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The worst is over, but recovery for the UK economy will take years

Do you want the good news or the bad news?

The good news – both for the UK, the rest of Europe and the US – is that the worst is over. April marked the bottom of the slump triggered by the response to the Covid-19 pandemic. Provided there is no second wave of infection (a pretty hefty qualification, admittedly), last month was as bad as it gets.

The bad news is that a return to pre-crisis levels of activity is a long way off and, as things stand, will be measured in years rather than months. There is more chance of spotting a yeti in the Himalayas than there is of a sighting of the V-shaped recovery.

Some businesses in the UK are starting to reopen, but the process is a slow one. The Office for National Statistics says that of the companies trading in late April and early May, 6% had reopened in the previous two weeks.

This fits with anecdotal evidence. There are more cars on the roads, more cafes and restaurants are offering takeaway services, factories have resumed production with skeleton staff.

It also chimes with the latest purchasing managers’ indices (PMIs), which have bounced off the historic lows plumbed in April. In the UK, the PMI rose from 13.8 to 28.9; in the eurozone it increased from 13.6 to 30.5.

Any reading of below 50.0 is supposed to represent economic contraction, so on the face of it, that means activity is still falling in May, but at a slower pace than in April. That doesn’t smell right: lockdown restrictions have been eased and that will have boosted output.

Samuel Tombs, UK economist at the economic consultancy Pantheon, has tentatively pencilled in a rise in gross domestic product of 3% in May following a 20% fall in April. That seems more like it.

For now, the economy remains on government-provided life support. Of those firms that have temporarily closed, 91% have furloughed staff, 70% have deferred VAT payments and 62% have taken advantage of the business rates holiday. Only 11% of shuttered businesses are certain their cash reserves will last for more than six months.

Hence Rishi Sunak’s keenness to get more of the economy running in the coming weeks. The other piece of good news for the chancellor is that the steadily falling trend in the growth of new Covid-19 cases should allow the government to further relax lockdown restrictions.

Argentina’s troubles spell another sovereign debt crisis
It’s crunch time for Argentina. The bizarre attitude of Jair Bolsonaro means that Brazil – with the third highest number of Covid-19 cases in the world – has been the Latin American country hogging the headlines, but its next-door neighbour has the more immediate problem.

The International Monetary Fund is worried about Argentina, and has every reason to be. The government in Buenos Aires missed a payment in April on the $65bn (£53bn) that it owes to its international creditors and the grace period runs out on Friday. Without a compromise deal or an agreement to extend the deadline, Argentina will be in default for the ninth time in its history.

This matters, and not just for Argentina. There are many countries in the world struggling with collapsing demand, pressures to spend more on creaking health systems and the spiralling costs of servicing debt.

Three things need to happen. Firstly, private creditors, who own 41% of the debt, need to cut a deal along the lines of that offered by the Argentine government. Secondly, the IMF needs to ratchet up the pressure on its member states for an allocation of its own reserve currency – special drawing rights – which hard-pressed countries could convert into US dollars in order to help meet their debt repayments. Finally, there needs to be a mechanism whereby countries can declare themselves insolvent, just as companies can.

As things stand, a sovereign debt crisis of the sort not seen since the 1980s is looming.
Source: The Guardian

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