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The concept of “buy now, pay January” whereby consumers go on a spending spree in the run-up to Christmas but only have to pay for their purchases in January gained huge traction in the 1980s, particularly in the United Kingdom during Margaret Thatcher’s premiership.

The world never looked back, with the breadth and depth of financial instruments offering some form of delayed payments having grown exponentially in the past three decades.

This concept of buying now paying later of course applies to another invaluable commodity – time – and rarely has this been more evident than in 2020. Moreover, what can be bought can also of course be sold and British and other European governments’ recent announcements about looser social distancing rules over the festive period arguably equate to “selling” precious time.

Figure 1: UK GDP growth has collapsed since the summer and likely turned negative in October-November

Source: 4X Global Research, Office of National Statistics, IHS Markit

Note: * Composite PMI is weighted average of manufacturing and services output. Last figure (November 2020) is preliminary.

Back in February-March very little was known about Covid-19 and the United Kingdom’s national infrastructure was simply not ready to cope with the sharp rise in cases and patients. So when Prime Minister Johnson’s government implemented its first blanket, multi-month national lockdown on 16th March its immediate goal – to save lives – was underpinned by a need to buy sufficient time to better understand the modalities of this virus, “protect” the Nation Health System (NHS) and acquire vital Personal Protective Equipment (PPE).

The economic cost was on an unprecedented scale. The collapse in UK GDP growth dwarfed the “dip” registered during the Great Financial Crisis in 2008-2009 (see Figure 1) despite the government running a huge fiscal deficit (see Figure 2) and the Bank of England cutting its policy rate to a record-low of 0.1% on 19th March and expanding its Quantitative Easing program by £200bn in March, £100bn in June and a further £150bn in November.

Figure 2: UK GDP growth collapsed in H1 2020 despite a surge in fiscal spending and ballooning deficit

UK government running a huge fiscal deficit  Source: 4X Global Research, Office of National Statistics, Office of Budget Responsibility (OBR)

Note: * Fiscal year to date (April-October 2020); ** OBR forecast on 25th November a 19.0% of GDP deficit in the fiscal year 2020-21 (April 2020 to March 2021).

While it may be premature to fully assess how individual countries performed, the British government arguably had the “benefit” of the United Kingdom’s pandemic lagging that of a number of major European economies (including France, Italy and Spain) by 3-4 weeks. However, it did little during that time. Borders were not shut and social distancing measures were limited in their scope and enforcement while Prime Minister Boris Johnson was distracted by a number of non-Covid 19 related issues. A case of precious time wasted.

Second lockdown – Stopping Covid-19 numbers spiralling out of control

Fast forward to October and exponentially more was known about the transmission and virulence of Covid-19 (and how to mitigate it), PPE was readily available and the NHS’ capacity had been upgraded (the UK erected seven temporary “Nightingale” hospitals even if they have admitted very few patients). And yet, in the face of a rapid rise in Covid-19 cases, hospitalisation rates and deaths the government felt compelled to introduce on 14th October a three-tier social distancing system in England which was upgraded to a full four-week national lockdown on 5th November. In effect the government once again had to buy time and partially shut down the economy in a bid to stop the pandemic from spiralling out of control and the NHS being overwhelmed (the availability of healthcare professionals remains a constraint).

Its analysis suggests that the cost of these recent and arguably more “surgical” measures will be lesser than the blanket lockdown introduced in March and that the price to pay was ultimately acceptable given the likely health benefits. Yet there is little doubt that the financial, economic and social cost will be very high in absolute terms. The likely contraction in UK GDP growth in October-November – derived from the further fall in the Composite PMI – will indeed be modest compared to the record collapse in GDP in March-April (see Figure 1). The Bank of England is forecasting that GDP will shrink “only” 2% quarter-on-quarter in Q4 2020. However, GDP will be falling from a much lower starting point and if the Bank of England’s forecast proves correct GDP in December will be about 13% lower than in December 2019 (see Figure 3).

Figure 3: GDP contraction in Q4 2020 will likely be mild but from an already weak starting point

GDP contraction in Q4 2020

Source: 4X Global Research, Office of National Statistics

Note: Data for October-December 2020 are forecasts

Back to three-tier system – Buying time until hope of vaccines becomes reality

The government confirmed on 26th November that the national lockdown in England would end on 2nd December, with the critical service sector allowed to partially re-open and households allowed to mix in certain circumstances. However, unlike in October, most of England will be under Tier 2 or Tier 3 social distancing restrictions. Only 1.3% of its population of 56.2 million will fall under the looser Tier 1 restrictions compared to 15.5% back in October. Moreover, restrictions in the top two tiers will be tightened. In effect the four-week national lockdown which started in early November will be replaced with “lockdown light” for most English counties and cities. Scotland is already under its own 4-tier system (Germany’s lockdown will be extended and tightened from 1st December until at least 20th December while France’s lockdown will (partially) end on 15th December with a reversion to a night-time curfew).

Governments are yet again buying time, albeit with the slightly longer term perspective that a number of potentially effective vaccines, including from Pfizer/BioNTech, Moderna and Astra Zeneca/Oxford University, could soon come on line. On the whole European governments have seemingly taken the view that most (if not all) of the critical health questions pertaining to these vaccines will be answered in due course and that the complex logistical challenge of mass production, distribution and inoculation can be surmounted…but that this will require more time.

In the UK the Medicines and Healthcare products Regulatory Agency (MHRA) may reportedly green-light one or more of these vaccines in coming weeks, giving hope that mass inoculation – at least of the elderly, most vulnerable and front-line health workers – could start as early as December. However, Professor Chris Witty, the UK’s Chief Medical Officer, forecast on 23rd November that the country could conceivably pull back from social distancing rules only next Spring.

Selling time for Christmas may result in having to subsequently buy far more time

Importantly British officials have confirmed that that social distancing measures will be significantly relaxed between 23rd and 27th December in all four devolved nations – England, Scotland, Wales and Northern Ireland. One of the concessions is that up to three households will be allowed to mix indoors. This has undoubtedly been a popular decision and a “vote winner” for an under-pressure government fearful that households would simply ignore tight restrictions over the festive period (in Germany private gatherings will be extended to 10 people, excluding children, over the Christmas period).

However, the risk is that looser social distancing measures even for five days could trigger a new spike in Covid-19 cases and officials have already hinted that in such an event a full-blown national lockdown could be re-introduced in January. In effect, “selling” a bit of time over Christmas could force governments into “buying” disproportionately far more time in the new year – assuming that mass immunisation has not yet materialised – at great cost to the economy and society.

For further information about 4X Global Research or to discuss a subscription to its research products and services, please email odesbarres@4XGR or call Olivier Desbarres on +44 (0)20 3811 0454

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Olivier Desbarres

Olivier Desbarres

Olivier Desbarres is a Director and Founder of 4X Global Research, a London-based consultancy set up in 2017 to provide institutional clients and private investors with focused, actionable, innovative and independent research on Emerging and G20 fixed income and FX markets and economies.

Olivier has over 21 years of experience in the finance industry, including 15 years as a senior Economist, Rates and FX strategist for Credit Suisse and Barclays in Moscow, London and Singapore.

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