Services collapse worst since 1996

If the UK economy needed any further confirmation of the difficult times that lay ahead, it received it in two pieces of economic news that were released yesterday.

First, data for services output fell to its lowest level since records began in 1995 and then Virgin Atlantic announced that it was to cut 3,000 jobs and possibly quit its slots at London’s second major airport at Gatwick.

The Chairman of Virgin, Sir Richard Branson had been calling upon the Government to provide cash to the stricken airline in order to help it to survive the growing crisis. Virgin is both a major employer and a flagship of the UK aviation industry, despite the fact that it is difficult to determine how much of a British company it actually is. Although Branson himself is a major philanthropist, the fact that his business interests are designed to minimise the tax they pay brings widespread public condemnation of his demands for help.

Yesterday’s release of data for services activity for April was as bad as predicted; it fell to 13.4 the lowest it has been since this dataset was begun twenty-five years ago. What made the result even worse that behind the headline is the fact that UK banks have been struggling through the lockdown despite it seemingly suiting their business model perfectly in that they have been forced to move the majority of their business online and away from the high street.

According to the report, financial services saw an unprecedented fall in output.

While this merely confirmed the tough times that lay ahead for the UK economy, the currency spent the day in a narrow range. It traded between 1.2483 and 1.2420 versus the dollar, closing just a single pip higher on the day.

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Breaks 112 months of growth

Following on from the UK’s dire services data, the U.S. found itself in a similar position.

Breaking a 112-month run of data which was above the level of 50 which denotes expansion in the sector, the numbers released yesterday showed a fall to 41.8. It still has some way to go to match the falls in the UK and Eurozone, but it is nonetheless a significant indication of the need to get the U.S. economy moving again.

As the U.S. revealed its lowest number of fatalities from Covid-19 in a month, the calls from several States for business to begin to reopen became more strident.

The makeup of the U.S. Constitution places the burden of that decision on the shoulders of the individual State Governors.

The data revealed in detail the slowdown in activity that the economy is facing.

While this has been outlined by the Central bank as it has taken steps to bolster output, this reveals the extent to which businesses such as restaurants, retailers, hotels and airlines together with other areas of the service sector are suffering.

This is by far the most visible indicator of the effect of the lockdown with travel and tourism worst hit. The only bright spark in the gloom is the performance of online retailers like Amazon and the distribution networks that handle their deliveries.

Having survived the spat between the U.S. and China which revolves mostly around manufacturing, the service sector now finds itself struggling for survival. When the lockdown is lifted it will face the most severe impediments as the public are certain to remain concerned about things like eating out and taking trips.

The financial services sector has also performed relatively well as the Fed’s programme of support includes loans by banks to small businesses that are 100% guaranteed by the Federal Government from the start.

The dollar index continues to revolve around risk sentiment. Yesterday, it rose to a high of 99.97, closing at 99.83 as the reality of falling activity hit home.

Buba prohibited from buying bonds without justification

Another major fissure in the unity of the European Union appeared yesterday.

A German Court decided that it was above the European Court of Justice in reaching a verdict that the Bundesbank being virtually ordered by the ECB to participate in bond buying as part of the QE operation was illegal unless it could be proven on a case by case basis that the actions were justified.

In what was labelled by prominent economists as a legal bombshell, the Court decided that it was unbound from a 2018 decision from the European Court of Justice that upheld the validity of the scheme. It will be the ECB that has to prove the necessity of the purchases once the current scheme expires in three months’ time.

Taken to its natural conclusion, this means that, while there are treaties in place, the individual states can challenge them in their own courts if they are deemed to be contrary to the interests of individual nations. This is a significant development and means that the position of the Union and its ability to inject large amounts of cash into the system will be impaired.

Jens Weidmann the Bundesbank President has said that he will work with the ECB to prepare its response.

Italy was warned yesterday that its continued protests about the way the financial fallout from the pandemic was creating a Europe no one wants. The warning came jointly from Germany and France as they both struggle to find their own way to navigate the lifting of the lockdown. Any hope of a unified effort to coordinate the recovery as requested by Ursula von der Leyen now appears in tatters.

The euro gyrated wildly as the news was digested it traded between 1.0925 and 1.0826 settling close to the bottom of the day’s range at 1.0842.