Demand for gilts remained strong during May as the economic outlook continued to deteriorate. The coronavirus pandemic is expected to take a heavy toll on UK and global growth; the UK economy contracted by 2% during the first quarter of 2020.
- Gilt yields continued to decline
- The UK economy contracted by 5.8% MoM in March
- The services sector shrank by 6.2%
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Demand for gilts remained strong during May as the economic outlook continued to deteriorate. The coronavirus pandemic is expected to take a heavy toll on UK and global growth; the UK economy contracted by 2% during the first quarter of 2020, posting its heaviest fall since the fourth quarter of 2008. The Office for National Statistics (ONS) reported “widespread” falls across most sectors; the services sector contracted by 1.9%, production by 2.1%, and construction by 2.6%. Over March, the economy contracted by 5.8% month on month, and the services sector dropped by a record 6.2%.
“The Government issued a tranche of three-year gilts with an effective negative interest rate”
The annualised rate of consumer price inflation declined to its lowest level since August 2016 during April, falling from 1.5% in March to 0.8%, and driven down by lower fuel and energy prices. Demand for gilts has been fuelled by growing speculation that inflation will continue to weaken, and by expectations that the Bank of England (BoE) could extend its programme of asset purchases. During May, the Government issued a tranche of three-year gilts with an effective negative interest rate of 0.003%. This is highly unusual because it means that, at maturity, investors will not be paid back in full.
The BoE believes that the UK economy could contract by as much as 14% this year, before rebounding in 2021 to grow by 15%. Unemployment is tipped to rise as high as 9% - its highest level since 1994.
In his evidence to the Treasury Select Committee, BoE Governor Andrew Bailey said that bigger companies that were already overindebted before the coronavirus pandemic had to take responsibility for this; however, he emphasised that more debt was not the answer to the problem. BoE policymakers are keeping monetary tools – including the possibility of negative interest rates – “under active review”, and the Governor commented: “It is quite a nuanced policy tool … We are not ruling it in, but we are not ruling it out”.
Manufacturing output volumes fell at their fastest rate on record in the three months to May, according to the Confederation of British Industry’s (CBI’s) monthly Industrial Trends Survey, as manufacturers struggled with collapsing demand and disruption to supply chains. The motor vehicles & transport equipment and the food, drink and tobacco subsectors were particularly badly hit. Total order books fell to their lowest level since 1981.
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