Worried over a double-dip recession, UK extends furlough and BoE provides QE support

Summary

• Rishi Sunak extends furlough till the end of March 2021
• Bank of England pumps yet another £150 billion to revive a struggling economy
• IHS Markit PMI dropped to a four-month low level in October

The fears of the UK economy moving towards a double-dip recession might just turn out to be true, if one goes by the latest PMI survey results by the IHS Markit/CIPS (Chartered Institute of Procurement & Supply).

The UK Purchasing Managers’ Index (PMI) figures for the services sector stooped to its 4-month low value of 51.4 in October 2020. The corresponding value achieved in the previous month was much higher at 56.1.

The only saving grace was that the PMI did not fall below the threshold of 50, which would have indicated a contraction in the business activity. As per its definition, a value above 50 for PMI implies an expanding activity and below that denotes otherwise.

PMI index is closely followed by economists and investors as a leading indicator of the health of an economy.

The UK composite PMI also plummeted from a high of 56.5 in September to a low of 52.1 for October 2020. Tim Moore, Economics Director, IHS Markit said that these figures indicated that the services sector in the UK was facing tough times even before the announcement of the second lockdown came out for November. This raised concern that the month of November 2020 could display worse numbers, he emphasised.

Services sector constitutes for about 75 per cent of the total economic activity in the UK.

The UK manufacturing PMI was released few days back and fared better than services with a reading of 53.7 for October 2020, supporting by a strong demand from exports.

The PMI recorded a poorer show in many other European nation including Spain, Italy, France, and Germany where its reading dived below 50 for the months of September as well as October 2020.

England entered a nation-wide lockdown on 5 November which would be lasting till at least 2 December 2020 and might be extended further if needed, according to media sources.

It is likely that Britain is on its course of a double-dip recession beginning Q4 2020 and a difficult recovery period during 2021. A recession is a period characterised by negative growth for two consecutive quarters. In case two recessions occur in a quick succession, it is termed as a double-dip recession.

Bank of England’s stimulus

Worried over the possibility of yet another contraction in the British economic output, the nation’s central bank rolled out quantitative easing (QE) support worth £150 billion on 5 November 2020. However, it kept the bank rate unchanged at a value of 0.1 per cent despite rumours over taking the interest rate to the below zero category.

Market experts had predicted an QE worth a lower value of £100 billion. The higher amount seemed to have been rolled due to a worsening outlook for the national economy. For instance, the Ernst & Young Item’s Club had forecasted that the British economy would shrink between 5 to 8 per cent during Q4 2020.

The Bank of England would undertake QE by purchasing government bonds from the secondary market, in turn pumping money into a slowing down economy. The bank also informed that it would be retaining a 20 billion pounds worth of monthly stock of corporate bonds.

These decisions were unanimously taken by the nine-member monetary policy committee of the BoE.

This latest QE expansion would be taking the BoE’s total asset purchasing facility to a value of £895 billion. It involved both corporate and government debt.

Furlough’s extension

UK government’s furlough scheme is meant to provide jobs support to the staff of ailing businesses impacted by the coronavirus pandemic. Under the scheme, the UK Treasury pays 80 per cent of the staff salary for impacted businesses with a monthly salary cap of £2,500 for an individual employee.

Rishi Sunak, Chancellor, UK Treasury extended the furlough scheme till the end of March 2021. When the scheme was first announced in March 2020, it was slated to expire on 31 October 2020.

The scheme is likely to bring relief to billions of workers across the nation, struggling financially due to the eruption of the coronavirus pandemic.

Some critics observed that the announcement should have come in earlier, given the deteriorating state of affairs with rapidly rising coronavirus cases across the nation. Experts had been worried over a rising unemployment rate across the UK for a long time and expected it to worsen if the furlough scheme had expired earlier.