ALEX BRUMMER: US economy is in terrible shape and that should be a worry in Whitehall since America is our single biggest trading partner
August has often been a month of nasties for financial markets, and the portents for this year are not great.
The headline 32.9 per cent collapse in American output in the three months to the end of June, the worst such number since the first quarter of 1946, is truly horrendous.
It was enough to frighten President Trump into musing on Twitter that Covid-19 and the surge in postal voting could lead to a fraudulent presidential election in November.
Going in the wrong direction: Any hope that the normally resilient US economy would achieve the dreamed of ‘V’ shaped recovery has faded
The US economy is in terrible shape and that should be a worry in Whitehall since America is our single biggest trading partner. Forging a trade deal with the US is critical to the vision of global Britain.
The only grain of comfort to be drawn from the US data is that it is measured on an annualised basis. On the simpler standard used by the UK, the decline is actually 9 per cent which is relatively modest when compared to the 19.1 per cent fall in GDP in Britain in the three months to May.
The jobless picture in the US is also alarming. Another 1.4m-plus workers made claims for benefits in the period to July 18, bringing the total on the dole up to over 17m. Any hope that the normally resilient US economy would achieve the dreamed of ‘V’ shaped recovery has faded as Covid-19 hotspots have sprung up.
For the moment, the White House is faced with a reverse ‘L’ – a plunge in output followed by a period of flat lining.
Wall Street, which has been mesmerised by the earnings heft of big tech during lockdown and has tended to ignore miserable economic data, plummeted more than one per cent and the concern must be this is the start of something worse.
Why should one fear August? Traditionally, it is the month when the top traders are on their yachts or in the Hamptons, and it is lesser mortals who lead the market charge. Here in the UK it was the month in 1992 when sterling began its journey out of the exchange rate mechanism (the precursor of the euro). It was also the month when the run on Northern Rock began in 2007 and when the fate of Lehman was sealed a year later.
The pandemic is proving the ultimate stress test for global banking.
Changes in the way the banks set aside funds for future losses are catching the market by surprise, with provisions at Lloyds Bank in the first half of the year 60 per cent higher than predicted.
The best case scenario is that super-cautious chief executive Antonio Horta-Osorio wants to go out on a high and has front-loaded the potential damage, resulting in a £3.8billion provision in the first half – leading to a cash loss of £560m.
Certainly, Santander earlier this week took the chance to kitchen-sink the goodwill in its accounts, which dates back more than a decade.
My suspicion is that the outlook is every bit as gloomy as the Lloyds provisions would suggest.
The strain on the household finances of millions of ordinary citizens in the pandemic is huge.
Even though Covid-19 loans might have a government indemnity, pre-pandemic credit of all kinds – from mortgages to credit cards and motor loans – could go badly wrong. In previous downturns in Britain the biggest problem has been the property sector turning sour. History is likely to repeat itself. The fashion for home and flexible working will take a toll on office values.
Even more seriously, Covid-19 has been a killer for city centre and secondary shopping mall stores and eateries.
Loans to retail groups will have to be rescheduled or written off and the bloodbath could be every bit as great as after the financial crisis.
The markets are taking a dim view of bank shares and Lloyds stock, widely held by private investors, plunged 7.6 per cent to the lowest level in eight years.
That is not the legacy of which Horta-Osorio has been dreaming.
Kodak has long been considered a bombed-out photographic company with a dominant brand, a sinking business and desperate for a deal.
This week it joined the pharma frenzy after the Trump administration lent it £600m to turn over its factories to making ingredients for Covid-19 medicines.
The stock soared 16 times from $2 to more than $30. Say cheese.