Bank of England warns of worst contraction in centuries, as economic activity slumps

The CBI has added to the gloom, by reporting that optimism among UK manufacturers is falling at a record pace.

The CBI says:

Business sentiment plunged at a survey-record pace in the three months to April (-87%), following a post-election bounce in January (+23%). Export sentiment also dropped at a survey-record pace in the quarter to April (-84% from -8% in January).

Its monthly survey of British factories (which began in the 1950s) also found that output volumes and total new orders fell in February-April, at the fastest pace since 2009.

Here are more key findings from the report, which suggests the Bank of England is right to be worried!

Around four out of five firms have seen a negative impact on their domestic output.

Just over three-quarters of manufacturers reported a negative impact on their international output.

Roughly half of manufacturers reported a partial shutdown/closure.

Just over half of manufacturers mentioned that they temporarily laid off staff, but only one in twenty reported permanent layoffs.

Around two-thirds of firms have faced cash flow difficulties.

P&O Cruises and Cunard, the two UK cruise lines in the Carnival group, have announced extensions to the “pauses” in their operations, until July 31 this year.

The 11-week extensions take the shutdown in cruise holidays a month further than most other global brands. Others are however likely to follow suit after US medical authorities said that they would close ports to cruise sailings, in an order that could last until late July.

Cruises have played a grim role in the spread of coronavirus, with passengers and later crew marooned on ships where the virus has rapidly spread. One Carnival-owned cruise ship, the Ruby Princess, has also accounted for a significant proportion of all coronavirus cases in Australia.

P&O Cruises president Paul Ludlow said the line was “considering the evolving advice as well as potential restrictions in ports of call as we look at how and when we phase our ships back into service”, and said future holidaymakers would likely have to adhere to “new stringent measures” that “will become the new normal”.

Bank of England policymaker Jan Vlieghe also defended the stimulus measures announced by the Bank of England since the Covid-19 outbreak began.

Those measure include buying another £200bn of government debt through the Bank’s QE scheme, and allowing the Treasury to expand its overdraft.

Vlieghe insists in today’s speech that these measures are a sensible response to the financial turmoil earlier this year, when a slump in asset prices created a dangerous tightening of financial conditions.

He insists the BoE is not acting like Germany’s central bank during the money-printing days of the Weimar Republic, or that of Zimbabwe, which suffered hyper-inflation more recently.

The first difference, Vlieghe argues, is that the BoE is trying to avoid a damaging depression. If it succeeds, inflation will remain low (around the 2% target).

The second difference, is that the BoE is taking these decisions independently – Westminster is not calling the shots.

Vlieghe argues:

If we were the central bank of the Weimar Republic or Zimbabwe, the mechanical transactions on our balance sheet would be similar to what is actually happening in the UK right now. That is not where you would find the smoking gun.

The difference would be that government would be telling the central bank what to do, implicitly or explicitly, in order to achieve fiscal objectives while subordinating any inflation objectives, a situation also known as fiscal dominance.

Why would that ultimately lead to inflation? Because, once a government decides to prioritise its fiscal objectives above its inflation objectives, it is likely to involve removing central bank independence implicitly or explicitly, and crucially keeping short-term interest rates lower than would be appropriate to meet the inflation target.