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UK interest rates held as economy shows signs of picking up – BBC News

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The Bank of England has held interest rates at 0.75% amid early signs of a pick-up in the UK and global economies.

In Mark Carney’s final interest rate meeting as governor, the Bank’s Monetary Policy Committee (MPC) voted 7-2 to keep rates unchanged.

Recent weak economic data had led to speculation rates could be cut, but Mr Carney said “the most recent signs are that global growth has stabilised”.

But the MPC said it was poised to cut interest rates if necessary.

Fewer companies in the UK are worried about Brexit, Mr Carney told a news conference following the rate decision. He added that survey data suggested UK growth will improve.

But he said: “To be clear these are still early days and it’s less of a case of so far so good than so far good enough,” he said, again referring to the UK economy.

“Although the global economy looks to be recovering, caution is warranted,” he said. “Evidence of a pick-up in growth is not yet widespread.”

He said the coronavirus outbreak was a “reminder of the need to be vigilant” when it comes to bumps in economic growth around the world.

Ready to cut

The nine MPC members have been split on rates since November.

Lower interest rates are good news for borrowers and bad news for savers because High Street banks use the Bank of England base rate as a reference point for many mortgages and savings accounts.

In a closely-watched decision, policymakers said they would monitor whether a recent improvement in business sentiment would lead to stronger economic growth.

The MPC said it stood ready to cut rates if there were signs that growth would remain subdued.

“Policy might need to reinforce the expected recovery in UK GDP growth, should the more positive signals from recent indicators of global and domestic activity not be sustained,” the MPC said.

Two members, Jonathan Haskel and Michael Saunders, argued that past business surveys of economic growth had not been reliable.

They continued to call for an immediate interest rate cut to 0.5%.

Weak UK growth

The Bank’s latest economic estimates suggest the economy did not grow at all in the final three months of last year.

Weaker growth at the turn of the year is also expected to drag overall economic growth down to just 0.75% in 2020. This is down from a projection of 1.25% last November.

The UK economy is expected to expand by 0.2% in the first three months of this year.

The Bank said a trade deal between the US and China that lowers some tariffs would provide a boost to the global economy.

An expected rise in spending by the government in the March Budget could provide a further boost to growth, policymakers said.

Ruth Gregory, senior UK economist at Capital Economics, said she also expected stronger growth ahead.

“Admittedly, the MPC left the door open to a rate cut in the coming months, but with the economy turning a corner and a big fiscal stimulus approaching, we suspect the next move in interest rates will be up not down, albeit not until next year.”

Brexit drag

The Bank said Brexit-related uncertainty had “weighed on investment” over the past few years.

Policymakers said companies’ Brexit plans had diverted money towards preparing for the UK’s departure from the EU that would otherwise be invested elsewhere.

This has reduced the UK’s long-term growth prospects by limiting the space in which the economy can grow without the risk of overheating.

This would force the Bank to raise interest rates, which would in turn slow the UK economy.

Policymakers now believe the UK’s potential growth has been reduced to 1.1%. This is down from 2.9% before the financial crisis and 1.6% over most of the past decade.

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Older workers will jump-start an economy post-pandemic faster than younger ones, argues Citigroup – MarketWatch

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What do older workers have over younger ones as an economy tries to recover from a pandemic? They can potentially breathe life into a shut-down economy faster, in part because they have more money to spend and better health insurance in case they do get sick.

So said Dana Peterson and Catherine Mann, global economists at Citigroup, who poured cold water on one idea circulating among policy makers that would see younger workers allowed back on the job ahead of their older counterparts.

“First, allowing younger people to return to work may help restart the engines of the economy, but they are actually not the ones who drive much of the consumer spending that fuels GDP growth,” said the pair in a note to clients.

Read:Bill Gates on all the reasons why a quick end to the lockdown won’t really work

They cited evidence that shows peak spending is something that often happens later in life for advanced and emerging economies. “This is because older generations often have reached peak earnings, and own assets (homes and financial assets) that facilitate greater spending.”

Older generations also play harder, meaning they spend more on experiences, such as in the U.K., where those 50 and older spend more than twice as much than persons 18 to 49, while in the U.S., that peak spending on movies, shopping, travel, etc. occurs between ages 45 to 54. And spending stays elevated over the mid-50s to mid-70s range, they said.

The third reason harks back to a scene in the 1991 movie “Fried Green Tomatoes,” in which actress Kathy Bates rams the car of a couple of younger women who swiped her parking spot. “Face it girls, I’m older and I have more insurance.”

Older workers simply have better access to health care in case they do get sick, as opposed to younger co-workers. “In the U.S., which has one of the highest Universal Health Coverage service coverage indexes in the world at 84, younger persons spend the least on health care and insurance, and are also less likely to have health insurance,” the economists noted.

The health-care coverage situation is worse in South Asia and sub-Saharan Africa, and even in countries that have better coverage, younger people can still carry the virus and infect multigenerational households. That has been the case in Italy, where the disease has had a bigger effect with more deaths on the older population.

Read:As Italy’s death toll exceeds 10,000, Italians anxiously wait for coronavirus surge to peak

Finally, the economists argued that the modern workplace needs all ages to function.

“Indeed, older workers may have the experience required to help guide the activities of the younger generations,” said the economists. “Practically, many persons who are in management and positions of leadership skew older. Hence, it seems inconceivable that younger people can return to work in every facet without managers in place.”

Read:‘We can get through this’: How to manage your mental health during the coronavirus pandemic

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It could take three years for the US economy to recover from COVID-19 – World Economic Forum

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The US and Eurozone’s economies could take until 2023 to recover from the impact of the COVID-19 coronavirus crisis, according to a new report from consultancy McKinsey & Company.

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What a muted economic recovery means for the world

Image: McKinsey & Company

If the public health response, including social distancing and lockdown measures, is initially successful but fails to prevent a resurgence in the virus, the world will experience a “muted” economic recovery, says McKinsey. In this scenario, while the global economy would recover to pre-crisis levels by the third quarter of 2022, the US economy would need until the first quarter of 2023 and Europe until the third quarter of the same year.

If the public health response is stronger and more successful – controlling the spread of the virus in each country within two-to-three months – the outlook could be more positive, with economic recovery by the third quarter of 2020 for the US, the fourth quarter of 2020 for China and the first quarter of 2021 for the Eurozone.

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Impact on global economic recovery if the virus is contained

Image: McKinsey & Company

In these scenarios involving partially effective interventions, policy responses could partially offset economic damage and help to avoid a banking crisis, says McKinsey. The firm has modelled nine scenarios, ranging from rapid and effective control of the virus with highly effective policy interventions to a broad failure of public health measures and ineffective policy and economic interventions.

The economic impact in the US, however, could exceed anything experienced since the end of World War II.

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How does the economic impact in the US compare with WWII?

Image: McKinsey & Company

The industries hardest hit by COVID-19, including commercial aerospace, travel and insurance, may see a slower recovery. Within the travel sector, the shock to immediate demand is estimated to be five-to-six times greater than following the terror attacks of 11 September 2001 – though recovery may be quicker for domestic travel. The crisis has also amplified existing challenges or vulnerabilities in the aerospace and automotive industries, which will affect their recovery rates.

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The impact of COVID-19 by sector

Image: McKinsey & Company

As supply chains around the world are disrupted, the report warns that the full impact is yet to be felt. Business leaders must prepare for the effects on production, transport and logistics, and customer demand. These include a slump in demand from consumers leading to inventory “whiplash,” as well as parts and labour shortages due to manufacturing plants shutting or reducing capacity.

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What should we expect from supply chain distruption?

Image: McKinsey & Company

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A Global Conundrum: How to Pause the Economy and Avoid Ruin – The Wall Street Journal

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The coronavirus has produced something new in economic history. Never before have governments tried to put swaths of national economies in an induced coma, artificially maintain their vital organs, and awaken them gradually.

Some past societies, such as medieval Europe, abandoned economic activities as people tried to escape plagues, and suffered heavy disruptions to their social order. In other pandemics, such as the flu of 1918, economic interactions continued with only limited quarantine measures, as authorities accepted contagion and deaths as the price of continuity.

Today, many nations are more willing—or feel more able—to try to have it both ways. Their hope is to press pause on the economy, save lives, and then press play again. If it works cleanly, it will be a testament to the flexibility of modern capitalism and the ingenuity of modern government. More likely, much will go wrong.

“We’re in unknown territory. Inevitably there’s a lot of guesswork,” said Simon Tilford, an economist at Forum New Economy, a Berlin think tank.

Number of confirmed cases around the world

Source: Johns Hopkins Center for Systems Science and Engineering

The problem is that the economy has no pause button. Social-distancing measures, such as telling people to stay home and businesses to close unless essential, can suspend the buying and selling of most goods and services. But many costs keep on running. Households have rent or mortgages to pay, as well as bills for food and other necessities. Businesses have payrolls, debts and other fixed overheads. Banks owe money and so must collect it.

The conundrum of how to pay wages, rents and interest in the absence of sales has three kinds of answer.

People and businesses could live off their savings until the restrictions end. But many don’t have enough reserves. The longer the health emergency lasts, the more people will run out of money.

The private sector could cut its outlays to match the commerce that is still permitted. But that raises the specter of mass unemployment and bankruptcies, the destruction of countless normally viable businesses, the scattering of workforces, and perhaps a lasting depression.

“There’s a clear common societal interest in preserving jobs and companies from this external shock,” said Christian Odendahl, chief economist at the Centre for European Reform, a think tank. “Our economic structure is a very complex machine, and its organization, the match between workers and firms, is difficult to replicate once it’s gone.”

Empty streets around a department store in Wolverhampton, central England.



Photo:

Nick Potts/Zuma Press

To avoid such armageddon, the government can substitute for sales for a while, sending or lending enough money to cover wages, interest and other fixed costs. In theory, the state could preserve today’s companies and jobs for months on end, provided it can borrow or print enough money and target the aid perfectly, and that people trust normality will return.

In practice, the outcome in many countries is likely to involve a mix of savings, slump and subsidies.

Government packages of fiscal and liquidity support are already huge: $2 trillion in the U.S. and hundreds of billions of dollars in Germany, the U.K. and France. European countries are focusing on subsidizing payrolls so that companies don’t lay off their workers. The U.S. is offering forgivable loans to businesses that hold on to staff, but also expanding unemployment benefits and sending one-time checks to households. Many countries are delaying taxes and encouraging or paying banks to accept late payments on loans.

But politics has inevitably meant disagreement about how to target the aid, and how far to go in subsidizing the private sector. The U.S.’s aid package came too late to avoid a sudden jump in job losses last week.

“We’re seeing unprecedented liquidity support in many countries, but the collapse of private consumption is so big that many firms will go under,” said Mr. Tilford.

In the U.S. and Europe, there is debate over which sectors and companies deserve handouts, which parts of the private sector should be asked to absorb some of the cost themselves, and how to avoid pumping money into ailing companies that would have gone bust anyway.

There is also reluctance in some countries to borrow too much, only a decade after the global financial crisis pushed up public debts. That concern in particularly acute in Italy, which has both the world’s deadliest coronavirus outbreak and fragile finances.

Italy’s fiscal and liquidity measures of around €25 billion ($27.8 billion) are small compared with those of most other big European economies. Yet Italy’s lockdown is among the most stringent outside central China, where the pandemic began, and is already weighing heavily on an economy that never fully recovered from the last financial crisis.

Rome’s cautious economic response reflects its high national debt and fragile bond market, which in bad times relies on investors’ trust that the European Central Bank would intervene to stop a rout. Italy, wanting more protection, is pushing for joint borrowing by eurozone members, but countries led by Germany and the Netherlands reject that.

A commuter waits for a bus in front of a boarded-up store in Chicago.



Photo:

Scott Olson/Getty Images

Bringing economies out of their induced comas will be slow. Countries don’t want resurgent coronavirus outbreaks to force a second bout of lockdowns. Nobody knows yet how many months will pass before normal commercial activity resumes in full. For countries with large tourism sectors, such as Italy and Spain, losing the summer to continued restrictions would be another heavy blow.

If the operation succeeds, there will be the question of what to do about the large additional public and private debts. Forgiving loans to businesses that held on the workers could help the private sector to recover, but add to public costs.

The coronavirus pandemic is disrupting the global economy. WSJ’s Greg Ip explains what the Federal Reserve can do to stem the damage. Illustration: Carlos Waters/WSJ

High public debts, however, are nothing new in history. Experience suggests they are usually dealt with in several ways, from central banks buying and sitting on them, to forcing private banks and savers to lend cheaply to the government, to eroding their value through inflation.

A decade ago, European countries tried to pay down high public debts after the financial crisis with fiscal austerity. The economic pain and political backlashes felt around the continent had still not fully subsided when the pandemic struck, making a repeat less likely.

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Write to Marcus Walker at marcus.walker@wsj.com

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