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The Corona tsunami shakes the global economy and warns of the effects of the second wave of the epidemic


Mary B
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Sunday, September 20, 2020 04:10 PM

 

The Corona tsunami shakes the global economy and warns of the effects of the second wave of the epidemic

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The British Central Bank warned of the impact of a second wave of the spread of the Corona epidemic (Covid-19) and how it could harm the recovery rates of the economy, especially if the authorities were forced to impose a partial or complete closure with the daily infection rate rising above 3 thousand cases in recent days. The British Central Bank also indicated that its estimates and projected scenarios for the performance of the economy were based on the possibility of reaching an agreement between Britain and the European Union before the end of the year that would govern the economic and trade relations between them after Brexit.
With the possibility of tightening prevention measures against the second wave of the Corona epidemic as a result of the high numbers of injuries and deaths and the increase in the chances of Brexit without an agreement, "the outlook for the economy remains in an unusual state of uncertainty," according to the bank statement.
The British Central Bank added: "The recent increase in the number of cases of Covid-19 in some parts of the world, including Britain, could negatively affect economic activity, albeit to a lesser extent than what we witnessed at the beginning of the year." As for Brexit, expectations for the recovery of the British economy were based on the assumption of "an immediate and orderly transition to a comprehensive free trade agreement with the European Union."
Cautious optimism
However, the bank was cautiously optimistic about the state of the economy indicating that the recession is no longer as bad as it feared in the worst-case scenario. According to his estimates, Britain's gross domestic product is currently 7 percent less than it was before the economy closed to limit the spread of Corona. And last week's National Bureau of Statistics figures for July showed that gross domestic product (GDP) is lower than it was beforeCorona epidemic increased by 11.7 percent.
The central bank attributed the continued improvement, albeit slow, to the increase in consumer spending, which "continued to recover during the summer months and is now closer to its rates at the beginning of the year." Consequently, the bank estimated that the economy will perform much better in the third quarter than in the second quarter, with GDP contracting by more than 20 percent. According to his estimates, the economy in the third quarter will be only 7 percent less than it was before the Corona crisis.
These expectations also reinforce the position of the British government, which seems so far anticipating the possibility of tightening preventive measures to face a second wave of Corona, but without resorting to a complete closure of the economy. And it appears that resorting to tightening procedures locally in areas with a significant increase in the number of cases is the likely option to avoid a return to the imposition of a general quarantine in the country.
This is almost the general trend in most regions of the world that are witnessing an increase in the number of infections, and everyone is now counting on the proximity of vaccines to prevent the Corona virus, which means the beginning of containing the epidemic.
But the most important development that affected the markets at the end of the weekdays Friday was the paragraph in the statement of the Monetary Policy Committee of the Bank of England after its meeting on Thursday regarding interest rates. The ambiguous message about inflation and the interest rate in Britain led to the pound ending the week's trading lower, while the price of government bonds rose to the appreciation of dealers that the bank would cut interest rates to become negative below zero.
But what the bank said was that the members of the Monetary Policy Committee "were informed of an independent study on the impact of negative interest in the event that it was forced to resort to it as a result of expectations of inflation rates and economic output." This was not the first indication from the British Central Bank in this regard, as Bank Governor Andrew Bailey said before that there is a possibility, "but the bank has other options to face any developments."
The Bank of England lowered the interest rate from 0.75 percent to nearly zero (0.1 percent) during the Corona epidemic crisis, and still maintains the quantitative easing plan at nearly a trillion dollars (750 billion pounds).
However, dealers and investment banks interpreted the vague message that the bank was about to change its hesitant stance towards reducing interest rates below zero. In a note to analysts at Bank of America, they concluded that “the Bank of England gave a strong warning that a rate cut to become negative is a realistic possibility ... so publish that paragraph (in the MPC’s statement) as news. This means that he may be ready to use negative interest more than we expected before.
As for analysts at Nomura Investment Bank, they considered that this message means the possibility of the bank resorting to further easing of monetary policy in November (November) is more likely than before.
 
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