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Severity of Omicron to determine UK economy’s fate, analysts warn

The severity of the Omicron variant will determine the strength of the UK’s economic recovery from the pandemic over the coming year, according to City economists.

The British economy could reach its pre-pandemic size by the third quarter of next year if the new strain of coronavirus proves to be less deadly than first thought, economists at KPMG have predicted.

In the consultancy’s best case scenario, in which no further restrictions on economic activity are needed to curb the spread of Omicron, the UK economy will grow 4.2 per cent in 2022 and 2.2 per cent in the following year.

Although growth could be tempered by an initial hit to consumer spending due to Brits becoming “more worried about catching the new strain of the virus… spending patterns could be restored if the milder nature of the virus is confirmed by the end of the year,” KPMG said.

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The bullish predictions mirror those made by the business lobby group the Confederation of British Industry (CBI), who expect the economy to expand 6.9 per cent this year and 5.1 per cent next. These new projections are, however, downgrades from the CBI’s previous forecasts, underlining the damage supply chain issues have inflicted on confidence in the recovery.

Consumers are set to drive economic growth, with spending surging 7.6 per cent next year. Household spending will generate around 90 per cent of growth in 2022, according to the CBI.

However, ongoing supply chain breakdowns caused by demand for goods staying elevated and roaring inflation present significant headwinds to the recovery, both organisations warned.

“A turn to the worse in Covid-19 cases could see more disruption to ports and logistics in the short-term, putting upward pressure on goods prices,” KPMG added.

Even if no further restrictions are imposed over winter, inflation will hit 5.8 per cent next spring, KPMG said. The CBI expects the rate to scale to over five per cent as well, a warning that will agitate officials at the Bank of England.

The Old Lady has come under intense pressure to get a handle on inflation running wild in the UK.

Prices are rising at their fastest pace in nearly a decade, scaling 4.2 per cent in the year to October.

The Bank will announce its latest decision on interest rates on December 16.

The City was adamant the Old Lady would hike rates this month.

However, the emergence of the Omicron variant has clouded the outlook for the UK economy, prompting analysts to rein their bets on a first rate rise in three years.

Experts are already painting a bleak picture of whether the economy can withstand a reintroduction of lockdown measures.

In KPMG’s worst case scenario in which Omicron evades vaccines, the UK will squeeze out anaemic growth of 1.8 per cent.

Meanwhile, an upsurge in case rates in South Africa driven by the rapid spread of the new strain has sparked experts to redraw their projections for the year ahead.

Goldman Sachs has revised down its forecasts for US growth due to the variant “slow[ing] economic reopening,” the Wall Street giant said in a research note.

By JACK BARNETT

Source: City AM

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Bank of England to look through Omicron and hike rates this month

The Bank of England will plough ahead and hike interest rates for the first time three years this month despite concerns the Omicron variant could whack the UK economy, according to City analysts.

Strong booster jab take up and high levels of existing immunity stemming from the successful vaccination programme has put the British economy in a strong position to withstand a fourth wave of coronavirus triggered by the new variant, experts at Goldman Sachs have predicted.

The emergence of the heavily mutated strain of coronavirus last week initially sparked fears over the health of the British economy due to the likelihood of strict restrictions to curb the spread of the disease.

These downbeat assessments cast doubt over whether the Bank would raise interest rates at its next meeting on December 16.

However, under Goldman’s baseline scenario, “the UK economy will hold up relatively well during the fourth wave, given high vaccine take-up and a successful booster programme,” the Wall Street investment banking giant said.

“As a result, we still believe that a 15 basis points BoE hike is more likely than not at the December meeting.”

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Bullish assessments from global health leaders have emerged this week downplaying the severity of the Omicron, potentially pushing members of the Old Lady’s rate setting committee into lifting rates.

The World Health Organisation (WHO) tempered speculation that the existing crop of Covid-19 vaccines could be scuppered by the new variant by signaling there is no evidence the new strain reduces their efficacy.

GlaxoSmithKline also announced today its Covid-19 antiviral treatment is effective against Omicron.

Those upbeat health assessments have been echoed by economists this week, who have stressed the UK economy is in a much better position to function effectively even amid Covid-19 curbs.

A waning impact of the virus on the economy suggests it will be able to stand on its own two feet without ultra-loose monetary policy, paving the way for a rate hike.

Even before the emergence of the variant, the Bank was under intense pressure to hike rates to hose down runaway inflation.

The Old Lady stunned markets last month when it left rates unchanged at a record low 0.1 per cent despite expecting inflation to hit five per cent next spring.

Prices are already 4.2 per cent higher than they were a year ago, the highest rate of increase in nearly a decade, according to the Office for National Statistics.

Goldman also expects the Bank of England to hike again in May next year, taking rates to 0.75 per cent by the end of 2022.

By JACK BARNETT

Source: City AM

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UK economy to return to anaemic growth as cost of living crisis spikes Brits

A triple threat of a worsening cost of living crisis, higher interest rates and a pulling of government Covid-19 support will throw the UK economy back into an anaemic state, according to new research published today.

Swelling energy bills and rising costs for basic necessities will cause households on tight budgets to rein in spending, according to predictions made by accountancy firm PwC.

Weaker spending from low income households will clamp down on the UK’s economic recovery from the Covid-19 crisis.

The forecast underlines the impact soaring inflation is having on the economy’s capacity for growth.

The UK economy is heavily reliant on consumer spending to generate output, meaning a reduction in spending from low income households would constrain growth.

Brits living on tight budgets “will feel the pinch from a combination of rising inflation, higher interest rates, and fiscal changes” and a looming 1.25 percentage point national insurance hike, cautioned Hoa Duong, economist at PwC.

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PwC’s experts said richer households would be able to shake off the impact of rising prices due to them having greater bandwidth to absorb a higher cost of living.

A surge in spending “will likely be concentrated on higher income households” as a result, the firm said.

Inflation in the UK has taken off in recent months, triggered by a combination of global supply chains breaking down, soaring wholesale energy costs and rising commodity prices.

The Office for National Statistics estimates prices are 4.2 per cent higher than they were a year ago, the highest rate of inflation in nearly a decade.

Yet, PwC expects the rate to scale even further and hit its highest level in three decades next spring.

“The rise in the energy price cap and the reversal of the VAT cuts for hospitality and tourism create a perfect storm that is set to push headline inflation rates to around five per cent and six per cent,” the firm said.

The downbeat projections will be a cause for concern for the Bank of England, which has a mandate to keep inflation at two per cent.

The Old Lady has come under intense scrutiny for keeping interest rates at a record low 0.1 per cent despite expecting inflation to rise to more than double its target.

Officials on Threadneedle Street will announce their next decision on rates on December 16. Earlier this month, they stunned markets when they left rates unchanged.

By JACK BARNETT

Source: City AM

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The economic outlook for the UK and Wales post-pandemic and Brexit

UK businesses, especially in North Wales, have demonstrated strong resilience and most have performed better than the economic predictions.

The main reason for the economic bounce back was the furlough scheme, which mirrored that of Germany’s normal economic support policy of intervention during financial crises in order to save the economy and jobs.

As the businesses are opening, these furloughed high skilled workers have resumed work and production. The machines which were lying idle for a while have started producing.

The economic downturn from the pandemic will be short-lived, as long as we are all very vigilant and the UK and Welsh governments do not attempt to completely stop their support.

In contrast, during the 1980s, 1990s and 2008 economic crises, the UK government did not provide economic support and allowed many good quality, viable businesses to go bust; permanently damaging the economy and jobs. Hopefully, we have all learned a lesson from the past.

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In this current crisis we have also witnessed the key roles which devolved nations can play.

The Welsh government’s targeted support not only saved many viable businesses, it also had a major positive social impact within the most deprived communities in North Wales.

This again signifies how the powers passed to a devolved nation can enhance the social and economic wellbeing of the whole of the UK.

The Welsh government’s support and intervention complemented the national support and tackled locally-focused challenges.

Welsh government’s development bank (DBW) also targeted its support to areas of the economy that were missed by the UK government and the large international banks.

The Office for Budget Responsibility (OBR) predicts that, although the UK economy will almost fully bounce back from the pandemic, it’s economy and eventually the jobs market will suffer for decades due to Brexit.

We are now facing mountains of bureaucratic paperwork in order to trade with the EU.

Some of the EU businesses do not want to go through the bureaucratic hassles of purchasing or selling to UK companies.

The only way my organisation can maintain a good trading relationship with EU businesses is through our Belfast or German offices.

The UK has already seen a dramatic drop in exports to the EU. Building trade deals with most countries outside the EU is now proving to be a long and horribly complex process which will take many years to achieve.

The Welsh government administration has proved its maturity and economic competence during the pandemic.

If Wales has greater power to manage its economic activity and was allowed to have its own direct independent trading relationship with the EU; it would deliver significant economic growth and social wellbeing.

Sadly, the UK government will not grant further autonomy to Wales and will very likely erode the autonomy it presently has.

Source: The Leader

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Why the seconds market is thriving

When the pandemic took hold last year, a host of second-charge lenders pulled back on their lending. As a result, the market struggled. However, there’s no denying that the second-charge market is now booming.

In fact, the latest figures from the Finance & Leasing Association show that in September this year new business agreements jumped by 67% to nearly 2,500, while the value of new lending increased 78% to £102m.

These aren’t one-offs either. In the three months to the end of September, both the number of new second-charge agreements and the value of those deals are up by more than 100% on the same point last year, while on an annual basis they are both up by more than 10%.

There is a pretty clear message there. Not only has the second-charge market bounced back from the challenges of COVID, it’s now at pre-pandemic levels. What’s more, the momentum isn’t ending – the FLA said it fully expects new business volumes to grow over the remainder of the year as demand is so solid.

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Changing circumstances

There are plenty of different reasons for why the second-charge sector is looking so positive at the moment, but the strength of that demand from borrowers is a significant one.

The last couple of years has had a real impact on the finances of millions of homeowners, and making use of the biggest asset they own – their home – in order to correct that makes sense.

It’s no secret that scores of clients have taken on additional forms of debt to get through the pandemic, but now that the economy – and perhaps their personal circumstances – look to be on an upward trajectory, they may want to explore their options for consolidating those debts into a single monthly payment.

Equally, there will be plenty of homeowners who have realised their current home doesn’t quite meet their needs, but they don’t have the appetite – or the funds – to purchase a new one, and so instead want to improve what they already have.

It may be converting an attic to build a new bedroom for a growing family, or perhaps adding an extension which can serve as a home office now that they spend a portion of the week working from home. That sort of home improvement project will likely require some serious funding too.

The number of clients in these positions has only increased as a result of the pandemic, and a second-charge mortgage is likely the perfect option for them.

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Remortgage regret

There was a time when intermediaries may have immediately turned to a remortgage for a client looking to raise funds for home improvement or to pay off debts.

There are some potentially significant downsides to following this course of action though. For starters, there’s the danger of large exit fees.

Let’s face it, with interest rates as they have been for the last decade, it’s no great surprise that huge numbers of borrowers have chosen to lock in for longer periods. For many borrowers, the 2-year fix is yesterday’s news – instead borrowers are more likely to want a 5-year fixed rate.

But that means that if they do need to raise funds, remortgaging can be prohibitively expensive due to the large early repayment charges they would face.

Of course, remortgaging may also mean the client has to move to a less attractive rate, particularly if the sum they are borrowing for their debt repayment or home refurbishment pushes the loan into a higher loan-to-value band.

Remortgaging may mean sacrificing a great rate, moving into a more costly band for borrowing and having to pay a hefty exit fee to boot. It’s not exactly a compelling proposition, is it?

A second option

However, a second-charge mortgage avoids all of those downsides. The client borrows against the equity they hold in the property outside of the existing mortgage – that first-charge is completely untouched.

This is an even more attractive idea after the last year, when the activity levels in the housing market have meant the value of our homes has increased, meaning homeowners often hold more significant equity levels than was the case just a year or so ago.

There are no exit fees to worry about, no payment shocks that will come from having to shift the existing mortgage to a higher rate or a higher loan-to-value (LTV) band. Instead, the client can simply access the funds they need for their project or debt repayment and get on with their lives.

With every week that passes, we see more and more advisers becoming more comfortable with the role that second-charges can play for their clients.

This has been coupled with fantastic competition and innovation across the lending space, meaning the products we deliver are better designed and suited for clients.

The FLA is absolutely right that demand for second-charge products are only likely to grow from here. As a result, it’s crucial for advisers to put plans in place for helping these clients, whether that be handling the advice themselves or partnering with specialists who can ensure those clients still receive the best possible guidance.

By Steve Brilus

Source: Mortgage Introducer

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UK economic bounce-back to weaken, analysts say

The United Kingdom’s economic recovery from the coronavirus pandemic slowed between July and September and is expected to be weaker than previously predicted in the coming months, largely because of supply-chain problems and higher energy costs.

Official figures from the Office for National Statistics, or ONS, show consumer spending increased as the UK emerged from pandemic-battling lockdowns, but other sectors of the economy shrank disappointingly.

Overall, growth during the three-month period stood at 1.3 percent, which was well down on the 5.5 percent recorded between April and June. The slowdown leaves the UK economy 2.1 percent smaller today than in the final quarter of 2019.

Grant Fitzner, chief economist at the ONS, told the BBC the service-sector growth was largely down to a tax holiday for property purchases.

“However, these were partially offset by falls in both the manufacture and sale of cars,” he said.

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The Guardian newspaper reported on Monday that EY Item Club had used the results, and other data, to predict the “tougher” part of the UK’s economic recovery is yet to happen.

EY said in its autumn forecasts there will be “higher and more sustained inflation” in the coming months, with rises in energy prices and supply chain disruption denting previous estimates.

EY said the UK’s GDP could rise by 6.9 percent this year, instead of the 7.6 percent it had expected. GDP fell by almost 10 percent last year. And EY said GDP growth in 2022 could run at 5.6 percent, instead of the 6.5 percent it had previously predicted.

Martin Beck, chief economic adviser to EY Item Club, told The Guardian: “With the boost from reopening the economy now largely passed, the UK was always expected to enter a tougher phase of the recovery. …Although inflation looks like it’ll peak higher-and stay higher for longer-than first anticipated, it doesn’t look like this will tip into ‘stagflation’; the combination of sluggish growth and persistent high inflation.”

But EY did have some good news. It said unemployment will likely run at 4.3 percent in the final quarter, instead of the 5.1 percent it had previously predicted.

Sky News added on Monday that recent disappointing economic data and a lack of investment had led the head of the Confederation of British Industry, or CBI, to say the British economy now feels second-rate.

Tony Danker said in a speech on Monday at the CBI’s annual conference that the government must find ways to deliver economic growth to all parts of the nation. “I don’t know a country in the world… where governments aren’t active in economic geography,” he said in an apparent swipe at London’s decision to cancel part of a planned upgrade of railway lines in the North of England.

Source: Hellenic Shipping News

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UK economy begins to emerge from Covid but old problems remain

After a bruising couple of weeks, the government was in need of some good news and that was provided by the latest jobless figures. Fears that the end of the furlough scheme would lead to rising unemployment have proved groundless.

It is, of course, early days. There are still only flash estimates of what happened in October once the Treasury’s wage subsidies had come to an end but the signs are promising.

But rather than the expected surge in redundancies as firms had to cope without government financial support, there was a 160,000 rise in the number of payrolled employees. In the three months from August to October the number of job vacancies hit a new record of close to 1.2m – up almost 400,000 on the pre-pandemic level.

The Office for National Statistics said in the July to September period – the months leading up to the scrapping of the furlough – the number of people moving from job to job was higher than ever before, but this was the result of choice rather than people being forced to move because they had been dismissed.

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Rishi Sunak said the figures were tribute to the “extraordinary success” of the furlough and few would dispute that claim. The unemployment rate fell by 0.5 percentage points to 4.3% in the three months to September and is only marginally higher than it was when Covid-19 arrived in early 2020.

Some of the workers who came off furlough in October may have gone into part-time rather than full-time jobs, but even so the labour market has shown resilience throughout the pandemic.

Andrew Bailey, the governor of the Bank of England, said on Monday that he wanted to see what was happening to employment post-furlough before deciding whether to support higher interest rates. Nothing in the official data suggests the City is wrong in its belief that borrowing costs will rise from 0.1% to 0.25% next month.

Indeed, the economy as a whole is now starting to go post-Covid. The inflation figures due out on Wednesday will still show the impact of the virus on global energy prices and on supply chains but in other respects it is as if the past 18 months never happened.

There are two sides to that. The good news is that the labour market has emerged relatively unscathed. The bad news is that the problems of February 2020 – low investment, low productivity, weak underlying growth – are problems that remain to be tackled in November 2021.

By Larry Elliott

Source: The Guardian

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Soaring inflation and tax hikes to squeeze UK economy

TAX hikes, soaring inflation and an end to pandemic-related government support is souring the UK economy’s prospects, according to City analysts.

Brits’ spending power will be eroded by the intensifying cost of living crisis, restricting their ability to splash the cash and drive the economy, analysts at Deutsche Bank warned today.

Inflation is accelerating at the fastest pace in nearly a decade, climbing to 4.2 per cent last month, up from 3.1 per cent in September, according to the Office for National Statistics.

Fiery price rises are threatening to derail the UK’s economic recovery from the Covid-19 pandemic by crimping consumers’ willingness to spend.

The UK economy is heavily reliant on the services industry to generate growth, meaning a sharp slowdown in consumer spending will produce severe downside shocks to the country’s growth prospects.

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The British economy will grow just 3.6 per cent next year, much lower than the Bank of England’s forecast of five per cent, experts at the German investment bank have predicted.

A combination of historically high inflation and tax hikes will cost the UK economy around £13.5bn next year, roughly 0.6 per cent of GDP.

Sanjay Raja, UK economist at Deutsche Bank, said: “As we turn the page on 2021, one thing is clear: consumers are already starting to feel the pinch of eroding spending power.”

“This has already started to filter through into recent consumer confidence data, which paints a bleaker picture of weakening confidence in both households’ economic and personal financial outlooks.”

In a separate note published today, British bank Barclays estimates the UK economy will expand 6.9 per cent this year, and then 4.1 per cent next year, before cooling to settle around its pre-pandemic trend of 1.3 per cent in 2023.

The lender expects the global economy to grow six per cent this year.

“Supply chain problems have not just persisted; new ones have arisen. Inflation has been much stronger, for far longer, than central banks expected,” Ajay Rajadhyaksha, head of macro research at Barclays, said.

By JACK BARNETT

Source: City AM

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UK inflation surges, fuels expectations interest rates will rise

UK inflation surged to a 10-year high last month, fuelled by a jump in household energy bills and petrol prices, official data show.

Annual UK consumer prices index inflation surged to 4.2% in October, from 3.1% in September, and is now more than double the target set for the Bank of England by the Treasury.

While a sharp rise in inflation had been expected, with economists in a poll by Reuters having projected an October reading of 3.9%, the jump was even greater than expected and fuelled expectations of a rise in UK base rates from a record low of 0.1% next month.

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Colin Dyer, client director at financial services group abrdn, said: “Rising fuel and energy prices, paired with global supply chain disruptions, caused inflation to soar last month after a temporary respite in September.

“The cost of living has been increasing rapidly for much of 2021 because of the strong economic recovery from the coronavirus pandemic, but October’s inflationary rate is the highest we’ve seen in over a decade. And with the Bank of England now warning of it exceeding 5% early next year, it’s likely to remain an uncertain and uncomfortable period for many.”

He added: “For those trying to save, rumours of a rate rise on the horizon might seem positive, but this is unlikely to be substantial enough to show any real returns.”

By Ian McConnell

Source: Herald Scotland

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City bets on Bank of England rate hike ramp up again after strong jobs figures

City bets on the Bank of England hiking interest rates soon are ramping up once again after fresh jobless data showed the worst effects of the end of the furlough scheme have been largely avoided.

The Old Lady will turn the dial at its next meeting in December due to the labour market looking less fragile, according to economists, experts and analysts.

Thomas Pugh, economist at RSM UK, said today’s jobless figures showed a key “obstacle preventing” the Bank from hiking rates had been “removed”.

“The continued robust recovery in the labour market will reassure those MPC members who were concerned about damage from the ending of the furlough scheme… most MPC members will probably decide that the labour market is now robust enough to withstand an interest rate hike,” he added.

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Officials on Threadneedle Street justified leaving rates unchanged at a record low 0.1 per cent around a fortnight ago due to a lack of visibility over the impact of the end of the furlough scheme on the jobs market.

The Bank is most concerned about wage pressures fuelling medium term inflation expectations, which could trigger even sharper upsurges in price rises if workers demand higher pay and businesses try to pass on swelling costs to consumers.

Data from the Office for National Statistics (ONS) released this morning showed payrolled employees climbed 160,000 over the last month to over 29m in October.

This is the first time the ONS has examined the labour market when the furlough scheme has not been live since the start of the pandemic, indicating the economy may be strong enough to stand on its own two feet and absorb higher borrowing costs.

“Today’s data has made the odds of a rate rise in December more finely balanced,” Martin Beck, senior economic advisor to the EY ITEM Club, predicted.

The Old Lady decided to keep rates dormant despite expecting inflation to hit five per cent in April next year, more than double its target.

Economists expect near term inflation to blow the Bank’s target out of the water, with some thinking it will reach four per cent.

The ONS will verify whether those wagers are accurate when it releases its latest inflation estimates tomorrow.

CPI inflation is already running hot at 3.1 per cent.

By JACK BARNETT

Source: City AM

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