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UK economy: momentum of disaster may be waning

The Covid-19 pandemic has hit British business worse than the financial crisis of 2008, but new PMI figures suggest the economic slump has bottomed out

London

The slump weighing on the British economy as a result of the Covid-19 crisis has begun to bottom out, according to the latest PMI data.

IHS Markit’s Purchasing Managers Index for the whole British economy rose from a devastating 13.8 in March to a still shocking 28.9 in April; a score of 50 indicates no change in business activity.

Businesses, politicians and investors will welcome the fact that the momentum of the economic turmoil triggered by the novel coronavirus outbreak, and the unprecedented lockdowns imposed to limit its spread, may be waning.

However, April’s figure still counts as one of the lowest readings in the survey’s 20-year history and indicates that the British economy has suffered a sharper contraction than it did after the Global Financial Crisis.

With just under 250,000 confirmed cases and around 35,700 deaths, the United Kingdom is the nation second-worst affected by the pandemic per the official statistics, although the veracity of China’s figures is hotly contested.

Reacting to his firm’s latest preliminary findings, IHS Markit’s Chris Williamson stated: “This remains a shockingly broad-based downturn with very few companies left unscathed. Travel and tourism firms, hotels, restaurants and producers of consumer goods such as clothing were again the hardest hit, reflecting virus containment measures.”

Some have argued that the moderate uptick in PMI indicates that businesses are adapting to cope with a prolonged period of social distancing. Others have attributed the rise to the increasing anticipation that the lockdown measures will be lifted and that a form of normality will return.

Seven million British workers remain on the government’s furlough scheme, which has been extended until October. The gargantuan cost of this policy, coupled with reinvigorated central bank intervention, has led to further speculation that the Bank of England (BoE) could cut interest rates below zero.

On Wednesday, May 20, the British government sold a negative yielding bond for the first time in its history; that same day the BoE Governor Andrew Bailey admitted to lawmakers that the bank is not ruling out the idea of negative rates.

While such measures may help the British economy and state in the short term, there are profound concerns for what negative rates could do to British business in the long term.

 

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