UK AND EUROPE WAITING FOR COVID VACCINATIONS TO REVIVE ECONOMIC GROWTH

UK AND EUROPE WAITING FOR COVID VACCINATIONS TO REVIVE ECONOMIC GROWTH

This week the impact of enforced hibernation over the winter started to become apparent, as a number of worse than expected GDP forecasts were published. The Bank of England expects the economy to shrink by 4 per cent in the first three months of the year and, despite predicting a bounce back once vaccines allow us to go out again, it downgraded its full year forecast as well. Data released this week showed Europe ended the year better than expected, shrinking just 0.7% in the last three months. This good news, however, is being overshadowed by the slow rollout of vaccinations across the continent that is reducing confidence in a quicker recovery.

Elsewhere the impact of lockdowns on the oil industry was on display with some dismal results. Shell’s 2020 profit dropped by 71 per cent – the lowest level in 15 years. BP reported a 96 per cent fall in profits and its first lost in over a decade and ExxonMobil suffered its first loss in its history, losing over $20bn. Like the rest of us, these companies are desperate to get back to normal, but there’s no telling if normal will be enough.

UK: BANK OF ENGLAND EXPECTS TO SEE VACCINE RECOVERY BY SUMMER

The Bank of England followed the trend from other major central banks by leaving its main interest rate and asset purchase programme unchanged this week. The bank’s short-term outlook has deteriorated since its last interest rate meeting and it now expects GDP to contract by 4 per cent in the first quarter of the year. However, it expects the economy to rebound quickly from the second quarter onwards once enough people have been vaccinated to allow Covid restrictions to be lifted. Once consumer spending returns to normal it expects GDP to be back to pre-Covid levels by the final quarter of this year.

Despite the positive outlook, the bank has warned of significant uncertainty. The minutes of the meeting show the bank is progressing with preparations to introduce negative interest rates, if the economy deteriorates significantly. The Prudential Regulatory Authority has been asked to engage with the banks it regulates to get them ready to implement negative interest rates by the summer, if necessary.

US: MARKETS WELCOME ATTEMPT TO PUSH THROUGH STIMULUS PLAN

US equity markets resumed their upwards trajectory as global vaccination programmes and the increased chance that Joe Biden’s $1.9tn stimulus package will be pushed quickly through the Senate boosted investor confidence. Republicans are backing a much more modest government stimulus programme but following a meeting with Republican senators this week Biden’s administration indicated it would most likely drop some of the more contentious long-term reforms included in his plan in order to get the main financial stimulus passed quickly.

After a setback last week, The S&P 500, Nasdaq and the smaller companies Russell 2000 index all hit new all-time highs this week. Better-than-expected unemployment figures also helped government bond yields climb dramatically and the difference between long- and short-dated Treasury yields is now at its greatest in 5 years. Expectations for robust economic growth have also seen the value of the dollar rise against the euro and yen in recent weeks, reversing some of the depreciation seen in 2020.

EQUITIES: OIL MAJORS SPY PATH TO RECOVERY AFTER TERRIBLE 2020

2020 was a dreadful year for the major oil companies as the plunging oil price and sharp drop in demand caused by coronavirus restrictions saw revenues evaporate. BP, Shell and ExxonMobil all reported huge drops in full year revenue this week, with BP and ExxonMobil reporting full year losses. The scale of their change in fortunes is stark. In 2019, BP posted a profit of $10bn but fell to a loss of $5.7bn last year, its first annual loss in a decade. Exxon lost $22bn in 2020 – its first ever annual loss.

Royal Dutch Shell managed to avoid a loss but saw profits fall almost as sharply. Profits for 2020 were $4.8bn, down 71 per cent on 2019. However, the recovery in the oil price, hopes for a vaccine-inspired economic recovery and turnaround programmes are beginning to be felt. The oil price is returning to levels last seen before the pandemic and share prices are beginning to recover. However, the growth in demand for green and clean energy means that even with higher oil prices the big energy companies face serious challenges.