The further emergency fiscal and monetary measures announced by the UK government yesterday were both massive in scale and coordinated in nature. They were also much needed as the Covid-19 crisis continues to deepen.
However, more will be needed in view of obvious gaps in the measures, such as help for renters and the self-employed, and support for travel-related industries whose survival is in doubt. Furthermore, because this is a global emergency, the efficacy of these measures on the UK economy will also depend on a similarly huge and joined-up response from other major economic blocks.
Other nations are responding too, albeit at a different pace and on a different scale. France, for instance, has a package estimated at 12% of GDP, accompanied by rhetoric from President Macron around not allowing any businesses to fail. There is also increasing talk of the eurozone issuing joint debt obligations, which would be a game-changer in terms of relieving pressure on Italy in particular. The US Federal Reserve has acted swiftly and aggressively too, but the fiscal response has been slower (not helped by deep divisions between the Republican and Democratic parties).
The £330bn package that the UK Chancellor Rishi Sunak announced this week (on top of the smaller stimulus and reliefs announced at last week’s Budget) amounts to 15% of current GDP (approximately £2.2 trillion). The UK’s public sector net debt is currently £1.8 trillion and forecast to rise to £2.0 trillion by 2024/5 – even before a severe hit to the economy. Assuming all of the measures announced so far eventually end up on the government’s balance sheet, the net debt/GDP ratio will leap to around 100%, even on a normalised basis. In the near term, the ratio will look far worse (China, for instance, is reporting a 16% year-on-year drop in GDP for Q1, and something of that order is likely in the UK and Europe in the second quarter of the year). However, the chair of the Office for Budget Responsibility, Robert Chote, has agreed that this “whatever it takes” approach is the correct one, given the war-like predicament the country is facing.
In terms of the detail, the Covid Corporate Financing Facility (CCFF) should alleviate some short-term funding stress related to the commercial paper (unsecured, short-term debt) market; it has a broader reach than similar programmes announced in the US, in that companies that don’t currently issue commercial paper will also be able to use the facility, rather than just the highest-quality borrowers, as is the case in the US.
The expected surge in government borrowing is having an impact on bond pricing: 10-year gilt yields at 0.8% are about 0.5% higher than the lows of early March, but still only around levels seen in the second half of 2019. This makes them still relatively low and affordable, so the cost of interest is not currently a major concern. Furthermore, additional quantitative easing (the introduction of new money into the supply via bond buying by central banks) looks very likely, and this should help keep bond yields in check.
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