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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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UK business confidence falls amid record-high inflation expectations

UK business confidence has fallen to its lowest level this year, amid concerns among businesses about supply challenges and inflationary pressures, according to the latest Accenture/ IHS Markit UK Business Outlook.

More than half of UK private sector firms (56%) expect an increase in business activity during the year ahead, compared to 11% that project a decline. The resulting net balance of +45% is a sharp fall from the highs recorded in both June (+58%) and February (+57%) earlier this year.

Despite this sharp fall from the spring and summer, confidence remains higher than seen throughout much of the last five years and UK businesses are more confident than those in every other European country apart from Ireland.

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Firms’ employment expectations also dropped last month, with the net balance of companies confident that they will hire additional staff in the next 12 months, at +32% compared to +41% in June. However, barring the record high seen in the previous survey, hiring intentions are at their peak since June 2015.

The fall reflects ongoing concerns among UK businesses about their ability to hire the skilled staff.Only one-third (35%) of businesses were confident that they will be able to hire the skills they need over the next 12 months. This was lowest for ‘experienced’ workers (29%), when compared with ‘entry level’ (47%) and ‘senior management and executive’ (40%) roles.

Inflation expectations among UK firms continued to surge higher, with forecasts for both staff and non-staff costs rising to unprecedented levels. Whilst primarily driven by global supply-side risks, firms increasingly expect to see wages rise as the labour market tightens and living costs increase. The rapid surge in energy costs also served to exacerbate fears that business expenses will spiral upwards.

Commenting on the survey, Simon Eaves, Market Unit Lead, UK & Ireland at Accenture, said: “The high levels of business confidence we saw earlier this year have been tempered by some strong economic and unanticipated headwinds. Despite this, business optimism in the UK remains higher than in most other European nations and we must capitalise on this sentiment to inspire further growth across the economy.

“Supply chain challenges and labour shortages cannot be fixed overnight, but it is critical that business leaders adapt their operations and invest in the right technologies, such as cloud and data, and bring in the right skills to remain competitive.

“Two areas are dominating every business leaders’ agenda at the moment. There’s the movement to digital as they recover post-Covid and, with it, sustainability which we saw many commitments made at the recent COP26 Summit. Our research shows that businesses that invest in these two important areas will be amongst the winners of the future.”

Source: London Loves Business

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Pound plunges to yearly low against dollar on underwhelming UK GDP figures

The pound has plunged to its lowest level against the dollar this calendar year driven by traders dumping the currency after fresh data showed the UK economic recovery is stalling.

Pound sterling dipped to day low of $1.3365, the weakest the pound/dollar exchange rate in 2021, following the release of new GDP data from the Office for National Statistics (ONS) this morning.

The fall was triggered by currency traders selling off sterling holdings due to a weaker than expected quarterly UK GDP clip, which came in at an underwhelming 1.3 per cent for the three months to September, soured sentiment toward sterling.

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The drop was compounded by currency traders pouring into the dollar after a fiery inflation print published yesterday strengthened the prospect of the US Federal Reserve raising interest rates.

Data from the US Bureau of Labor Statistics shows prices are rising at their fastest pace since 1990 in America.

The pound has rebounded over the last month, but was sent tumbling after the Bank of England last week decided to hold interest rates at a record low 0.1 per cent despite expecting inflation to hit at least five per cent in April next year.

Currencies tend to weaken if inflation is strong due to holders of separate currencies losing purchasing power.

By JACK BARNETT

Source: City AM

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UK economy set to eke out anaemic growth in set of muddled GDP figures

The UK economy is set to squeeze out anaemic growth as the recovery from the Covid-19 crisis continues to slow, according to City economists.

Severe supply chain bottlenecks, compounded by soaring energy prices, logistics systems breaking down and a paucity of workers has crimped businesses.

As a result, the size of the British economy is likely to have remained unchanged over the last month, economists at Pantheon Economics think.

Those findings will be put to the test on Thursday when the Office for National Statistics (ONS) publishes its latest estimates for monthly and quarterly GDP.

A slowdown in consumer spending, driven by Brits shunning shopping trips to preserve petrol amid a fuel crisis that plagued the country in September, kept economic growth in check.

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Output in the manufacturing sector was weak due to a “slump in car production” as a result of an ongoing global shortage of semiconductor chips, Pantheon Economics said.

Industrial firms likely held back on production due to higher prices for raw materials and energy making normal business activities financially unviable.

According to the ONS, input prices climbed 11.4 per cent annually in September.

However, despite the blizzard of headwinds knocking businesses off course, there will be some bright spots in the ONS’s figures.

The final tranche of Brits staycationing before the end of the summer amid ongoing travel bans will boost production in the food and accommodation sectors.

“Investment growth” is likely “to have improved with businesses ramping up activity, although supply chain shortages would have had some impact,” Yael Selfin, chief economist at KPMG, said.

The quarterly statistics will also show the UK economy is in ruder health as they will take into account July and August as well as September and compare the period to the second quarter, a time when the recovery was just getting off the ground.

But, the quarterly print will still underwhelm and – coupled with the poor monthly GDP figures – prompt Bank of England to hold off from hiking interest rates next month, according to economists at Bank of America.

Experts at Pantheon Economics agree.

“September’s data likely will unsettle the [Bank of England], which highlighted last week that the recent fragility of the recovery played a role in its decision to stand pat.”

By JACK BARNETT

Source: City AM

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Impact of Brexit on economy ‘worse than Covid’

The impact of Brexit on the UK economy will be worse in the long run compared to the coronavirus pandemic, the chairman of the Office for Budget Responsibility has said.

Richard Hughes said leaving the EU would reduce the UK’s potential GDP by about 4% in the long term.

He said forecasts showed the pandemic would reduce GDP “by a further 2%”.

“In the long term it is the case that Brexit has a bigger impact than the pandemic”, he told the BBC.

His comments come after the OBR said the cost of living could rise at its fastest rate for 30 years, with suggestions inflation could hit almost 5%.

Speaking after Wednesday’s Budget, Mr Hughes said recent data showed the impact of Brexit was “broadly consistent” with the OBR’s assumption that the leaving the EU would “reduce our long run GDP by around 4%”.

“We think that the effect of the pandemic will reduce that (GDP) output by a further 2%,” he added.

The Treasury has been contacted for comment.

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What is GDP and how is it measured?
GDP or Gross Domestic Product is one of the most important ways of showing how well, or badly, an economy is doing. It is a measure – or an attempt to measure – all the activity of companies, governments and individuals in an economy.

In a growing economy, quarterly GDP will be slightly higher than the quarter before, a sign that people are doing more work and getting (on average) a little bit richer. If GDP is falling, then the economy is shrinking.

The UK voted to leave the EU in 2016 and officially left the trading bloc on 31 January 2020, however, both sides agreed to keep many things the same until 31 December 2020, before a new trade deal was announced and implemented on 1 January this year.

Supply chain problems
Both the pandemic and Brexit have played a part in current supply chain issues across the UK, and have further exposed the scarcity of lorry drivers, which has resulted in recent shortages of products for businesses and some empty shelves for customers.

However, in the OBR’s latest report, the independent body said “supply bottlenecks had been exacerbated by changes in the migration and trading regimes following Brexit”.

Supply chain issues has led to the government granting short-term visas to EU workers across certain sectors, including the haulage industry.

The British Poultry Council has said turkey farmers will do their best to ensure Christmas “is as normal as it can be”, but warned shortages are likely, due to a shortage of seasonal overseas workers.

The government has assured consumers that turkeys will be available for the festive season and has also deployed temporary visas in a bid to bolster worker numbers.

Source: BBC

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Second charge agreements more than double in August ‒ FLA

The second charge mortgage market has continued to show signs of recovery with the number of new agreements and value of new business more than doubling compared to the same period last year.

According to the latest figures from the Finance & Leasing Association (FLA), there were 2,314 new second charge agreements in August, just over double the figure from the previous year. Last year, the market recorded 1,134 new agreements for August.

This continues a trend of growth, with 7,054 agreements in three months to August, more than double the figure of 2,761 during the same period last year.

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In the 12 months up to August there were 22,880 new agreements, which was up five per cent on the year before.

The value of new business for August was pegged at £95m, up from £43m during the same month last year but on a par with £102m in August 2019.

For the three months up to August the value of new business was estimated at £297m, and for the 12 months the value was £956m.

FLA’s director of consumer and mortgage finance and inclusion Fiona Hoyle said: “The second charge mortgage market continued its recovery from the pandemic in August. The market has reported more normal levels of new business in recent months which we expect to continue in the final quarter of 2021.”

By Anna Sagar

Source: Mortgage Solutions

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UK economy picks up in Oct despite strongest price pressures in a generation

UK businesses reported faster growth in October, helped by fewer curbs on foreign travel, but the Bank of England is likely to be worried about record rises in the costs faced by businesses, which are being passed on to consumers.

The IHS Markit Composite Purchasing Managers’ Index (PMI) rose to 57.8 in October from 54.9 in September, its highest since July and well above an initial flash estimate of 56.8.

The narrower services PMI rose to a three-month high of 59.1, up sharply from 55.4 in September and above the initial flash reading, as reduced COVID-19 testing and quarantine requirements led to greater foreign travel bookings.

The readings suggest the UK economy regained momentum last month – despite high-profile supply-chain disruption that led to petrol stations running short of fuel.

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However a record proportion of businesses reported a surge in operating costs, according to two series which went back to 1996 for the services sector and to 1998 for the composite index which also includes manufacturers.

Tight labour market conditions were a major factor behind higher costs, IHS Markit said.

“Many consumer service providers commented on unfilled vacancies after staff departures for higher wages, despite efforts to boost pay and conditions,” IHS Markit economics director Tim Moore said.

“The impact of staff shortages was another rise in backlogs of work and greater willingness to pass on higher costs to new customers,” he added.

Businesses were more likely to raise prices than at any time since these records began in 1999.

On Thursday, the BoE is widely expected by investors to become the first major central bank to raise interest rates since the start of the COVID-19 pandemic, increasing its benchmark cost of borrowing to 0.25% from 0.1%.

Governor Andrew Bailey said last month the central bank would have to act if it sees a risk that medium-term inflation or inflation expectations will exceed its 2% target.

However, some policymakers view the surge in inflation – which the BoE’s new chief economist thinks could soon top 5% – as driven overwhelmingly by temporary bottlenecks and higher energy prices which BoE rate rises will do nothing to ease.

IHS Markit said rising costs caused business optimism in the services sector to fall to its lowest since January.

“Respondents also cited worries about prolonged staff shortages and constraints on growth due to the supply chain crisis,” Moore said.

Reporting by David Milliken

Source: Nasdaq

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London set to drive UK recovery with business confidence highest in capital

London businesses are set to drive the UK’s economic recovery from the Covid-19 crisis over the coming months.

Firms in the capital are the most confident out of all regions across the country, according to Lloyds Bank’s latest businesses barometer survey.

65 per cent of London businesses are optimistic about their medium term prospects, up three percentage points over the last month.

Elevated confidence levels in the capital underlines the scale of recovery London businesses have undergone since the depths of the pandemic.

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The capital was one of the hardest hit areas of the UK due to a large proportion of the country’s leisure and hospitality sector being concentrated in the city.

Business confidence in the UK as a whole edged down three percentage points over the last month to 43 per cent as a result of firms becoming more pessimistic about the health of the British economy.

However, positivity is well above the long term average of 28 per cent.

An easing of supply chain breakdowns and shortages of crucial materials has improved trading conditions and boosted firms’ confidence levels.

But, swelling costs are making firms more willing to hike prices to protect margins. 45 per cent of businesses expect to increase prices, the highest proportion since Lloyds started tracking the data.

An increase in labour supply after the furlough scheme was fully wound down at the end of September has partially resolved businesses’ struggles in attracting enough workers to deliver normal services.

According to Lloyds, 90 per cent of businesses plan to bring back more than half of furloughed staff, indicating unemployment is unlikely to undergo a sharp uptick.

Hann-Ju Ho, senior economist Lloyds Bank Commercial Banking, said: “While economic optimism saw a slight dent in October due to rising costs and the on-going supply chain issues, it is clear that firms are still feeling relatively buoyant as overall business confidence remains high and above the long term average.”

By Jack Barnett

Source: City AM

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House price jumps make second charges a compelling debt consolidation option

As we head towards the end of the year, many advisers will be hearing from clients who want to get to grips with their debts. The run-up to Christmas often coincides with borrowers taking a step back from their finances, recognising they would like to be paying less for their various forms of credit, and investigating their options for consolidating those debts together into a single monthly payment.

Clients who want to consolidate their debts will have a few options if they want to make use of their property asset, but it’s important for advisers to consider all of those possible solutions rather than simply the one they are most familiar or comfortable with.

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Remortgaging for debt consolidation

One option will be remortgaging, taking out a larger loan so that they can clear all of those existing debts on credit cards, personal loans and the like. They then have just one debt to keep on top of, their mortgage.

It’s certainly a simple option – there will only be one repayment date to monitor, one interest rate to be aware of. But there are a couple of potential downsides that come from the remortgaging route.

The first, and potentially most punitive, is the risk of having to pay an early repayment charge. Advisers don’t need me to tell them that the vast majority of their clients are likely to be on fixed-rate mortgages these days, and more often than not they are lengthy ones. Given the way ERCs are calculated as a percentage of the outstanding mortgage balance, they can easily become a considerable cost if your client happens to be only halfway through a five-year fixed rate. That’s an exit fee that is really going to sting on the way out.

That’s not the only financial hit that comes from remortgaging either. Your client will also have to switch rate too. That’s not a bad thing if they happen to be on a poor deal but given the level of competition we have seen in recent years there’s a real risk that they will have to move to a less attractive rate, particularly if the additional borrowing moves their loan into a higher loan-to-value band. As a result, remortgaging in order to clear those additional debts may mean that not only does the client have to hand over thousands in ERCs, they also move onto a higher interest rate, with a more substantial mortgage balance to boot.

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It doesn’t have to be like this

There is a clear alternative though, in the form of a second charge mortgages. And not only does a second charge offer a different route for borrowers, it actively avoids some of those potential downsides that come from remortgaging.

It’s worth emphasising the fact that a second charge mortgage is secured against the equity the borrower holds in the property. As a result, the original mortgage is unaffected by the loan. That means no concerns over exit fees, moving LTV bands, or shifting interest rates – the client can carry on as usual with that first-charge mortgage, and continue to benefit from the excellent rate that you secured for them.

A second charge stands separate from that original mortgage, meaning there is no unpleasant knock-on effect from raising the sums needed for the debt consolidation.

Rising equity levels

It’s impossible to ignore the considerable growth in house prices that have taken place over the past year or so, off the back of the stamp duty holiday. That tax break has caused huge numbers of would-be buyers to take the plunge and pursue a move, and it’s driven up prices across the board.

In fact, the latest figures from the Office for National Statistics show that the average property price jumped by a massive 10.6% in the 12 months to the end of August, meaning a new average price of £264,000. To put that in cash terms, that’s a rise of around £25,000 compared to a year ago.

And that’s really good news for any borrower considering a second charge for debt consolidation purposes. That price growth means they hold far more equity in their property, and so are better positioned to raise the funds needed in order to clear those debts.

The demand for help with debt consolidation is only going to grow in the months ahead, so it’s important that advisers keep on top of the full range of options open to their clients. If they aren’t comfortable dealing with second charges themselves, then now is a good time to find a second charge specialist to partner with who can help their clients find the best possible funding solution.

By STEVE BRILUS

Source: Financial Reporter

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Brexit is harming the UK economy, say 44% of voters

Almost twice as many voters now believe Brexit is having a negative effect on the UK economy as think it is benefiting the nation’s finances, according to the latest Opinium poll for the Observer, carried out during budget week.

The survey comes after Richard Hughes, the chairman of the Office for Budget Responsibility, said his organisation calculated that the negative impact on GDP caused by the UK’s exit from the EU was expected to be twice as great as that resulting from the pandemic.

Hughes said Brexit would reduce the UK’s potential GDP by about 4% in the long term, while the pandemic would cut it “by a further 2%”. “In the long term, it is the case that Brexit has a bigger impact than the pandemic,” he said.

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Opinium’s findings appear to be in line with other recent polling, including a survey last week by Ipsos MORI, which showed concern about the effects of Brexit rising to the point that it is now seen as the biggest issue for the country alongside Covid-19.

The Opinium survey found that 44% of people think Brexit is having a bad impact on the UK economy, compared with 25% who think it is having a positive effect.

More starkly, 53% of people believe Brexit is having a bad effect on prices in shops, against 13% who think it is having a good effect, while 51% think it is adversely affecting the UK’s ability to import goods from the EU, against 15% who think it is helping.

While chancellor Rishi Sunak’s approval rating rose slightly after his Budget speech on Wednesday, in which he increased government spending to its highest sustained level since the 1970s while warning that inflation would rise to 4% next year, the fact that people appear to be linking Brexit with economic problems including rising prices will be a worry to No 10 and No 11 Downing Street.

During the campaign for Brexit, led by Boris Johnson and Michael Gove, voters were told by the Leave campaign that leaving the EU would create a more dynamic UK economy able to trade freely across the globe, and less bureaucracy, leading to lower prices.

The OBR report, published alongside Sunak’s budget, said that its evidence to date suggested its previous forecasts that Brexit would lead to a 15% fall in both UK imports from, and exports to, the EU appeared to have been broadly accurate.

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The report said: “The evidence so far suggests that both import and export intensity have been reduced by Brexit, with developments still consistent with our initial assumption of a 15% reduction in each.”

It is also made clear that shortages of lorry drivers were at least partly caused by Brexit.

Last week the Financial Times reported that whereas by August this year global goods trade had rebounded sharply since the height of the pandemic (according to the CPB World Trade Monitor), the UK was proving a notable exception, with its exports still sharply down.

Since the end of the Brexit transition period on 1 January this year, UK ministers have insisted that difficulties with trade to and from the EU would be short-lived and amounted merely to “teething problems” that would be resolved quickly once companies got used to the new arrangements.

While Opinium found evidence of clear anxiety about Brexit, this has yet to translate into a negative effect on support for the Tory party.

The Conservatives are on 40%, down 1 point compared with a fortnight ago, while Labour is down 2 points on 35%. The Lib Dems are on 8%, the Green party 7%, the SNP 5% and Plaid Cymru 1%.

By Toby Helm

Source: The Guardian