Cambridge Weekly 17th August 2020

COVID II the sequel – as scary as the original?

The pleasures, and then increasing discomfort, of the UK’s unusually broiling August weather offered a welcome distraction from the seemingly never ending COVID news flow of gloominess. As the heatwave came to an end with a thunderous bang, so too did many of the UK’s summer freedoms. The reintroduction of widespread lockdowns at local level, and travel restrictions for most of Europe’s holiday destinations, reiterated that the virus has not been overcome and, indeed, we may already be in the midst of a second wave, or at least a formidable resurgence.

Confirmation that the UK suffered the worst economic decline among the G7 countries during the second quarter of 2020 soured the mood further (see separate article). The recent pick-up in the rate of recovery no longer feels quite as encouraging given it hardly looks sustainable against a backdrop of returning activity restrictions.

Please sir! How long will the UK stay bottom of the class?

Throughout the pandemic, the UK has been beset by a host of unflattering comparisons. The statistics on virus cases, deaths and other health figures have consistently put Britain as one of the hardest hit countries in the world. Last week, the press focused on a different kind of bad news: In GDP terms, the UK economy shrank more than 20% in the second quarter of the year – making it the worst-performing country in Europe over the three months to July. For the first half of the year, economic activity fell 22.1%. That puts the UK bottom of the table for G7 countries, and ahead of only Spain among its European peers.

Understandably, these statistics make sobering reading. On their release, Chancellor Rishi Sunak told the nation frankly that the “hard times are here”. The media ran with stories of ‘economic doom and gloom’ and the Labour party lambasted the government’s handling of the crisis in health and economic terms. But historical comparisons do not tell the whole story. Although this recession is the deepest on record, this is less to do with the shrinking demand of a ‘classical’ recession, and everything to do with an economy effectively forced to shut down for an unprecedented period. If anything, the nearest comparison would be the economic impact of a natural disaster – minus the physical destruction element.

The US government’s intriguing $1.7 trillion rainy day fund

These extraordinary times for the global economy have forced the world’s central banks to extraordinary measures. As usual, the US Federal Reserve (Fed) has been one of the chief protagonists during the emergency, cutting interest rates close to zero and funneling trillions of dollars into keeping the financial system afloat. But in recent weeks, we have noticed a counterintuitive, and intriguing, trend. The pace of Fed asset purchases, which spiked to well over $1 trillion at the height of the crisis, has slowed to around $100 billion a month. At the same time, the Fed’s excess liquidity – the usable cash it has sitting in the banking system – first spiked up at the start of its emergency interventions, and then started shrinking again to levels seen in 2014/2015. Given the lengths the Fed has gone to during the crisis, this retrenchment seems a little puzzling. What’s more, the explanation brings up just as many questions.

Read the full commentary here