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UK Economy Contracts By Record 9.9% According To Official Data

UK economy shrank by 9.9% in 2020, the worst annual slump on record amid the Covid-19 pandemic, according to official data released on Friday.

The contraction in 2020 “was more than twice as much as the previous largest annual fall on record” said the Office for National Statistics. It was the biggest fall in annual GDP since the ‘Great Frost’ of 1709, when the economy shrank by 13%.

In December, the economy grew by 1.2%, after shrinking by 2.3% in November, which the ONS said was due to the loosening of some coronavirus lockdown restrictions. It also meant that the UK avoided a “douple dip” recession for the time being.

A double-dip is when the economy briefly recovers from recession, only to quickly sink back, while a recession is generally measured as two consecutive quarters of contraction.

Fourth quarter gross domestic product (GDP) grew by an estimated 1%, following revised 16.1% growth in the previous three months. However , despite two consecutive quarters of growth, GDP is 7.8 below the final quarter of 2019.

The ONS reported increases in services, production and construction output in the final quarter, although the output in these sectors was lower year on year.

Britain has reported Europe’s highest death toll from coronavirus and is among the world’s highest in terms of deaths per head of population as the government struggles to come up with a coherent strategy to combat the pandemic.

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UK IS G7’S ‘LAGGARD’

“The UK economy remained the laggard in the G7 in Q4, with GDP still some 7.8% below its pre-Covid peak. By contrast, GDP in the US was only 2.5% below its Q4 2019 level, Germany was down only 3.9%, France 5.0% and Italy 6.6%,” said Samuel Tombs at Pantheon Economics.

“The UK’s underperformance can’t simply be attributed to the different way the ONS measures government expenditure to most other countries; indeed, it rose by 6.4% quarter on quarter in Q4. Instead, pronounced weakness in households’ spending once again has been the root cause.”

Tombs said real household spending in the fourth quarter was 8.4% below its peak in the corresponding three months of 2019, following a further 0.2% quarter-on-quarter decline, greatly exceeding shortfalls of 2.6% in the US and 6.8% in France.

He added that governments abroad had done more to boost consumption; citing Germany’s across-the-board VAT cut in the second half of last year, and stimulus checks for US households.

“The UK government’s two main initiatives—the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme—have focussed on bolstering incomes, not spending, and were extended only at the last minute in the fourth quarter, leading many households to save more than if they had known government support would be ongoing.”

“The modest pick-up in GDP in December is a dead cat bounce; the economy has started 2021 on a very weak footing, due to the third lockdown. We look for a 5% month-to-month decline in GDP in January and a 3.5% quarter-on-quarter drop in Q1 as a whole.”

By Frank Prenesti

Source: ShareCast

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UK suffers worst annual slump since 1709

The UK economy contracted by 9.9% in 2020, its largest annual contraction since the Great Frost of 1709, as the coronavirus pandemic ravaged economic activity.

In the final quarter of the year, gross domestic product (GDP) grew by 1%, according to the Office for National Statistics, as the country re-imposed nationwide lockdown measures in a bid to combat a resurgence of Covid-19 cases.

The 9.9% annual contraction is more than twice that seen in 2009 in the aftermath of the global financial crisis, and narrowly worse than the 9.7% slump during the crisis of 1921.

Economists polled by Refinitiv had expected an 8% annual decline, in 2020 with a fourth-quarter expansion of 0.5%. This follows a revised 16.1% rebound in the third quarter as social, travel and business restrictions were eased.

As of Friday morning, the UK has recorded more than 4 million cases of Covid-19 and 115,000 deaths, according to data compiled by Johns Hopkins University. The UK has been blighted by new and more transmissible variants of the virus in recent months.

Hitesh Patel, portfolio manager at Quilter Investors, said the U.K. had experienced an “annus horribilis” in the form of the “trifecta” of a public health crisis, economic shutdowns and uncertainty surrounding Brexit.

“However, 2020 is in the past and the UK arguably has a promising second half of the year ahead given the success of the vaccine rollout,” he said.

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“This could easily be derailed should one of the mutations prevent the vaccines properly taking effect, but for now a double dip recession has been avoided and soon lockdowns may potentially be the thing of the past.”

England remains in a nationwide lockdown with no clear end date, although British Prime Minister Boris Johnson confirmed on Wednesday that around one in four adults, approximately 13 million people, have now received the first dose of a Covid vaccine.

Monthly GDP in December increased by 1.2% from the previous the month, but remained 6.3% below the level of February 2020. Fourth-quarter GDP remained 6.6% below the level seen in the fourth quarter of 2019.

The services sector grew by 1.7% in December having contracted by 3.1% in November, while manufacturing posted its eighth consecutive month of growth, the ONS said, albeit its smallest incline since May 2020.

“The tighter restrictions imposed towards the end of last year, which are likely to remain in place for much of the current quarter, suggest that the economy may shrink again,” said Dean Turner, economist at UBS Global Wealth Management.

“However, what is clear from the data is the resilience and adaptability of firms and households, so any contraction will be modest. As and when restrictions are eased, we continue to expect a vigorous rebound in the UK economy.”

By Elliot Smith

Source: CNBC

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Second charge business down but contraction easing: FLA

The value of new second charge business stood at £75m in November 2020 in the UK, down 35 per cent on the same month in the previous year.

The latest figures from the Finance and Leasing Association show the number of new arrangements in the month was 1,857, down 28 per cent by the same comparison.

For the three months to November 2020, second charge business was worth £199m, down 41 per cent and down 39 per cent on the 12 months to November to £759m.

The number of new arrangements in the 12 months to November 2020 was 17,651 down 36 per cent on the previous 12 months.

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FLA head of consumer and mortgage finance Fiona Hoyle says: “The level of new business by value and volume in the second charge mortgage market continued to improve in November and the rate of contraction compared with pre-crisis levels continued to ease. In the eleven months to November 2020, new business volumes in this market were 40 per cent lower than in the same period in 2019.

“Lenders are continuing to do all they can to support customers during this challenging period. If customers are experiencing payment difficulties we encourage them to contact their lender as soon as possible.”

By Rebekah Commane

Source: Mortgage Strategy

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Don’t expect sharp post-Covid rebound for UK economy, warn Niesr economists

The UK economy will grow by little more than three per centin 2021 after a 10 per cent slump last year, with a double-whammy from Covid and Brexit likely to be felt for years.

Leading economists at the National Institute of Economic and Social Research (Niesr) are also pushing chancellor Rishi Sunak to raid the coffers once more for extra emergency support.

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Niesr slashed its growth forecast for 2021 to 3.4 per cent from a previous estimate of 5.9 per cent, after taking into account the UK’s third lockdown and Covid-19 wave.

It’ll be 2023 before the UK economy returned to pre-Covid levels, it said.

Last week, the Bank of England said it expected that to happen in the first quarter of next year.

“Despite the roll-out of vaccines, Covid-19 will have long-lasting economic effects,” Niesr’s deputy director Hande Kucuk said today.

By 2025, the UK’s economy was likely to be about six per cent smaller than expected before the pandemic, reflecting higher unemployment, weaker business investment and Britain’s more restricted trading relationship with the European Union.

Sunak – who has promised to spend £280bn on the UK Covid-19 response this financial year, taking the budget deficit to a peacetime high – is due to announce his plans for the next 12 months in a budget statement on 3 March.

By Josh Martin

Source: City AM

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Sterling jumps following BoE’s decision to hold interest rates

The pound rebounded this afternoon as the Bank of England announced it would leave interest rates unchanged.

The currency saw its biggest fall in three weeks this morning as traders nervously waited to see whether the BoE would formally endorse negative interest rates.

The Prudential Regulation Authority’s analysis found the UK would need six months to prepare for negative rates as anything sooner would risk incurring “increased operational risks”.

The bank’s Monetary Policy Committee (MPC) unanimously voted to keep rates at 0.1 per cent and its bond-buying programme at £895bn.

Sterling welcomed the central bank stepping back and returned cable to $1.367 while two-year yields jumped from 0.1 per cent to 0.05 per cent.

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Against the euro it moved from a 0.2 per cent decline to a 0.6 per cent rise to reach a nine-month high of €1.141.

“This was primarily because traders know that negative interest rates are not going to become a reality,” Naeem Aslam, Ava Trade’s chief market analyst. “This particular fact was holding Sterling from further appreciation. Now, it is pretty much clear that negative interest rates are not going to come into daylight. Hence the path of the least resistance for the Sterling is skewed to the upside.”

But the bank did not rule out negative rates entirely, hinting they could be used in the future should conditions warrant them.

In a statement the BoE said it was expecting a rapid recovery in GDP towards pre-pandemic levels in 2021, led by the UK’s vaccination programme. However it cautioned the outlook for the year remains “unusually uncertain”.

“It depends on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments”, the nine-strong MPC added.

By Angharad Carrick

Source: City AM

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200,000 retail redundancies forecast for 2021

The UK’s retail sector is forecast to report 200,000 job losses this year as Covid-19 restrictions continue to affect the industry.

The latest research from the Centre for Retail Research (CRR) showed that an average of 320 stores were shuttered every week in 2020.

New figures show a bleak retail landscape for 2021, with high streets and shopping centres likely to be most affected by social distancing rules.

The CRR said the retail sector’s troubles are “caused by high costs, low profitability, and losing sales to online shopping”.

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“These problems are felt by most businesses operating from physical stores in high streets, shopping malls or neighbourhoods.

“The low growth in consumer spending since 2015 has meant that the growth in online sales comes at the expense of the high street.”

The third lockdown and tiered restrictions have impacted stores as a large proportion of retail trade has been lost.

“Although a lot of money has been channelled into the retail sector ‘to preserve jobs’, businesses cannot operate with zero revenue and constant threats of pandemic-driven closure,” CRR said.

By Sahar Nazir

Source: Retail Gazette

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Bank of England: Cautious optimism reduces need for negative rates this year

The rapid vaccine rollout and the corresponding likelihood of a spring recovery has taken the pressure off the Bank of England to offer further stimulus. Policymakers will be careful not to shut the door on negative rates, but we don’t expect further rate cuts this cycle

The brighter outlook has taken the pressure off the Bank

The Bank of England is poised to unveil its latest decision this Thursday, and it’s now widely expected that policymakers will shy away from taking the plunge into negative interest rates this month. In fact, we think it’s unlikely they will do so at all in this cycle.

The outlook is brighter, and we expect the Bank’s new forecasts to continue to signal a full economic recovery around the turn of the year (albeit with some inevitable downgrades to growth this quarter). We are a little more cautious – we expect the combination of higher unemployment and ongoing disruption related to Brexit to prevent a full return to pre-virus levels for at least another 18 months.

But the conclusion is the same – with the vaccine rollout going well, and cases now falling rapidly, there is a good chance that the economy will record a rapid bounce in activity through the middle of the year. That in turn reduces the pressure to inject additional stimulus.

The BoE’s November forecasts assumed more-or-less a full recovery this year

Negative rates unlikely this cycle, but don’t expect the BoE to close the door on them

Of course, there are plenty of uncertainties in the outlook – not least how the new Covid-19 strains will affect the current batch of vaccines and therefore the need for future restrictions. But even so, what’s become increasingly evident from MPC commentary over recent weeks is that the willingness to enact negative rates is mixed.

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Some ‘external’ committee members, most notably Silvana Tenreyro, have signalled it is a move they are willing to make – though we suspect there won’t be any dissent this week. But the overall majority, including Governor Andrew Bailey, have played up some of the challenges.

On that note, we will get an update this week on the review that’s been carried out with the banking sector to see how negative rates might play out in practice. We suspect the general conclusion is likely to be that there are challenges, but that the sector could probably cope.

We don’t expect negative rates in this cycle

What’s less clear is how far the committee will go in passing judgement on how these findings affect the policy outlook. In theory, the findings are coming from the Prudential Regulation Authority (PRA), so it is entirely possible that the MPC passes no further judgement at this stage. However the findings could prompt the MPC to formally reduce its estimate for the ‘effective lower bound’ this week – which is a fancy way of signalling they are prepared to take rates below zero.

Either way, the key message is likely to be one of cautious optimism. We don’t expect negative rates in this cycle, though we could at some point see a step in this direction if the Bank decides to offer a negative rate on its Term-Funding Scheme, a policy designed to incentivise lending to SMEs.

If the outlook goes as planned, we also don’t foresee a further extension in the Bank’s QE programme beyond this year.

GBP rates: one last hurrah for negative Sonia forwards

The BoE meets at a time of benign market developments, with an improving economic outlook but still significant discount for negative rates. Something has to give. As we explained above, we do not see a strong case for taking the Bank rate below zero, but the conclusion to the PRA’s review on negative rates, and possible dovish dissent at this meeting, could be the cause of greater confidence in negative rates in the near term.

Some of the easing benefit of negative rates has been achieved already

We think this would be misguided. As the outlook improves, the case for negative rates will weaken. In a sense, some of the easing benefit of negative rate expectations has been achieved already with 1Y1Y Sonia swaps staying below zero since June last year. After a possible dovish reaction on Thursday, we expect this rate to move back above zero, and eventually above Sonia fixings (currently around 0.05%).

Sonia 1Y1Y to cross above zero, but curve flattening potential limited

In the grand scheme of things, this would be a fairly mild re-adjustment, and not something that threatens to invert dynamics at the long end of the curve. A more significant force in the pricing of longer rates is the impending recovery, and eventual tightening of policy.

As Bailey has stated, the BoE might start balance sheet reduction (quantitative tightening) before or during its rate hikes. This normalisation at both ends of the curve implies the flattening potential could be more limited than in the previous (shallow) hiking cycle in 2017-18.

Source: ThinkIng

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UK economy could avoid a double-dip recession after resilient November

The UK economy looks likely to avoid a double-dip recession thanks to a better-than-predicted performance in November 2020, according to the EY ITEM Club’s Winter Forecast, published today (January 28).

With the economy contracting by just 2.6% in November, despite the impact of a month-long England-wide lockdown and other restrictions across the UK, the EY ITEM Club now expects the economy to have had a flat performance across the fourth quarter.

While the latest COVID-19 restrictions are expected to cause a three to four per cent contraction in the first quarter of 2021, the absence of a contraction in the fourth quarter of 2020 means the UK may – just – avoid its first double-dip recession since the 1970s.

Vaccine roll-outs are under way and a free trade agreement with the EU has been secured, putting the UK in position for a steady economic recovery from the second quarter of 2021 onwards.

The latest forecast predicts growth of five per cent in 2021, 6.5% in 2022, two per cent in 2023 and 1.8% in 2024.

With a better-than-expected fourth quarter performance and the Office for National Statistics revising earlier GDP data upwards, the EY ITEM Club now estimates that the UK economy shrank by a record 10.1% in 2020, an improvement on its December forecast of an 11.6% contraction.

Positively, the point at which the UK economy is expected to regain its pre-COVID-19 peak is inching forward, with this now forecast to happen in quarter three 2022 – an improvement from the 2023 and 2024 dates predicted in earlier forecasts.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “The UK economy has demonstrated remarkable resilience in recent months and the impact of recent lockdowns has been nowhere near what we saw in April.

“Over the course of 2020, the economy has become quicker to adapt to new COVID-19 restrictions and, while new restrictions may still cause disruption, lessons learned from previous lockdowns are rapidly put into place.”

He added: “The prospects for recovery are looking brighter. Once the economy has negotiated what is likely to be a challenging first quarter of this year, it will, undoubtedly, benefit from the vaccine roll-out helping to boost consumer and business confidence.

“The combination of vaccines, a UK-EU trade deal and previous lockdown experience means there’s much less uncertainty out there. Excluding the first quarter, the UK is looking at two years of strong growth.”

The EY ITEM Club forecasts that unemployment will peak at seven per cent in mid-2021 before starting to fall towards the end of the year.

This would be a significant improvement on the 7.7% unemployment rate peak expected in the Autumn forecast and the nine per cent peak expected in the Summer forecast.

Howard Archer said: “Seven per cent unemployment is high compared to recent years, but it’s not on the same scale as what was seen during the 1980s and it’s much lower than what was forecast at the outset of the pandemic.

“Government programmes, such as the furlough scheme, have helped keep job losses down so far. A lower unemployment peak means less long-term scarring for the economy.

“Where unemployment levels end up will be important for consumer confidence and will have consequences for the economic recovery, particularly in its early stages.”

The EY ITEM Club predicts that consumer spending is likely to contract again in the fourth quarter of 2020 after bouncing back strongly in quarter three from a record contraction in quarter two. It estimates that consumer spending contracted a record 12.6% over 2020, but will be up 5.1% in 2021 and 7.4% in 2022.

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Howard Archer said: “Consumer spending will be affected in early 2021 by the closure of non-essential retailers and most of the hospitality and leisure sectors.

“After the first quarter, depending on unemployment levels, consumers should be well placed to play a key role in the recovery given the very high recent savings ratios.”

Meanwhile, business investment is expected to improve in 2021 and then accelerate in 2022 as confidence is lifted by a firmer and more settled business environment.

The EY ITEM Club forecasts business investment to expand 14.2% in 2022 following a 1.8% increase in 2021 – 2021’s low overall growth figure masks improvement throughout the year.

Stephen Church, EY’s office managing partner in the North West, said: “While some sectors are clearly still struggling, there are encouraging signs that the recovery could be stronger than initially thought.

“M&A is a good indicator of future growth, and things have picked up after the lows of mid-2020. Likewise, there is strong anecdotal evidence of productivity improvements, which should provide businesses with a strong platform to build on.

“If this feeds through into profits, then business investment may return faster than current sentiment implies. This would be good news for the UK competitiveness, particularly post-Brexit.”

He added: “As the North’s economy heads towards recovery, physical infrastructure, including HS2 and advanced technological connectivity, will play an important role in levelling up the UK.

“Businesses need to be prepared. Now is the time to firm up post-pandemic plans as the shape of the future economy becomes clearer.”

Finally, the EY ITEM Club forecasts public spending to rise 6.3% in 2021, while government investment is expected to be up 8.2% as the Government seeks to put the economy on a firm footing ahead of action to repair the impact of the pandemic on the public finances.

Additionally, it expects monetary policy to remain accommodating for growth, although the need for further stimulus from the Bank of England is questionable.

Stephen Church added: “Heading into the Budget on 3 March, declining uncertainty and a strong growth forecast mean there is a good platform for the Chancellor to articulate a clear plan for an orderly reduction of public support for the economy at the same time as articulating a future vision.

“It will be important to see plans for a green recovery, steps to level up the economy and deliver inclusive growth, as well as a vision for how to ensure the UK economy remains internationally competitive. The right approach could support the recovery and, significantly, help Britain to build back better.”

The EY ITEM Club’s latest forecast does not rule out the Bank of England adopting negative interest rates, although it is predicted that it is more likely a 0.10% interest rate will be maintained for some time to come.

By Neil Hodgson

Source: The Business Desk

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How Brexit is already taking its toll on the U.K. economy

Prime Minister Boris Johnson recently qualified as ‘teething problems’ the many incidents and trade disruptions triggered by the start of Brexit.

With disruptions at European borders and supply chains perturbed by new tariffs, the U.K. economy has begun to show the negative economic impact of leaving Europe’s single market and customs union at the beginning of the year, several indicators show.

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  • Gita Gopinath, the chief economist of the International Monetary Fund, said this week as she was presenting the organization’s new economic forecast, that Brexit would shrink the U.K. economy “by about 1%” this quarter.
  • It was the only economy whose performance in 2020 was downgraded by the IMF, which estimates the country’s gross domestic product fell 10% last year.
  • Surveys by data company IHS Markit show that U.K. manufacturers and service providers are reporting the most severe disruptions of their supply chains, which is “almost exclusively linked to both Brexit disruption and a severe lack of international shipping availability.”
  • Freight volumes between the U.K. and the rest of Europe were down 38% in the third week of January compared with last year.
  • Paperwork, higher costs and compliance delays are severely affecting the traffic of goods on the U.K.-European Union routes, but they have an even more severe impact on trade between Britain and Northern Ireland, which remains in the single market.
  • The Office for Budget Responsibility, the official fiscal watchdog, predicted back in November that Brexit would shrink the U.K. economy by 4% in the long run with a free trade agreement such as the one that was signed between the two sides just before Christmas.

The outlook: Prime Minister Boris Johnson recently qualified as “teething problems” the many incidents and trade disruptions triggered by the start of Brexit. But from British fishermen to City of London finance professionals, many rather expect the government to act to try soften the blow.

The massive economic hit triggered by the COVID-19 pandemic may help hide the detrimental Brexit impact to the general population in the first half of the year. But it is hard to see how the government will be able to mitigate the consequences of being an outsider to the single market without taking steps back toward the EU and opening further discussions.

By Pierre Briançon

Source: Market Watch

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UK could avoid double-dip recession after resilient November

The UK economy looks likely to avoid a double-dip recession thanks to a better-than-predicted performance in November 2020, according to the EY Item Club.

The economy contracted just 2.6 per cent in November, despite the impact of a month-long England-wide lockdown and other restrictions across the UK.

As a result, it is expected the economy will have had a flat performance in the final quarter of 2020.

Although Covid-19 restrictions are expected to cause a three to four per cent contraction in the first quarter of 2021, the absence of a contraction in Q4 2020 means the UK could avoid its first double-dip recession since the 1970s, EY said.

EY estimated the UK economy shrank by a record 10.1 per cent in 2020 – an improvement on its December forecast of an 11.6 per cent contraction.

Howard Archer, chief economic advisor to the EY Item Club, said the UK economy had demonstrated resilience, and the impact of recent lockdowns had been nowhere near what it was last April.

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“Over the course of 2020, the economy has become quicker to adapt to new Covid-19 restrictions and while new restrictions may still cause disruption, lessons learned from previous lockdowns are rapidly put into place,” he said.

Archer said the prospect for recovery looked bright, adding: “The combination of vaccines, a UK-EU trade deal and previous lockdown experience means there’s much less uncertainty out there. Excluding the first quarter, the UK is looking at two years of strong growth.”

Unemployment to peak

EY’s Item Club said unemployment was likely to peak at seven per cent in mid-2021, before falling towards the end of the year.

Archer continued: “Seven per cent unemployment is high compared to recent years, but it’s not on the same scale as what was seen during the 1980s and it’s much lower than what was forecast at the outset of the pandemic.

“Government programmes, such as the furlough scheme, have helped keep job losses down so far. A lower unemployment peak means less long-term scarring for the economy.”

Elsewhere business investment is expected to improve in 2021 and then accelerate in 2022 as confidence is lifted by a firmer and more settled business environment.

EY forecasted business investment to expect 14.2 per cent in 2022 following a 1.8 per cent increased in 2021.

By Hannah Godfrey

Source: City AM

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