Central banks around the world have begun cutting interest rates and outlining other policy initiatives to ease financial pressures on businesses hit by the Covid-19 crisis. As numerous banks and agencies downgraded their forecasts for global growth this year, the OECD said on Monday that it could halve its previous forecast for global economic growth this year. The Paris-based group lowered its central growth forecast from 2.9% to 2.4%.
Australia cut its interest rates to a record low of 0.25% on Monday, followed by the US’s emergency cut of 0.5% on Tuesday and the Bank of Canada’s 0.5% cut on Wednesday. Markets are pricing in a 0.25% cut by the Bank of England later this month, but Andrew Bailey, the incoming governor, said that the UK policy response to the outbreak would need to be broader than just rate reductions. He said that the Bank and government should provide bridging finance to small companies to help them through what outgoing governor Mark Carney earlier described as a “large but temporary” economic shock. Chancellor Rishi Sunak is expected to announce some special measures in the Budget next Wednesday.
Economic data released this week is beginning to reflect the impact of the virus. The Chinese services sector endured its worst month on record in February, with the Caixin/Markit Services Purchasing Managers’ Index (PMI) collapsing to a reading of just 26.5 in February, down from 51.8 in January. It was the first time it fell below the 50-point margin that separates growth from contraction since the survey began in 2005. Caixin’s composite PMI, which includes both the man-ufacturing and services sectors, also slowed to a record low of 27.5 in February from 51.9 in January.
In the US, the ISM Manufacturing Purchasing Manager’s Index fell to 50.1 in February from 50.9 in January. Production output fell by 4% and the new orders index fell to 49.8 from 52 the month before. The disappointing data was collected as the coronavirus was spreading throughout China. Another survey, the IHS Markit US Composite PMI, which combines the manufacturing and services sectors, produced a reading of 49.6 in February, from 53.3 in January.
Here in the UK, supply chains have already been hit by the coronavirus outbreak. Although the UK manufacturing sector grew at its fastest pace in 11 months in February with a PMI reading of 51.7, it was down from a previous estimate of 51.9 due to supply chains being disrupted as the month progressed. In addition, almost a quarter of British retailers are reporting severe disruption to their supply of goods as a result of the spread of coronavirus, according to a survey by Retail Econom-ics. However, some are getting a boost from an increasing amount of panic-buying by worried consumers.
On a more positive note, UK construction activity grew at its fastest pace in more than a year in February, driven by a rebound in housebuilding. The IHS Markit UK Construction Purchasing Managers’ Index rose to 52.6 in February, up from 48.4 in January. The biggest boost came from residential activity, which reported the strongest expansion since July 2018. The IHS Markit UK Services PMI came in at 53.2 for the month, slightly down on January’s reading of 53.9. Respondents blamed the coronavirus outbreak causing cancellations and delays to new projects from clients in Asia.
Finally, UK house prices rose for the fourth consecutive month in February, according to Halifax. House prices were up 2.8% on an annualised basis, down from a 4.1% annual increase in January and below expectations of a 4% increase.
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