Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

BlackRock Commentary: UK – A case study in virus dynamics

Mike Pyle, Global Chief Investment Strategist together with Elga Bartsch, Head of Macro Research, Vivek Paul, Senior Portfolio Strategist, and Nicholas Fawcett, Vice President all part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.


We zero in on the UK this week to highlight the three main signposts we use to assess the impact of the coronavirus: the pace of the economic restart, the state of policy support and evidence of permanent economic damage. The UK’s experience confirms our assessment that the cumulative virus impact will ultimately be a fraction of that of the 2008 financial crisis, but it also shows the challenges ahead.

Article image 1

Sources: BlackRock Investment Institute, with data from Haver, October 2020. Notes: The chart shows the cumulative change in real GDP from the fourth quarter of 2019 through the second quarter of 2020 for each country/region.

 

The UK has been one of the hardest hit developed economies in the Covid-19 pandemic. GDP fell nearly 22% in the first half of 2020, a much bigger shock than other developed countries. See the chart above. Part of this reflects a relatively high concentration of services in the UK’s overall economic activity. The other reason is that the UK lockdown started later but lasted longer than in other European countries as infection rates were slower to drop in the UK. That said, as we previously set out in our framework for assessing the Covid-19 macro shock, financial markets should be focused on the cumulative shortfall in GDP versus its trend, rather than the initial drop in output. On that score, consensus forecasts suggest the UK’s cumulative GDP loss over coming years will be well below that seen in the wake of the global financial crisis. As in other regions, this is thanks to the timely and overwhelming initial policy response. The same holds true for Europe, and especially the U.S.– where we see the cumulative hit as smaller. 

The economic restart is under way in the UK. Google data point to mobility roughly 30% below pre-pandemic levels, versus 70% at the trough. This recovery has been somewhat softer than that seen in the euro area and U.S. We believe the recent resurgence in infections – in the UK and many parts of Europe – should not be classed as a second wave, as it partly reflects materially higher testing rates than at the earlier peak of the pandemic. Our assessment also reflects a UK government that is acting preemptively now – especially after criticisms of its late introduction of the initial lockdown and despite weakening political support for reintroducing lockdowns. Future pauses or delays to the activity restart are likely to be materially less significant to the overall economy, we believe.

How about policy support? The UK saw an early policy revolution with a comprehensive and coordinated fiscal and monetary easing with the aim of bridging the gap in private sector incomes. The government’s furlough program saw the state cover most of the costs of keeping workers on payrolls in affected industries. This has kept the unemployment rate low. The Bank of England unveiled a broad package of easing measures and in August added negative interest rates to its policy toolbox –but is unlikely to cut rates below zero in the near term. Weaker data could well be met with further asset purchases.

The risk? Unemployment is set to rise as the UK’s furlough program winds down and is replaced by a more limited program that supports “viable” jobs and companies legally forced to close to stop the virus spread. This highlights the balancing act facing some governments, weighing the desire to provide an income bridge against the cost of impeding reallocation of resources away from nonviable firms in a post-Covid world. Fading policy support is also a key risk in the United States, where talks over additional fiscal support face a narrow and steep path ahead of the November election.

One key challenge looms that could affect the UK economy’s long-term health: negotiating a post-Brexit trade deal with the EU. Tensions increased after the UK floated rules that appeared at odds with a previous agreements, but we still believe that there will ultimately be some form of “skinny” trade agreement. The potential downside for the UK is greater than Europe, which has galvanized its policy response to the crisis by starting a pan European Recovery fund. Overall, our UK assessment offers a window into how we view other regions and markets. This points to potential for a more cautious view on Europe than we currently hold – and a more optimistic one on emerging markets.

 

Market Updates

Article image 2

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, October 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

Market backdrop

COVID infections have picked up in Europe and parts of the U.S., but fatalities are far off peaks reached in the spring. Democratic presidential nominee Joe Biden has widened his lead in polls ahead of the Nov. 3 election, but the race for the Senate looks closer. Talks over a U.S. fiscal stimulus package continued in fits and starts, but the path to a pre-election deal is narrow. This raises the risk of permanent economic scarring and a weakening of an activity restart that has been running ahead of expectations. The U.S. election could change this, as differences in fiscal impulses between the outcomes are large.

Week Ahead

  • October 12th – 19th: China total social financing, new yuan loans and money supply
  • October 13th: Germany industrial orders and output; U.S. international trade
  • October 15th: Philly Fed business index
  • October 16th: University of Michigan consumer sentiment index

Market attention will turn to key data releases gauging the status of the economic recovery across the world. In the U.S. and Europe, we’ll get more color on economic sentiment, especially in areas where virus infection rates continue to pick up. The annual IMF meetings will also be in focus, with growth forecasts likely to be revised up from earlier more bearish projections.


BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 12th, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Join MeDirect today to access the tools you need to put your money to work on your own terms.

Latest news articles

Our anchor in choppy markets
All News

BlackRock Commentary: Our anchor in choppy markets

Market narratives have shifted from AI excitement and recession fears to confidence in U.S. economic resilience, with a focus on supply-driven dynamics, prompting a risk-on stance, overweight in U.S. stocks, diversified AI investments, and flexibility in Japanese and Chinese equities.

free stuff that can help you save
All News

Free stuff that can help you save

Saving money is a challenge that can be made easier by taking advantage of free stuff that’s out there to help you keep living costs under control.

Epic Investment Partners Weekly Article
All News

Epic Investment Partners Views: The Week Ahead

This week’s key events include FOMC minutes, US CPI, PPI figures, and bank earnings, along with Eurozone and German economic data, while US inflation data ahead of the presidential election takes center stage; markets reacted strongly to the US jobs report, with treasury yields rising, oil prices spiking due to geopolitical tensions, and central bank chatter driving volatility, especially in the euro and sterling.

Experience better Banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. 


Sign up and open your account for free, within minutes.

MeDirect_Multi-Devices-cards

You are leaving medirect.com.mt

Please be aware that the external site policies, or those of another MeDirect website, may differ from this website’s terms and conditions and privacy policy. The next website will open in a new browser window or tab.

 

Note: MeDirect is not responsible for any content on third party sites, nor does a link suggest endorsement of those sites and/or their content.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.