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UK economy growing at the fastest pace in eighty years – EY

Big Four accountancy firm, EY, has upgraded the country’s economic growth prospects, predicting the fastest rate of growth in 80 years as the UK emerges from the coronavirus pandemic.

The EY ITEM Club’s Summer Forecast predicts the UK economy to grow 7.6% this year, the fastest rate of economic growth since 1941, upgrading its forecast by 0.8 percentage points from Spring figures.

The UK economy is expected to now return to pre-pandemic level by the end of the year, three years earlier than appeared likely in forecasts made this time last year. Growth of 6.5% is now expected in 2022, an improvement from the 5% growth forecast in April. This will be followed by growth of 2.1% in 2023 and 1.6% in 2024.

The return to growth, according to EY, is being driven by consumer spending as the economy reopens, with confidence boosted by the UK’s rapid rollout of the Covid-19 vaccine. Delays to the government’s reopening of the economy were not judged to have impacted recovery, however.

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Compared to other economies, the UK is much more dependent on consumer spending on services, such as recreation and leisure activities, which meant that lockdowns had a greater economic impact here than elsewhere. Reopening these face-to-face parts of the economy means the UK should have a correspondingly faster recovery.

“Vaccines have played a key role in bringing forward the reopening of the economy and have been a key factor in the upgrades of the forecast throughout this year. We are also seeing some structural effects too: the UK’s way of measuring public sector spending means this will soon switch from being a drag on output to a positive, while the restrictions on international travel mean there should be much less of a tourism deficit than usual.

Martin Beck, the senior economic advisor to the EY ITEM Club

“While elements of the forecast remain uncertain, the UK has all the ingredients for a strong economic recovery from the pandemic. There is the possibility of a virtuous circle of positive expectations among businesses about rising consumer confidence and spending which, in turn, could boost firms’ confidence and output further. The fuel to sustain this circle – in the form of strong household and corporate balance sheets, and supportive fiscal and monetary policies – is there too.

“After almost 18 months of significant disruption, businesses have some space to plan ahead and invest in confidence. This could help businesses catch-up on the growth they’ve missed out on if they take the right steps to adjust to a return to a more familiar business environment.”

Stephen Church, EY’s North Markets Leader

The accountancy firm is also optimistic for employment figures, with unemployment predicted to peak at 5.1% in the second half of this year, according to EY’s analysis, and then beginning to fall in 2022. While above pre-pandemic levels, the rise in unemployment has been well below predictions made in 2020 at the height of the pandemic. The firm’s forecast attributes the furlough scheme and the way businesses have adapted to new trading conditions to the better than expected picture for jobs.

While EY’s forecast is optimistic for rapid growth as the consumer economy reopens in the UK, uncertainty remains over inflation and to what extent the British public will draw on savings built up during lockdown. Inflation is forecast to reach 3.5% by the end of 2021.

Martin Beck added:

While consumers have accumulated their largest stockpile of savings since the Second World War, the big question is whether they will actually start to spend these funds once restrictions on activity are lifted. The assumption is that they will, but this is not guaranteed. The picture for consumers is not entirely positive: savings are concentrated among higher-income households, while higher unemployment and inflation will weigh on real income growth. Household incomes are expected to rise 1% in real terms this year, which is well short of forecast GDP growth.

“The risks posed to the forecast by inflation can’t be overlooked either, particularly if prolonged higher-than-target inflation prompts the Bank of England to tighten monetary policy. However, while the departure of overseas workers from the UK during the pandemic might lead to some inflationary bottlenecks, there are factors, such as a stronger pound, which will help keep a lid on prices. Positively, the ingredients which were often a precursor to sustained higher inflation in the past do seem to be missing.”

Source: Marketing Stockport

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Sterling sinks to 5-month low as investors seek safety on “Freedom Day”

The British pound hit its lowest since February on Monday as global markets turned cautious over a surge in coronavirus infections, meaning that riskier currencies lost out to the safe-haven dollar.

Risk-aversion ruled the day as bond yields dropped and stocks faced their longest losing streak since the pandemic first hit global markets 18 months ago.

The wary moves coincide with Prime Minister Boris Johnson lifting most COVID-19 restrictions in England in what some have dubbed Freedom Day. Johnson has urged the public to remain cautious as infections in Britain are surging.

Last week, the pound had its worst week in a month versus the dollar. The downward turn continued on Monday with sterling hitting $1.3663 at 1455 GMT, its lowest since Feb. 4.

At 1511 GMT, cable was down 0.6% on the day at $1.36795. Versus the euro, the pound was down 0.6% at 86.3 pence.

Neil Jones, head of FX sales at Mizuho, said that the losses in the pound were caused by investors liquidating their long positions.

“The pound was one of the real darlings of the foreign exchange market for a number of months now,” he said, citing Britain’s speedy vaccine rollout as a driver of gains earlier in the year.

“Since that time there have been developments, some doubts… Market participants would not argue with the success of the vaccine because it has been highly successful but just the variant data does seem to be surging on a global basis.”

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The pound’s status as a risk-sensitive currency means that it faces the potential double whammy of being hurt by rising COVID-19 infections globally, and in the United Kingdom specifically, he added.

Britain has the seventh highest death toll in the world and is forecast to soon have more new infections each day than it did at the height of the second wave of the pandemic. But it is ahead of its European peers in terms of vaccine rollout.

“I think the pound is basically being influenced by general risk appetite as opposed to anything specifically geared towards the UK itself,” said Ned Rumpeltin, head of European currency strategy at TD Securities.

Positioning data showed that speculators’ net long position on the pound – bets that the pound will strengthen – was cut to its smallest since January 2021, in the week to July 13.

CFTC https://fingfx.thomsonreuters.com/gfx/mkt/jznvnojaypl/CFTC.png

Last week, two top Bank of England officials surprised investors by suggesting monetary policy might be tightened sooner than expected.

But BoE interest rate-setter Jonathan Haskel said on Monday reducing stimulus was not the right option for the foreseeable future, despite rising inflation.

By Elizabeth Howcroft

Source: Investing

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UK economic recovery to continue but new COVID-19 strains a threat

UK economy will expand rapidly this quarter as additional coronavirus-related restrictions are lifted and further pent-up demand is unleashed, a Reuters poll found, but growth is at risk from new variants of COVID-19.

The country has suffered the highest death toll in Europe from the pandemic but a fast-moving vaccine rollout has allowed the government to withdraw many of the lockdown restrictions, with more set to lifted on Monday. read more

Gross domestic product will grow 2.5% this quarter, the July 12-15 poll found, a touch better than the 2.4% predicted last month. But medians showed that pace was expected to slow to 1.4% next quarter and then to 0.9% in early 2022, unchanged from last month’s forecasts.

“So far, the UK data look promising in two respects. First, vaccines seem to have significantly reduced the health risks from the virus,” said Holger Schmieding, chief economist at Berenberg.

“Second, the UK’s GDP estimate for May shows that activity has rebounded with the easing of restrictions.”

GDP expanded a monthly 0.8% in May, much faster than its typical pre-pandemic pace but down from April’s 2.0% surge, official data showed last week. read more

On an annual basis, growth was pegged at 6.7% this year – much stronger than the 6.2% predicted last month – and an unchanged 5.2% in 2022.

But when asked what was the biggest threat to those buoyant numbers over 70% of respondents said the spread of new variants of COVID-19.

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“COVID-19 cases are rising quickly again and are showing few signs of slowing. With infection numbers doubling every 8-9 days, daily cases above 100,000 are entirely possible in the coming weeks,” said James Smith, an economist at ING.

“Rising COVID-19 prevalence also means higher rates of contact tracing and self-isolation. These risks amplifying the current worker shortage in some of the consumer services industries, but could also see consumers reducing social contacts to mitigate the risk of having to stay at home for 10 days.”

PRICE PRESSURES

Like its peers, Britain has faced steep inflationary pressures as supply chains disrupted by the pandemic and increased demand have led to price rises.

Inflation was expected to average 2.2% this quarter and peak at 2.7% next quarter. However, that upswing is likely to be transitory and is driven by the pandemic-induced low base of last year.

So while those forecasts are well above the Bank of England’s 2% inflation target the central bank was not expected to increase borrowing costs from their record low of 0.10% until 2023.

None of the 82 economists polled expected a change when the Bank announces is next policy review on August 5.

BoE interest rate-setter Michael Saunders said on Thursday the central bank could decide to stop its current programme of government bond purchases early due to an unexpectedly sharp rise in inflation, a day after another top BoE official said the time for action might be approaching. read more

“There is a risk, however, that inflation strength will prove more persistent, which may put more pressure on the BoE to tighten policy,” said Chris Hare, senior economist at HSBC.

“There are genuine supply-demand imbalances which have become apparent during the economic reopening, which we think could persist or even build in the near term.”

By Jonathan Cable

Source: Reuters

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UK inflation hits 2.5% in June, ONS has revealed

UK inflation jumped again in June, outpacing economists’ expectations to accelerate away from the Bank of England’s target, the Office of National Statistics (ONS) revealed this morning.

The Consumer Price Index (CPI) rose to 2.5 per cent last month, its highest level since August 2018, up from 2.1 per cent in May. Analysts had forecast a rise of 2.2 per cent.

On a monthly basis, the CPI rose by 0.5 per cent in June 2021, compared with a rise of 0.1 per cent in June 2020.

Once again, the ONS said that the largest single factor pushing inflation upward was transport costs such as fuel, as well as higher prices for clothes, food and footwear.

The figures come a day after it was revealed that US inflation had rocketed to 5.4 per cent.

The Labour Party said that the rise was because firms were struggling to access critical supplies and were also handling a shortage of staff.

Shadow Chief Secretary to the Treasury Bridget Phillipson said: “The Government must do all it can do to keep materials and other supplies moving to prevent shortages, including cutting the unnecessary red tape following the EU-UK agreement, and providing much better training so that we have access to the skills we need here in the UK.

“Longer-term, Labour’s plan would mean we buy, make and sell more in the UK, protecting our access to critical supplies through better use of procurement and efforts to bring more production here.”

Last week outgoing Bank of England chief economist Andy Haldane said that inflation was on track to hit 4.0 per cent – double the Old Lady’s target.

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Commenting on this morning’s rise, KPMG’s chief economist Yael Selfin said inflation would likely peak at 3.0 per cent this year.

“The prospects of cooling inflationary pressures next year, as firms adjust to new levels of demand, should provide the Bank of England with room to keep interest rates unchanged for a while longer”, she said.

Jason Hollands, managing director of Bestinvest: “That prices are continuing to rise as economies bounces back from last year’s brutal contraction is little surprise, especially when there are supply bottlenecks that have built up during the lockdowns.

“Where the jury remains out though is whether the surge is a temporary effect or could lead to a more persistent problem if economies are allowed to overheat fuelled by unprecedented levels of both monetary and fiscal stimulus.”

Joseph Little, global chief strategist at HSBC Asset Management said that though inflation would likely continue to increase this year, it would be a temporary bump.

“We expect inflation pressures to continue building over the course of the year driven by base effects and the service sector’s reopening, higher energy prices and general supply-demand imbalances.

“The bulk of these transitory factors should unwind over the course of 2022, pushing inflation back towards the Bank of England’s 2 per cent target.”

By Edward Thicknesse

Source: City AM

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Covid: Planned redundancies at lowest level since 2015

Employers are planning the lowest number of job cuts for over six years, as the economy reopens after the pandemic.

Redundancy figures for June from the Insolvency Service saw 15,661 positions put at risk in Great Britain.

Last June saw nearly ten times that number, the worst on record.

The reduction in expected redundancies comes despite the imminent end of the furlough scheme which was designed to protect jobs during the pandemic.

Employers planning 20 or more redundancies have to file a form called HR1 notifying government at the start of the process.

This data gives an early indication of moves in the labour market, months before they show up in the official unemployment figures.

Proposed redundancies have been on a downward trend since September, despite two lockdowns being imposed across most of the UK during that period. June saw the lowest monthly total since February 2015.

Redundancy figures from the Office for National Statistics have shown a similar trend, a few months later.

“The data suggest that there is no spike in redundancies coming in July or August,” says Xiaowei Xu, senior research economist at the Institute for Fiscal Studies. “The labour market is in a much better position than anyone expected at the start of the pandemic, and it shows how well the furlough scheme has worked,”

The latest numbers are the lowest since the Insolvency Service tightened up reporting guidelines, according to Tony Wilson of the Institute for Employment Studies.

Before that, it was more common for firms to fail to file the necessary paperwork when planning redundancies, leading to artificially lower figures, he says.

The number of HR1 forms filed has also been falling this year, with 179 forms filed by 151 different employers.

That’s the lowest number of forms since 2014, despite the winding down of the furlough scheme, where the government has supported jobs in the pandemic by paying wages when employers cannot.

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No rise despite end of furlough
From July, employers will have to pay 10% of employees’ wages, on top of pension contributions and employer’s National Insurance. That rises to 20% in August, until the scheme finishes completely at the end of September.

“Anyone who has been on furlough this year has already cost their employers money – so their employers must be keen to keep them on. It’s not surprising that they are not being made redundant in large numbers,” says Ms Xu.

A total of 11.6 million jobs have been furloughed during the pandemic, though only 2.4 million were still on furlough at the end of May.

The success of the furlough scheme and the vaccine programme have lead many economists to cut their forecasts of how many jobs would be lost in the pandemic.

“By the time the furlough scheme ends on 30 September, the economy is likely to be strong enough to support a level of employment not far off where it is now. In fact, there is evidence that firms are finding it increasingly difficult to hire workers, especially in industries such as transport and manufacturing,” says Ruth Gregory, senior UK economist at Capital Economics.

“I think it’s likely that many firms have already made and communicated their plans and that with the easing of restrictions happening on schedule next week, we just won’t see any significant increase in redundancy notifications over the next few months,” says Mr Wilson.

Until recently, HR1 data were not routinely published, except for in Northern Ireland.

Last year the BBC began requesting these figures through the Freedom of Information Act, revealing the extraordinary increase in redundancy plans through the spring and summer of 2020.

This year, the Insolvency Service has started to publish these figures every month on its website.

The data only covers firms proposing 20 or more job cuts, so smaller firms are not picked up by these figures. Employers sometimes notify more redundancies than they eventually make.

The figures are not classified as Official Statistics, which are subject to rigorous quality control procedures.

Data for Northern Ireland is published by the Northern Ireland Statistics and Research Agency as part of its monthly Labour Market Report.

By Ben King

Source: BBC

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UK’s economic rebound slowed in May according to official data

UK’s economic rebound slowed sharply in May despite a relaxation of social-distancing rules, according to official data which also showed a hit to carmakers from the global shortage of microchips.

Gross domestic product expanded by a monthly 0.8%, much faster than its typical pre-pandemic pace but down from April’s 2.0% surge. It was also a lot weaker than the median forecast of 1.5% in a Reuters poll of economists.

“Of course, the pace of the recovery was always going to slow as the economy climbed back towards its pre-crisis level. But we hadn’t expected it to slow so much so soon,” Paul Dales, an economist with Capital Economics, said.

Britain suffered one of the biggest hits from the pandemic among advanced economies last year and GDP in May was 3.1% below its level in February 2020 just before the pandemic struck.

The Bank of England expects Britain’s economy to grow by 7.25% this year, the fastest since 1941. Last year output plunged by almost 10%, the biggest drop in more than 300 years.

April saw the easing of restrictions for many retailers, hairdressers, and pubs and restaurants that could serve customers outside. In May, hospitality firms were allowed to resume indoor service.

Britain’s dominant services sector grew by a weaker-than-expected 0.9% in May from April as a huge 37.1% monthly jump for accommodation and food services failed to offset slower increases elsewhere in the sector.

Supermarket sales fell as more people ate out, and education output dropped due to a decline in school attendance. Reduced COVID-19 testing also weighed on GDP.

Industrial output grew by 0.8% but manufacturing shrank narrowly. The chip shortage affecting carmakers led to the biggest fall in their output since April 2020.

Data published earlier this week showed Germany’s industrial output fell in May as semiconductor bottlenecks also contributed to a recovery slowdown in Europe’s largest economy.

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Bank of England Governor Andrew Bailey, taking part in discussions with his Group of 20 peers, said the world needed “robust openness to prevent the breakup of supply chains, which we are seeing threats to” in data from Britain and beyond.

“I think the G20 is in the front line here in reinforcing the importance of openness in a multilateral context,” he said.

Output in Britain’s construction industry contracted by 0.8% from April, hit by the fourth-rainiest May since 1862. Dales at Capital Economics said the fall could also reflect shortages of materials and labour.

NEW RELAXATION – REBOUND OR RISK?

Prime Minister Boris Johnson plans to lift most of the remaining restrictions from a third lockdown on July 19.

Rory MacQueen, an economist at the National Institute of Economic and Social Research, a think-tank, said the decision could yet backfire.

“It remains to be seen whether the lifting of further restrictions in July contributes to a continuation of strong growth in the third quarter or – if cases of COVID-19 continue to rise – increased caution among consumers and even another national lockdown,” he said.

Cases of the Delta variant of the coronavirus have accelerated in recent weeks but private-sector data and surveys have suggested no major hit to hiring or consumer behaviour.

The ONS revised down its figure for growth in April to 2.0% from 2.3% – reflecting a reduced contribution from COVID testing – although the estimate for March was increased.

Compared with May last year, when the country was in its first coronavirus lockdown, GDP was up by nearly 25%.

Separate data showed British imports and exports with the European Union continued to recover after a slump in January when the country finally left the bloc’s single market. But they remained below trade volumes with the rest of the world.

Reporting by William Schomberg and David Milliken

Source: Reuters

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UK economy records modest May growth despite reopenings

The latest UK growth data covering May was a tad disappointing, with economic activity increasing by 0.8% on the month, a little lower than the 1.3/1.4% figure we’d been looking for. The good, albeit unsurprising, news is that consumer services activity rebounded strongly again owing to the ongoing reopening, and the likes of hospitality and recreation indices are essentially back to where they were last summer with comparable levels of restrictions. Otherwise the picture was slightly lacklustre, with the likes of retail, construction and manufacturing all recording month-on-month falls. In the case of the latter, you’d probably put this down to some of the supply chain issues being encountered globally.

Nevertheless, we still expect the UK to record approximately 5% growth through the second quarter. But the outlook for the current third quarter is becoming trickier to predict. Covid-19 cases are rising, albeit the growth rate may finally be showing some tentatively signs of slowing. And while the link with hospitalisations has weakened with the vaccines, there is growing concern about the number of people needing to self-isolate.

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Around 600,000 people were pinged by the NHS app or told to isolate by contact tracers in the week to 30th June, and that’s likely to be in the millions within days, if it isn’t already. This risks amplifying the worker shortages that we’re seeing in the consumer services sectors right now.

There’s also a growing risk that consumers begin to ‘act with their feet’ and reduce socialisation again while cases are high. And this may be one contributing factor to the recent levelling off in UK high frequency data. Mobility and spending data have come off recent highs.

We’d still expect positive third quarter growth of around 1.5%, especially given we’re not currently looking at new restrictions – and indeed the government is planning a further relaxation on 19 July. And we’d still say the outlook beyond the summer looks reasonably good, assuming no significantly vaccine-evasive variants emerge in the near-term.

We expect the size of the economy to be more-or-less back to pre-virus levels by the end of the year.

Source: Think Ing

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Second charge mortgage new business volumes up 293% in May

Second charge new business volumes rose by 293% in May 2021, according to the Finance & Leasing Association (FLA).

The number of new agreements in May was 1,910, and the value of new business was £84m.

In the three months to May 2021, the number of new agreements rose by 82% to 5,848, and the value of new business increased by 74% to £253m.

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However, year-on-on-year, the number of new agreements fell by 27% to 18,044, and the value of new business dropped by 33% to £784m.

Fiona Hoyle, director of consumer and mortgage finance and inclusion at the FLA, said: “The second charge mortgage market reported a second consecutive month of growth in May, and new business volumes increased by 12% in the first five months of 2021.

“The improvement in consumer confidence means the market expects to see the recovery in new business continue during the second half of 2021.”

By Jake Carter

Source: Mortgage Introducer

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UK economy shrinks more than expected in first quarter

UK economy shrank by slightly more than expected in the first quarter before a subsequent easing of lockdown restrictions, revised official data showed on Wednesday.

Gross domestic product contracted by 1.6 percent in the three months to the end of March, down from the previous figure of 1.5 percent, the Office for National Statistics (ONS) said in a statement.

“Today’s updated GDP figures show the same picture as our earlier estimate with schools, hospitality and retail all hit by the re-imposition of the lockdown in January and February, with some recovery in March,” said ONS deputy national statistician Jonathan Athow.

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“With many services unavailable, households again saved at record levels.”

The UK government reimposed England’s lockdown in early January, but began lifting restrictions at the start of March with the reopening of schools.

Under a phased reopening, bars and restaurants restarted outdoor dining in April and indoor services in May.

Non-essential retail stores also opened back up in April.

The economy is expected to fully reopen on July 19, after the government delayed the date by four weeks due to surging Delta infections.

The ONS added on Wednesday that economic activity in the first quarter was 8.8 percent below its pre-pandemic level from late 2019.

“The small downward revision to Q1 GDP growth probably won’t stop the economy from rising back to its pre-pandemic peak in the coming months,” noted Capital Economics analyst Paul Dales.

“And the larger rebound in the household saving rate increases the potential for faster rises in GDP further ahead.”

Source: Bangkok Post

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BoE’s Haldane warns inflation headed towards 4 per cent

Andrew Haldane warned in his last speech as the Bank of England’s chief economist that policymakers risked losing control of inflation.

At an event hosted by the Institute for Government, Haldane said that UK consumer price inflation was headed towards 4% by the end of 2021 and that everyone would lose should inflation expectations became unhinged as a result.

Bank would be forced to play catch-up, hiking interest rates “materially” higher “and/or faster” in order to reanchor people’s expectations.

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“If this risk were to be realized, everyone would lose — central banks with missed mandates needing to execute an economic hand-brake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs,” he said in prepared remarks for the speech.

For now, there was no evidence that expectations had become unhinged, he added, but said that the recovery was changing the economy rapidly which could mean that rate-setters would have to shift their stance quickly.

“We’re moving from a regime of rather localized shortages and price pressure to a world of slightly more generalized shortages and generalized price pressures – from pockets of excess demand to aggregate excess demand,” he added.

Quick action was needed because “getting the cat back in the bag is jolly hard work.”

By Alexander Bueso

Source: ShareCast

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