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BoE governor is not expecting soaring inflation despite pent-up demand

BoE governor has said he is more positive about the future of the economy but added the optimism comes “with a large dose of caution”.

Andrew Bailey told BBC Radio 4’s Today programme that risks and uncertainty remain, including how much of the accumulated £180 billion unintentionally saved by high and middle-income households will be spent once restrictions ease.

Some economists have warned that the pent-up demand could lead to high inflation, but Mr Bailey said the central bank does not expect inflation to hit suggested heights of between 4% and 5%.

Instead, he believes it will return to around 2% in the next few months.

I think there will be for many people more of a hybrid model of working at home and working in a place of work… I would be very surprised if we went back to exactly as we were before Covid

Andrew Bailey, Bank of England

Mr Bailey also said he does not believe office workers will ever return to the pre-Covid five-days-a-week commute, with most employees working in a hybrid model.

The governor said: “I think we will see things change, because I think some habits and some practices will prove to be sustainable.

“I think there will be for many people more of a hybrid model of working at home and working in a place of work… I would be very surprised if we went back to exactly as we were before Covid.”

On the economy, he said: “We now have a more balanced picture of risks… The risks on the upside are that there has been a very large build-up in savings in the economy, largely because people have not been able to do the things they normally do.

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“The question of course then is: to what use will those savings be put and over what period of time? It could introduce more consumption and more demand into the economy.”

He pointed out that around 5% of savings could be spent over the next two years but “it could be larger”.

It has affected the low paid more, because the sectors of the economy that have had a larger shutdown tend to have a greater concentration of low-paid workers

Andrew Bailey

Mr Bailey said the effects of Covid have been very unequal, hitting the poorest hardest – with unemployment still expected to rise.

He said: “It has affected the low paid more, because the sectors of the economy that have had a larger shutdown tend to have a greater concentration of low-paid workers.

“I would also add that there are more women in that section of the labour force. I think there is a greater ethnic proportion in that labour force (too).”

Any new Covid variants that require further restrictions and lockdowns would also knock the economy, he added.

But the governor said the Bank of England was ready to use more “firepower” if required, including the introduction of negative interest rates to encourage spending.

Source: Shropshire Star

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Furlough numbers climb sharply in January to 4.7 million

Furlough numbers rose by 700,000 in January after tighter lockdown restrictions were imposed.

Treasury figures show a total of 4.7 million people were on the government scheme at the end of the month.

The hospitality sector, one of the hardest hit by the coronavirus crisis, furloughed 1.15 million people in January – an increase of 3%.

But the middle of February a total of £53.8bn had been claimed since the furlough scheme began last year.

The furlough data means that 16% of eligible workers were on the support scheme at the end of January.

In total, 11.2 million employees across the UK have been given furlough cash. The scheme pays up to 80% of salaries to those who cannot work because of Covid-19 restrictions.

Charlie McCurdy, researcher at the Resolution Foundation, said: “Furlough has once again played a crucial role in protecting incomes and keeping a lid on rising unemployment.

“But with almost five million workers still on furlough in the most recent data, our biggest labour market challenges may be ahead of, rather than behind, us.”

Separately, businesses took out a further £2.2bn of government-backed loans in the last month, according to Treasury figures.

The coronavirus business interruption loan scheme (CBILS) was most popular, with a further £1.2bn of loans awarded.

In total, nearly £73bn has been lent under the scheme and its two sister schemes – the coronavirus large business interruption loan scheme and the bounce back loan scheme.

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Gender split

The furlough figures show that while 1.5 million workers using the scheme are employed by big companies, it is staff at small firms with between two and four employees who are most likely to be furloughed.

These companies filed claims for more than 620,000 staff, or 36% of those eligible to be furloughed. Among larger businesses with more than 250 employees, only 9% of eligible staff were furloughed – the lowest proportion.

On average, women are more likely than men to be furloughed, however in London and Northern Ireland the furlough rate among eligible male employees is higher than among women.

Who is being furloughed?

The furlough statistics are vital to assess what is happening with the economy, and for how much longer the government’s rescue support will be required.

The answers from today’s statistics show that just under five million workers were on furlough in January during the second wave national lockdown.

It is though less than the nine million during the first national lockdown, giving some clues as to how the economy has been able to adapt better to these conditions.

By sector, retail and hospitality saw the biggest rises on the end of last year. About 68% of workers in the restaurant sector are currently furloughed. Retail furloughs were 938,500 at end of January, well up on December, but about half the level of the peak last April.

On the other hand, manufacturing and construction seems to have largely continued, and numbers furloughed are well down on the first wave.

The Centre for Cities dug into the numbers by location. The top 10 areas for furlough include those most exposed to tourism and aviation – Crawley, Blackpool, Brighton, Slough, all seeing over 1-in-6 workers on furlough. Those least reliant on the scheme include Barnsley, Doncaster and Hull at around 1-in-9 workers.

More women than men have been furloughed, reflecting the sectors most hit by pandemic lockdowns. By age group it is 25-34-year olds most hit, with over one million again now furloughed.

All of this underpins why rescue support will be extended at the Budget next week. But it also suggests that the real problems are concentrated by sector and by age.

Source: BBC

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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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Economic impact of crisis will be keenly felt in 2021

At times like these it is really scary to study economic forecasts.

We all know that no economic forecast is ever fully accurate, but when the set of reasonably reliable forecasts is as consistent as is now the case, and as uniformly troubling, then it is time to sit up and take a fair modicum of interest.

Let us start with the UK’s Office for Budget Responsibility, generally respected as informed and relatively unbiased.

This is a good place to start, as the OBR’s forecasts provide the basis upon which the UK Government’s budgets are based.

The OBR expects the UK economy to contract by 11.3 per cent this calendar year. This is apparently the sharpest decline since 1709 when the Thames froze over – although the 1709 data may be even less reliable than today’s!

They then see growth for 2021 at 5.5% followed by 6.6% in 2022. That sounds superficially decent, but note two caveats.

First, UK economic output – GDP being the key number – would not be back at where we were pre-pandemic until the last quarter of 2022; we will be returning from a very low base.

Second, if there were to be no deal on Brexit – which sadly looks to be an increasingly high risk – then the OBR suggests that UK output would be reduced by 2% initially, and would still be 1.5% below their ‘with deal’ forecast in 2026.

Looking elsewhere does not bring relief. Consider the EY ITEM Club, another generally respected source.

They suggest growth in 2021 of 6.2%, marginally above the OBR figure, and 4.3% in 2022, significantly lower than OBR. On this basis, “the economy is not seen as returning to its Q4 2019 size until Q4 2023”.

This is based upon the assumption of wide availability of a Covid-19 vaccine in the first months of next year (fingers crossed) and – wait for it – a free trade agreement being reached between UK and the EU.

Failure to reach such an agreement would, in their forecast, knock 2021 growth down to 5% and 2022 to 3.5%. This suggests that the UK would be lucky to regain the end-2019 level of GDP by the close of 2024 – four full years from now.

Seeking international comparators does not ease concerns.

The Organisation for Economic Co-operation and Development – OECD to its pals – sees the UK’s recovery next year from the Covid-induced recession as slower than any other major economy save Argentina.

UK GDP will, according to the OECD, be 6.4% lower at end 2021 than end-2019, while the world is up by a bare 0.6% and China up by nigh on 10%. All other major economies will remain below last year’s peak, but barely so for the US, by 3% for the EU and just 1.7% for Germany.

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There is no escape from the clear expectation that economic times will remain tough for the next couple of years, and particularly so in the UK. In some crucial aspects the impact will be more severe next year than has been the case in 2020.

Remarkably, while unemployment has eased upwards, the relative proportions of “working” and “workless” households had changed little in the year up to the third quarter in 2020. According to the ONS the share of “workless” households had risen by only 0.2 percentage points.

But these are artificial figures, in that so many billions of pounds have been provided to households via the Job Retention Scheme. That has been hugely valuable, but will come to an end at some time in early 2021. Then unemployment will shoot up.

The OBR sees an increase from just under 5% to 7.5% in the middle of next year. EY suggest 7%, but there seems general agreement that the peak level of unemployment will have been put back a few months by the Chancellor’s interventions and that peak will now be lower than previously anticipated. (But – excuse the cracked record – a touch higher again if there is no Brexit deal!)

So what to do? The first answer is definitively not to tighten the strings on the public purse either soon or sharply; a big “No” to austerity.

The UK public sector deficit is set this year to hit nearly £400 billion or 19% of GDP – the highest ever in peacetime. Inevitably tax revenues have fallen catastrophically while spending has skyrocketed.

The stock of Government debt has sailed past 10% of GDP, but the cost of servicing this debt is remarkably low as interest rates stay at rock-bottom levels; and, with inflation low and stable, rates look set to stay low for a good couple of years yet.

Over that period some tightening of the public finances will be required, but with caution and with great care being taken over where to temper expenditure and where to edge up taxation.

This should, of course, be based upon economic and public welfare considerations, not party politics.

As the Fraser of Allander Institute has wisely stated: “The need to remain flexible in the face of huge ongoing uncertainty is inevitable.”

In Scotland the UK’s Spending Review should result in a healthy increase next year in our core funding, but there will be a major decline in the “Covid consequentials”. Those are the extra funds allocated to Scotland for special measures to cope with the impact of Covid on individuals and businesses, and they will fall sharply, meaning that difficult choices will have to be faced.

Again, economic and public welfare considerations should be paramount – and the Scottish Government could benefit from a careful read of the new report from Carnegie on Gross Domestic Wellbeing – as an alternative measure of social progress.

Didn’t someone say that we need to “grow back better”?

Source: Herald Scotland

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