferies reckons that hopes of a pre-election package remain low:

Fiscal stimulus in the US also in a bit of a ‘game’ of its own, and we’ll see if the two sides come to some sort of conclusion today.

I am not sure that will do much to foreign exchange market pricing, maybe a bit US dollar negative as some commodity currencies and emerging market currencies rally but the markets are going to wait for the election result for now with expectations low that an actual fiscal deal will happen before then.

Updated

The latest Reuters polling of City economists shows that Gertjan Vlieghe is right to be worried about downside risks.

Expectations for growth (or lack thereof) this year have hit their lowest point, with the economy expected to shrink by just over 10%.

The economy is only expected to recover around half that lost output next year, with growth of around 6.1% (of a smaller economy than a year earlier, as Vleighe explained)

EU enjoys 'outrageous demand' for new Covid-10 recovery bonds

The EU launched its first new coronavirus-related bonds today, triggering a frenzy of interest from investors.

The Financial Times reports that the sale was 14-times oversubscribed, as bidders battled to get a piece of the action. The bonds will fund Europe’s Covid-19 recovery efforts, and are attractively priced compared to German and French government debt.

Here’s the FT’s take:

The deal forms the start of a borrowing binge that will make Brussels one of the region’s biggest debt issuers. Investors placed bids for more than €230bn, far exceeding the €17bn of bonds on offer, according to one of the banks arranging the deal.

Buyers were drawn by the relatively high yields on the bonds, which came with 10-year and 20-year maturities, and offered more income for investors than the eurozone’s safest government debt.

The sale is the first under the EU’s €100bn SURE programme, which will provide loans to support member states’ efforts to keep workers in jobs during the pandemic. Brussels will ramp up its debt issuance next year as it funds the larger €750bn coronavirus recovery package agreed in July.

“This is outrageous demand, which they are going to need for the huge wave of supply on the way,” said Peter Goves, a strategist at MFS Investment Management. “This is just an appetiser for what’s coming in 2021.”

In the US, the number of new building permits jumped 5% in September, as the market recovered from its spring lockdown.

The Commerce Departments reports that the number of new privately-owned housing units authorized jumped to an annual rate of 1,553,000m up from August’s 1,476,000. That’s also 8.1% above the September 2019 rate of 1,437,000.

Encouraging... except the number of actual housing starts missed forecasts. It hit an annual rate of 1.41m in September, missing estimates of 1.457m. August’s reading has been revised down too, to 1.38m from 1.416m.

Some early reaction to Gertjan Vlieghe’s speech:

Gertjan Vlieghe’s speech also includes this striking graph, which shows how the size of different sectors of the UK economy has changed, quarter-by-quarter.

To create it, he’s taken each sector of the economy, measured how its share in GDP has changed from one period to the next, and then tracked how wide the distribution of changes is.

As you can see, there’s normally relatively little change - until the pandemic, when spending on some areas has slumped, and others are little changed, or even increased.

As Vlieghe puts it:

We are really not all in this together. It is far, far worse for some than for others.

And this is likely to lead to permanent changes, leading to a reallocation of capital - and changes in the jobs market:

People might have persistently lower appetite for business travel, with all the related airline, hotel, restaurant, conference facility spending that this is normally associated with.

People might have persistently lower appetite for spending five days per week in the office, with a related reduction in spending on office space, on commuter travel, on food and drink consumed near the workplace. And on-line shopping, which in any case was already growing more rapidly than bricks-and-mortar retail, is likely to become even more prevalent in the future.

These persistent reallocations will require workers in declining sectors to find work in expanding sectors. It will require disinvestment by firms in declining sectors and new investment in expanding sectors.

Back in the markets, Wall Street is expected to claw back around half of Monday’s losses when trading begins in a couple of hours.

Investors may be hoping for a last-minute compromise on a US stimulus deal, with Republicans and Democrats due to resume talks today - ahead of tonight’s deadline set by house speaker Nancy Pelosi.

Last night, Pelosi told MSNBC that the differences between the two sides (outlined earlier) were narrowing:

“Finally, they have come to the table and we’re going to try to get something done,.

Here’s a timely example of the rising downside economic risks worrying the BoE:

Vlieghe also expresses some support for the idea of cutting UK interest rates below zero (from their current record low of 0.1%).

In today’s speech, he cites “growing empirical literature” which suggests negative interest rates have not been counterproductive to the aims of monetary policy in other countries, adding:

My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low. Since it has not been tried in the UK, there is uncertainty about this judgement, and the MPC is not at a point yet when it can reach a conclusion on this issue.

But given how low short term and long term interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that headroom.

BoE's Vlieghe: Downside economic risks materialising as virus cases rise

Gertjan Vlieghe goes on to warm that the recent increase in Covid-19 cases is likely to undermine the UK’s recovery from its Covid-19 slump:

And for that reason, he believes the Bank of England may need to inject more stimulus soon (a decision he could vote for, as an MPC member).

In today’s speech, Vlieghe shows that the economy has suffered a much sharper slump than after the financial crisis, even after the summer rebound:

Let me start with a bit of simple arithmetic to illustrate what is happening to the UK economy.

If something drops by a quarter and then increases by a quarter, it ends up a little more than 6% short of where it started.

It turns out that this is, approximately, what has happened to the UK economy during the pandemic so far. It’s actually a little bit worse. Between February and April, GDP fell by 25%. Since then, between April and August, GDP has risen by 22%. In August, GDP was about 9% below its February level.

Rather than trying to figure out what letter of the alphabet this looks like, I would like to give you some context of what it means to be 9% short of where you started, in GDP terms.

In the global financial crisis, UK GDP declined by 6% relative to its pre-crisis peak. Since we are 9% short of the pre-pandemic peak, in GDP terms, we are therefore not even at the bottom of the financial crisis:

And for that reason, Vlieghe says there is “quite a way to go before we can say we have recovered” from the slump.

Here’s his conclusion:

While the economy so far has grown quickly, we must not lose track of where we are. There is a tremendous challenge ahead. GDP and labour market indicators stand at levels that are below what has historically been the trough of a recession.

Given that virus prevalence has been increasing again recently, it is likely to weigh more heavily on economic activity. Indeed, it appears that the downside risks to the economic outlook are starting to materialise. In my view, the outlook for monetary policy is skewed towards adding further stimulus.

Bank of England: risks are skewed towards even larger job losses

Newsflash: One of the Bank of England’s top policymakers has warned that unemployment will rise sharply this autumn and winter as the government’s furlough scheme ends.

Gertjan Vlieghe, a member of the Monetary Policy Committee which sets interest rates, fears that joblessness could surge over the BoE’s current forecast of 7.5% unemployment at the end of 2020.

In a speech called “Assessing the Health of the Economy”, Vlieghe points out that there were still two million people on the furlough scheme this month. That’s 9% of the private sector workforce, down from 30% at the peak of the lockdown.

Not all will return to work after it wraps up at the end of October, he warns, with a risk of “even larger losses” than the BoE predicted in August...

To be clear, we do not expect the 9% of private sector workers who are currently on furlough to lose their jobs. We expect many of them to either be re-employed by their current employer, or to find new work relatively quickly.

But, our August central forecast was for unemployment to reach a peak of 7½%, implying aggregate net job losses on the same scale as in the global financial crisis. The fact that redundancies are rising sharply and the number of vacancies is only at around 60% of its level at the start of this year makes it difficult to see a scenario where all of the remaining furloughed workers are reintegrated seamlessly into the labour force.

There is huge uncertainty about the scale of job losses, in both directions, but in my view, the risks are skewed towards even larger losses, implying even more slack in the economy than in our central projection.

As Vlieghe points out, 3.3% of the UK workforce lost their jobs in the global financial crisis, compared to 3.8% in the 1990s recession and 6.6% in the 1980s recession.

Heathrow’s new fast Covid-19 Covid tests may not prevent heavy job cuts at Hong Kong’s Cathay Pacific.

The South China Morning Post are reporting that the airline is planning to lose 6,000 workers -- a grim total, but also less than first feared.

Here’s the story:

Cathay Pacific Airways has agreed to scale back planned job cuts by 25 per cent to around 6,000 globally, and will axe its Cathay Dragon sister airline brand, according to multiple sources.

Hong Kong’s flagship carrier was eyeing global lay-offs of up to 8,000, but has now reduced them to about 18 per cent of its total workforce, including around 5,000 in the city, after government intervention.

While Cathay’s local workforce will bear the brunt of job cuts, the global scale is still lower than the industry average of about 20-30 per cent staff reduction.

The job cut announcement is expected to be made on Wednesday, after the closure of the stock market, two days after the board met on Monday.

A Cathay Pacific spokeswoman said the company would not comment on speculation.

News of Heathrow’s speedy Covid-19 tests for passengers to Hong Kong and Italy has also lifted shares in jet engine maker Rolls-Royce (+4%).

Hopes of a pick-up in travel has also boosted engineering firm Melrose (+2.9%), which has an aerospace division.

Updated

IAG shares jump as one-hour Covid tests begin at Heathrow

Passengers flying from London Heathrow to Hong Kong and Italy will be able to have a rapid Covid-19 test at the airport before checking in from Tuesday.

The test costs £80 and results will be available within an hour.

The aim is to provide rapid Covid-19 tests for passengers travelling to destinations that require pre-departure tests.

British Airways, Virgin Atlantic and Cathay Pacific, which all fly routes that require pre-departure tests, will be the first airlines to offer it, according to the two companies that will run the testing, Collinson, a medical and security assistance firm, and Swissport, the ground and cargo handling company.

Here’s the full story:

This news has lifted shares in BA’s parent company IAG by 4%, making it the top FTSE 100 riser.

UK housebuilder Bellway has reminded us of the economic damage caused by the pandemic, with its latest financial results.

Bellway built 30% fewer houses in the 12 months to 31 July than a year earlier (at 7,522, down from 10,892).

Pre-tax profits fell by two thirds, with Bellway’s gross margin dropping to 19% from 24.6%.

Bellway has also taken some multi-million financial charges to cover the cost of the pandemic -- as the new physical distancing rules mean houses are taking longer to build.

They are:

  • a non-exceptional COVID-19 expense of £18.9 million in relation to extended site durations and enhanced health and safety requirements;
  • an exceptional COVID-19 related expense of £25.8 million, principally comprising abnormal, non-productive site-based costs of £14.5 million, arising from the interruption to construction activity during the ‘lockdown’, together with impairment costs of £9.9 million on several aborted land deals.

Despite this, Bellway has resumed dividend payments (with a final payment of 50p, down from 100p a year ago).

Noble Francis of the Construction Products Association has pulled out some key points:

Reckitt Benckiser: Durex sales rebound as social distancing relaxed

Consumer goods giant Reckitt Benckiser has lifted its revenue guidance after seeing strong growth for hygiene and health products.

The firm behind Dettol, Air Wick, Gaviscon and Cleararil now expects revenue growth to hit ‘low double digits’ for 2020, up from ‘high single digits’ before.

It reports that demand for cleaning and air freshening products has been strong this year, with people spending a lot more time at home during the pandemic:

‘Stay at home’ dynamics and social distancing have had significant effects on some of our brands. For example, Finish and Air Wick have benefited from consumers spending more time at home.

But Covid-19 has also hit Reckitt’s sales of formula milk for babies and infants, with the company predicting that the pandemic will weigh on birth rates in 2021:

In contrast, restrictions on movement have impacted cross-border sales, for example, for infant formula between Hong Kong and China and some VMS demand into Asia from the US.

There is also evidence that birth rates will be further lowered in coming quarters as a result of behaviour changes related to the pandemic. This is expected to have an impact on market growth for our infant nutrition business in 2021.

Reckitt’s Durex division, meanwhile, targets customers who are keen not to make babies. Sales of ‘sexual wellbeing products’ dipped earlier this year due to ‘reduced social interactions’, but are now recovering in markets where people can mingle more freely again.

Following a more challenging first half of the year, relaxations of social distancing regulations resulted in improved demand for our sexual well-being products, including Durex, which saw double digit growth in revenue.

This has been particularly pronounced in markets where the rate of pandemic infection has materially improved.

Shares in Reckitt have jumped 1.2%, to near the top of the FTSE 100 leaderboard.

Updated

The Europe-wide Stoxx 600 has opened 0.2% lower, with Germany’s DAX losing 0.3%.

Trading is muted in London too, with the FTSE 100 down 3 points at 5880.

Asia-Pacific markets had an edgy day, with Australia’s S&P/ASX 200 down 0.7% and Japan’s Nikkei losing 0.44% - although China’s CSI 300 gained 0.6%.

Fiona Cincotta of City Index explains that anxiety from Wall Street spilled across the markets:

Wall Street ended lower as the stimulus clock ticked. News that there was still no agreement on fiscal stimulus unnerved investors. The negativity spilled over into Asia overnight and Europe is also set to start in the red.

The Tuesday deadline for a fiscal stimulus agreement between the Democrats and Republicans looks as if it could come and go without an agreement being reached. Whilst the two sides are narrowing their differences, differences still remain and the deadline is later today. The likelihood of a deal being achieved before the November 3rd election is slipping lower.

Not only are investors grappling with the idea that the world’s largest economy will have to wait for additional stimulus, rising coronavirus cases are also dragging on sentiment. Europe recorded a record number of new daily covid cases on Monday and lockdown restriction are being tightened across the region.

Updated

Introduction: Clock ticking on US stimulus deadline

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

Some familiar themes are weighing on the markets today. There’s just two weeks until the US presidential election, and fears of a contested results abound. The Covid-19 pandemic continue to rage, with Argentina becoming the 5th country to report 1m cases.

Today is also the deadline to agree a pre-election US stimulus package, set by House speaker Nancy Pelosi. She’s due to speak with US Treasury secretary Steven Mnuchin again today, in a final push to close the gap between the two sides.

Pelosi’s spokesman, Drew Hammill, tweeted overnight that the two sides are narrowing their differences - and should know by the end of today whether a deal can be done.

Investors, though, fear that the two sides won’t close the gap. The Democrats are still pushing for at least $2.2trn of additional spending to support families, businesses, and public-health agencies - the latest White House offer is $1.8trn.

Pelosi is also pushing for more support for those made unemployed in the pandemic, expanded tax credits for poorer families, and aid for states worst hit by Covid-19. That’s a lot for the White House to swallow.... but president Trump would like a deal, so that $1,200 cheques could be dispatched to Americans.

Anxiety about the talks hit shares on Wall Street last night, with the Dow Jones industrial average losing 410 points in a nervy late selloff.

Jim Reid of Deutsche Bank says anxiety about the talks has ‘soured’ the mood in the markets:

The two sides remain talking ahead of today’s deadline. While the Republican-led Senate has been reluctant to pass a stimulus bill above the $500 billion level that Majority leader McConnell has supported, President Trump has indicated that he is willing to go up to the $2.2 trillion range that Democrats have demanded. Mr Trump said yesterday that if an agreement with Democrats is reached, he would “lean” on Republican Senators to “come along.”

Regardless, the confirmation that the two sides remain significantly apart saw the S&P 500 fall over 1.1% in the last 90 minutes of trading, though the index had been dripping lower throughout the day as risk sentiment soured after a healthy start.

After falling yesterday, European stock markets are on track to open lower this morning.

Bank of England policymaker Gertjan Vlieghe is due to speak about the state of the UK economy this morning, and we also get a healthcheck on America’s housing market.

The agenda

  • 7am BST: German consumer confidence survey from GfK
  • 10.30am BST: Bank of England MPC member Gertjan Vlieghe speech on “Assessing the Health of the Economy”
  • 1.30pm BST: US housing start and building permit data for September
 

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