‘These Are Our Dark Times’

The Bank of England topped up QE on Thursday to the tune of £100 billion. The vote was 8-1.

The move was expected, and on the surface of it, suggests the bank thinks the economic situation is dire. And they do – think it’s dire, that is. But the silver lining is that it’s less dire than previously thought. Or at least according to the statement.

“Recent data suggest that the fall in global GDP in 2020 Q2 will be less severe than expected at the time of the May Monetary Policy Report”, the BOE said. “There are signs of consumer spending and services output picking up, following the easing of COVID-related restrictions on economic activity”.

The statement does, of course, acknowledge that the UK is going through an extremely rough patch.

GDP collapsed more than 20% in April (figure below), and this year is expected to witness the deepest annual contraction since at least 1706 (and no, that is not a typo).

“The unprecedented situation means that the outlook for the UK and global economies is unusually uncertain”, the BOE went on to lament Thursday. “It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors”.

The BOE cut rates to what one would have assumed was the lower bound in March during the flurry of coordinated policy action across major economies. Speculation abounded about the prospect of negative rates in the UK, something the MPC hasn’t exactly ruled out.

And yet, money markets removed bets for NIRP until the end of 2021 after today’s meeting, which was seen as somewhat “hawkish”, in that the bank suggested QE could be done by the beginning of next year. By “merely” meeting market expectations, today’s outcome is likely to be seen as underwhelming. “The speculation they would err on the side of doing more rather than less were clearly dashed”, UBS said. Gilts plunged.

Beyond the narrow interpretation of Thursday’s decision, the BOE’s predicament (which is obviously made more complicated by Brexit) mirrors that seen across the developed world.

Central banks have done quite a bit, but there’s really no way to know whether it’s enough or too much at the current juncture.

A similar dynamic is at play in New Zealand and Australia.

The Australian labor market woefully underperformed expectations in May, data out Thursday showed. Employment dropped 227,700 last month, triple the median estimate. That comes on the heels of April’s dramatic 600,000 plunge. The unemployment rate spiked to the highest in nearly 20 years.

“While devastated by the number, I am sadly not surprised”, Scott Morrison said, during remarks to the press. “These are our dark times, but I can see that ray of light”.

Australia, like every other country, has aggressively deployed fiscal and monetary stimulus, and the RBA sounded a somewhat optimistic tone in minutes from the June meeting released earlier this week.

“It was possible that the downturn would be shallower than expected”, the minutes read. “The rate of new infections had declined significantly and some restrictions had been eased earlier than had previously been thought likely. However, the outlook remained highly uncertain”.

While the central bank seems content with where monetary policy is currently, the assessment from June’s RBA minutes echoes that from today’s BOE statement. Perhaps the downturn will be shallower than anticipated, but the outlook is uncertain and, as is the case in every other locale, any “green shoots” in the data are interspersed with disconcerting misses.

“Timelier payroll data suggested that the pace of job losses had slowed towards the end of April”, the same RBA minutes said. Needless to say, today’s figures do not appear to support that. The RBA of course cut rates to the effective lower bound, launched QE, and a version of yield-curve control during the crisis.

Meanwhile, New Zealand said Thursday the economy shrank 1.6% in Q1, a far larger contraction than expected, and the worst performance in nearly three decades.

“The fall surpassed quarterly falls during the global financial crisis in the late 2000s”, Statistics New Zealand remarked. “It is the largest quarterly fall since the 2.4% decline in the March 1991 quarter”.

This effectively confirms the first recession in 10 years. As is the case around the world, the second quarter will be catastrophic. Economists see New Zealand posting a 19% contraction for the period and yet, some see evidence that the Q2 slump may not be as deep as feared thanks to the country’s success in controlling the virus. The Q1 GDP data only captures one week of lockdowns.

RBNZ rolled out QE in late March, topped it up last month, and opened the door to negative rates.

Central banks continue to insist that policy options are not exhausted and maybe they’re correct. The message from the highest-frequency data generally makes the case for guarded optimism, and we shouldn’t mistake lagging data for anything other than what it is – confirmation of what everyone already knows.

And yet, when you see things like the May labor market figures from Australia, it makes you doubt any thesis which posits a one-way road out of the crisis. Most investors were never buying that narrative in the first place, and central banks certainly aren’t either.