A procession of economists have warned that the V-shaped recovery looks increasingly illusive. Chancellor Rishi Sunak said it shows the ‘scale of the challenge’.
European stock markets have closed for the day - and the weaker pound has helped the FTSE 100 to outperform continental rivals.
The blue-chip index has closed slightly higher, up three points at 6179, lifted by oil companies BT and Shell.
Sterling is now down 0.6% against the euro, which makes multinationals earnings in Europe more valuable.
BT was the top riser, up 4%, after the government gave telcos until 2027 to remove Huawei kit from their 5G infrastructure - and resisted ordering to rip out equipment from older networks.
Germany’s DAX lost 0.8%, while France’s CAC finished 1% lower.
David Madden of CMC Markets sums up the European session:
The mood has been downbeat all day as continued health concerns and rising tensions in relation to China has weighed on stocks. Dealers are still worried about the rate at which the virus is spreading, and seeing as some restrictions are being reintroduced, that is adding to the bearish move too.
The US government has hit out against the Beijing administration in regards to its territorial claims in the South China Sea. This represents the latest development in the frosty relationship between the two largest economies in the world. China isn’t on great terms with the UK either, as earlier today it was announced the British government basically banned Huawei from its 5G network.
Wall Street looks a little brighter though - the Dow is up 1%, lifted by construction equipment maker Caterpillar, and oil companies Exxon and Chevron.
Speaking of taxes.... The Telegraph has spotted that Chancellor Rishi Sunak has commissioned a review of capital gains tax (paid when you sell an asset).
The move could be a sign that the historically low CGT rates could be increased, to cover some of the debt increase caused by the pandemic. Here’s the story.
Tom Selby, senior analyst at AJ Bell, suspects Sunak is considering aligning CGT rates with income tax- which might not please his own party.
“With UK borrowing set to hit its highest level in peacetime history, Chancellor Rishi Sunak’s request for a review of CGT feels like the starting pistol for a tax grab ahead of the Autumn Budget later this year.
“A quick look at the numbers gives us some idea of why CGT might be in the Treasury’s crosshairs. While chargeable gains subject to CGT after losses but before the annual exempt amount were £57.9 billion in 2017/18, total CGT liabilities were £8.8 billion – implying an average tax rate of just 15%.
“Given those who pay CGT are twice as likely to pay higher-rate (40%) income tax as taxpayers generally, the Treasury may have its sights set on aligning CGT rates and income tax rates. CGT rates are currently set at 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayer (18% and 28% where gains relate to residential property).
“Such a shift could both simplify the system and raise tax revenue – particularly if the annual exempt amount, currently set at £12,300, is either slashed or abolished altogether.
“Any attempt to attack CGT would inevitably face stiff resistance from Conservative backbenchers. However, with the Treasury needing to raise funds to pay for its COVID-19 response and a huge Parliamentary majority, the Government may feel CGT cuts are among its least-worst options.”
The Financial Times’s Chris Giles has written about the OBR’s warning that the UK public finances are on an ‘unsustainable path’ (as flagged at 12.15pm):
He says:
Tax increases of £60bn or a return to austerity will be needed to restore the UK’s public finances to stability after coronavirus, the fiscal watchdog said on Tuesday, predicting government borrowing will reach £370bn this year.
Describing the long-term public finances as “clearly . . . on an unsustainable path”, the Office for Budget Responsibility said that a combination of borrowing to address the consequences of Covid-19 and the government’s decision to limit immigration after Brexit would increase the necessity for tax increases.
In its central scenario, it calculated that the country now needed to raise 50 per cent more from tax increases each decade to keep public debt stable as a share of national income than would have been required before the pandemic, assuming the prime minister keeps his promise of not imposing austerity measures. There was now a need for £60bn of tax rises per decade to stabilise the public finances, it said.
But other economists aren’t convinced by the OBR’s logic. Jo Michell, associate professor in economics at Bristol Business School, reckons the watchdog’s forecasts for the national debt are flaky.
He points out that the OBR forecasts assume long-term borrowing costs of 4.1% per year. Currently, UK 30-year government bonds are trading at a yield (interest rate) of just 0.6% - a historic low (recently falling below Japan) which shows strong appetite for such gilts.
Gilt rates at 4.1%. Righto. I guess it's possible that gilt rate could also be a different number over a 50 year time horizon. But no confidence bands, yes, fine fine. pic.twitter.com/cDJEploXYn
Plus, the Bank of England could expand its quantitative easing programme and buy more government debt. That would keep borrowing costs low, as well as reassuring private investors that gilts are a safe investment*.
In May, Professor Michell recently created a neat online tool with the IPPR that lets you examine how the Covid-19 crisis would affect the public finances. It shows, he says, that high borrowing and an increased debt level are manageable in the medium term.
He co-wrote at the time:
A more equitable way to place the public finances on a sustainable footing is through progressive taxation, including taxation of wealth.
Given that government spending as a share of GDP will need to rise, higher tax shares should be a medium-term policy goal.
According to the ONS estimate published this morning, the UK economy contracted by 19.1 per cent in the three months to May, broadly in line with what we forecast last month. The contraction in growth reflects widespread negative contributions across all major sectors.
The economy grew by 1.8 per cent in May itself but output remained 25 per cent below its February level.
The initial outlook for the third quarter of 2020 is for growth of about 8 to 10 per cent.
UK GDP forecasts Photograph: NIESR
Senior economist Dr Kemar Whyte is also “doubtful” that we’ll see a V-shaped recovery.
The loosening of Covid-19 restrictions has provided an impetus to kickstart the UK economy. However, the measures unveiled by the Chancellor at the Summer Statement are a poorly timed change of tack and could trigger a sharp rise in unemployment, and possibly lead to permanent long-term damage to the economy.”
Virgin Atlantic Airline at Manchester Airport. Photograph: Oli Scarff/AFP/Getty Images
Newsflash: Virgin Atlantic has announced it has secured a rescue deal to recapitalise the airline.
The ‘private-only solvent recapitalisation’ will pump £1.2bn into Virgin Atlantic, which has been extremely badly hurt by the Covid-19 pandemic and the slump in airline travel.
The funds come from existing shareholders, including £200m from Richard Branson’s Virgin Group. US hedge fund Davidson Kempner Capital Management is also involved, providing £170m of debt funding.
However, the UK government is not involved.
Here’s the details:
Shareholders are providing c.£600m in support over the life of The Plan including a £200m investment from Virgin Group, and the deferral of c.£400m of shareholder deferrals and waivers
New partner Davidson Kempner Capital Management LP is providing £170m of secured financing
Creditors will support the airline with over £450m of deferrals
The airline continues to have the support of credit card acquirers (Merchant Service Providers) Lloyd’s Cardnet and First Data.
Virgin Atlantic CEO Shai Weiss says the deal will let the airline keep flying (passenger flights will resume on 20 July).
“Few could have predicted the scale of the Covid-19 crisis we have witnessed and undoubtedly, the last six months have been the toughest we have faced in our 36-year history. We have taken painful measures, but we have accomplished what many thought impossible.
The solvent recapitalisation of Virgin Atlantic will ensure that we can continue to provide vital connectivity and competition to consumers and businesses in Britain and beyond.
We greatly appreciate the support of our shareholders, creditors and new private investors and together, we will ensure that Virgin Atlantic can emerge a sustainably profitable airline, with a healthy balance sheet.
Just in: Average pay in the US has dropped, as America’s economy is buffered by the Covid-19 pandemic.
Hourly earnings of private workers shrank by 1.2% in June compared to May, the latest inflation report shows. That may be a sign that some lower-paid employees, who suffered badly from job losses in the lockdown, have returned to work, pulling the average lower.
The Labor Department also reports that inflation rose to 0.6% in June, from just 0.1% in May. Add in a 0.6% drop in average hours worked, and it all means that real earnings shrank by 2.3% in June. Not an encouraging sign for the US economy.
The pick-up in inflation was partly due to higher fuel costs, following the rise in the oil price. But food is also pricier -- up 4.5% over the last 12 months, with the index for food at home rising 5.6%.
Two Wall Street banks have also revealed the impact of Covid-19 on their businesses.
JP Morgan has reported that profits shrank by 51% in the last three months - a sharp fall, but less severe than expected. The bank has also put aside some $10.5bn to cover a likely jump in bad loans, as the global recession hits its customers.
JP Morgan CEO Jamie Dimon sounded a cautious note:
“Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy.”
Rival Citigroup was hit harder, reporting that profits slid 73% in Q2. It has put $5.6bn aside to cover loan defaults.
Economic confidence in Germany has taken a small knock this month.
The ZEW institute’s gauge of German economic sentiment has dipped to 59.3, down from 63.4 in June - and weaker than expected.
It’s the first drop in four months, suggesting renewed caution about the economic situation. Investors are slightly more upbeat about current conditions, though.
Britain’s weak recovery in May hasn’t improved the mood in the markets today.
All the main European indices are in the red, with the Europe-wide Stoxx 600 down 1.2%.
Photograph: Refinitiv
Investors are still disconcerted by the late fall on Wall Street last night, and worrying that new lockdown measures in the US will hamper the recovery.
Ironically, the drop in the pound today is supporting the FTSE 100 (it makes overseas earnings more valuable). The blue-chip index is only down 0.25%, helped by multinationals like Royal Dutch Shell, Imperial Brands and WPP.
But the UK-focused FTSE 250 is worse hit, down 1.6%. Aerospace engineer Meggitt, retail group Frasers and outsourcing group Capita have all lost over 5%.
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