Next week might bring signs of a recovery – albeit a weak one from a low base.
Flash purchasing managers’ surveys could show that UK manufacturing output stabilised in June after collapsing in April and May. This should be confirmed by the CBI survey, which could show a record drop in output in the last three months but expectations for a levelling off in the next three: the survey will also show prices falling a lot, although how much due to falling input prices and how much to weak demand is unclear. Another CBI survey could show that retail sales have picked up, thanks to the easing of restrictions on a few shops such as garden centres – although they will of course be sharply down on a year ago.
News from the eurozone might be slightly better. Purchasing managers there might report that output is rising slightly, thanks to the easing of lockdowns – although of course it is doing so from a low base.
As for how vigorous the upturn will be, we’ll get mixed signals next week. Some good news could come from the ECB. It is likely to report that the narrow money stock has risen more than 12 per cent in the last 12 months, its biggest increase since 2015. In normal times, such growth has been a good lead indicator of output growth a few months later.
But we’ll also see more cautious messages. Although Germany’s Ifo survey could post a rise in companies’ reports of both current trading conditions and expectations, the latter is likely to remain well below normal. This message will be corroborated by the National Bank of Belgium’s survey of business confidence, which is likely to be well below normal, albeit up from last month.
These indicators will reinforce fears that we might not get a V-shaped recovery. Instead, business failures, loan defaults and mass unemployment will hold back demand, while spare capacity and heightened risk aversion (caused in part by fears of a second wave of the virus) will restrain capital spending and hiring.
Such fears mean that the ECB is likely to follow the Fed and promise to keep rates low and continue quantitative easing until it is confident that the recovery is strong and sustainable. This means ultra-loose monetary policy for a very long time – and continued calls for looser fiscal policy as well.
