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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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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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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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UK economic growth slows to weakest level since Covid rules eased in March

Severe shortages of workers and supplies have dragged down economic growth in Britain to the weakest levels since pandemic restrictions were eased in March, according to a closely watched business survey.

The latest snapshot from IHS Markit and the Chartered Institute of Procurement and Supply (Cips) showed that growth in private sector output slowed in August as firms battled with severe shortages while costs rose at the fastest pace since the late 1990s.

Business activity faltered in the dominant service sector, which accounts for 80% of the economy, while the slowdown was more pronounced in manufacturing where severe supply-chain disruption held back growth in factory output.

In a sign that the economic recovery from lockdown is waning, business expectations for the year ahead fell to their lowest since January and new orders eased to a seven-month low.

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The IHS Markit/Cips flash purchasing managers’ index dropped from to 54.1 in September from 54.8 in August, on a scale where anything above 50 indicates expansion. City economists had forecast a reading of 54.5.

Chris Williamson, the chief business economist at IHS Markit, said the barometer of business activity would add to concerns that the UK economy was heading for a bout of stagflation, a period of weak economic growth accompanied by rapid growth in consumer prices.

The survey of about 1,200 service-sector firms and manufacturers, which is closely watched by the Bank of England and the Treasury for early warning signs from the economy, showed a sharp acceleration in companies’ costs. Against a backdrop of rising transport costs, product shortages and higher staff wages, firms raised their prices at the fastest pace since the survey began in July 1996.

“Shortages are meanwhile driving up prices at unprecedented rates as firms pass on higher supplier charges and increases in staff pay. Brexit was often cited as having exacerbated global pandemic-related supply and labour market constraints, as well as often being blamed on lost export sales,” Williamson said.

By Richard Partington

Source: The Guardian

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Poorest Struggle As Coronavirus Impacts UK Economy

A report published by the leading anti-poverty charity Joseph Rowntree Foundation said the economic crisis brought by the coronavirus pandemic will make it extremely hard for the poorest families to recover unless the UK government takes action to tackle the crisis.

A report published by the leading anti-poverty charity Joseph Rowntree Foundation said the economic crisis brought by the coronavirus pandemic will make it extremely hard for the poorest families to recover unless the UK government takes action to tackle the crisis.

The report also found that 40 percent of minimum-wage workers face a ”high or very high risk” of losing their job.

A food bank in East London has been struggling to cope with the number of people asking for food.

Community worker Abdi Hassan told British broadcaster Sky News that the food bank receives more and more help requests for mental health support as well.

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Wheelchair user Piers Wilkinson has lost his job during the summer due to the coronavirus pandemic.

He is now a disability activist and said that despite the help received by professionals to find a new job, he is now drowning in debt.

Helen Barnard, a member of Joseph Rowntree Foundation, said the charity found out that the majority of people who were losing their jobs during the pandemic, were those who were already struggling financially.

Earlier this week, a mother shared on social media an image of a poor free school meal delivered by a food company.

The image went viral and showed poor quality and low-value food, which was supposed to feed children who were homeschooling because of the lockdown.

Health Secretary Matt Hancock told Sky on Wednesday morning the food company has ”apologized” for the incident and will make sure people were delivered the high-standard food they deserve.

Source: Republic World

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UK economy may be 6% smaller in early 2021 than initially forecast

The UK economy could be up to 6% weaker in early 2021 than expected in initial forecasts.

The latest report from the Resolution Foundation found that due to the new Covid-19 restrictions to stop the rising infection rate it is likely that the country’s economy for 2021 will be negatively impacted.

The report said that the duration of those restrictions will determine the effect on the economy.

The report said that a possible path for the economy, takes the Office for Budget Responsibility’s November forecast and assumes that monthly output remains at its November level (reflecting the fact that Tier 4 is the equivalent of repeating the second lockdown) until Easter before returning to its forecast path (which included the impact of some ongoing restrictions).

This would see the economy being 6% smaller by Easter than forecast by the OBR just last month and reduce growth for 2021 as a whole from 5.5% to 4.3%.

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Sectors reliant on social consumption, specifically hospitality, leisure and non-essential retail, will remain hardest hit and government support should be focused on them, said the Resolution Foundation report.

The thinktank also said that widespread vaccination in 2021 would lead to a swift drop in deaths from coronavirus and enable a gradual return to normality. It assumes that those over 65 will be vaccinated by Easter.

The report said spending will bounce back very quickly once normality is achieved and it should lead to a big labour market boost. The report believes this improvement will be noticeable towards the second half of 2021.

Nevertheless, “2021 is going to be a rough ride. The early months of the year will try the patience of a nation fatigued by the trauma that was 2020. And with unemployment rising and incomes possibly falling in 2021, it certainly won’t be roaring for everyone”, said the report.

By Caoimhe Toman

Source: ShareCast

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Risks to UK economy as Brexit deadline approaches

With the UK economy suffering more from the coronavirus than most advanced nations, the stakes couldn’t be higher as Brexit trade negotiations enter their endgame.

Gross domestic product (GDP) will likely be smaller than what it would have been had the UK stayed in the European Union (EU) regardless of the outcome.

But reaching an accord would help avoid major trade disruptions come Jan 1.

Leaving without a deal, meanwhile, means that Brexit could end up inflicting more lasting damage than the pandemic, according to economists. Both sides say the onus is on the other to make a decisive move before the transition ends in just over a month.

The pandemic has put Britain on course for its deepest economic slump since the Great Frost of 1709.

By the first quarter of 2025, GDP will be 3.1% lower than anticipated in March, according to estimates by the Office for Budget Responsibility (OBR) released on Wednesday. The fiscal watchdog deems the loss of output to be permanent.

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In a separate analysis, the OBR said transitioning into a free-trade agreement with the EU would shave 4% off GDP in the long run.

A no-deal scenario – meaning a shift to World Trade Organisation rules – would mean losing another 1.5%. Dan Hanson of Bloomberg Economics puts the combined cost higher still, at 7% of GDP.

Jobs are also on the line. Unemployment is set to peak at 7.5%, or 2.6 million people, next year under the OBR’s central scenario that a trade deal be reached. A no-deal exit pushes the rate up to 8.3%.

Financial services and export-reliant manufacturing sectors such as the car industry, food and textile producers stand to be among the hardest hit if trade talks fail.

There are concerns that the time and money spent dealing with the pandemic has left many firms ill equipped to cope with the potential costs and disruptions ahead.

A Bank of England survey of chief financial officers last month found less than 4% of them were fully prepared for the end of the transition period.

Before the pandemic, businesses were already holding back on spending as they awaited greater clarity over Britain’s post-divorce relationship with Europe.

No matter what the outcome of the talks, a period of adjustment is likely to make it hard for companies to know how best to invest for the future, but a move to WTO terms risks keeping spending depressed for longer, hitting already weakened productivity. — Bloomberg

Source: The Star

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Two-thirds of all UK businesses at risk of insolvency

Two-thirds of all businesses across the UK currently trading have a “low to severe risk of insolvency”, according to the Office for National Statistics (ONS)

The latest Business Impact of Coronavirus Survey (BICS) from the ONS found that 64 per cent of businesses across all industries are at risk of insolvency, with 43 per cent of companies running on less than six months’ cash reserves.

The figure comes on top of the 14 per cent of all UK businesses that have already paused trading under local lockdown restrictions.

Businesses in the hospitality industry are at the highest risk of entering administration, with 17 per cent of all accommodation and food companies currently trading at “severe risk” of insolvency, according to the ONS.

Seven per cent of all pubs, restaurants and hotels in the UK have zero cash reserves, latest data showed.

A spokesperson for trade body UK Hospitality told City A.M: “There can be no doubt of the devastating impact that the government’s restrictions are having on hospitality and pub businesses across the UK.

“Without urgent sector-specific support for our industry, massive business failure is imminent and hundreds of thousands of jobs will be lost around Christmas from a sector that was in growth at the beginning of this year, as well as in the supply chain that supports them.”

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It comes after more than two-thirds of businesses in the hospitality sector reported a slump in usual turnover for this time of year in the three weeks to 4 October, when the survey was conducted.

Key figures in the hospitality sector have called for further financial support, warning that the 10pm curfew, social distancing measures and tier restrictions will decimate the industry and cause wide-scale job losses.

Nine per cent of the entire UK workforce, and more than a quarter of the nation’s hospitality industry, were still on partial or full furlough at the beginning of the month, according to the ONS.

The Trade Union Congress (TUC), which represents more than 5.5m workers across the UK, has warned the country will see a “tsunami” of job losses when the furlough scheme winds down on 31 October — in just three days’ time.

Figures up to the 4 October from the ONS showed a slight increase in the number of UK businesses resuming trading in October, with 86 per cent of businesses in the UK currently operating — compared to just 66 per cent in June.

However, the latest figures are likely to be much higher, after large swathes of the North of England, Scotland and the whole of Wales entered some form of local lockdown since the ONS survey was compiled.

Businesses in the arts and entertainment industry have taken the biggest hit from the pandemic, with 30 per cent of companies in the sector currently shuttered.

But the pandemic continues to weigh on those businesses that have reopened, with almost half of companies that have resumed trading experiencing a decrease in turnover compared to normal business at this time of year.

A government spokesperson told City A.M: “We understand the pressures businesses are currently under and have put in place one of the most comprehensive packages of business support in the world, worth more £200bn.

“We have also given businesses much-needed breathing space by extending measures put in place to protect them from insolvency.”

The spokesperson added: “Our plan for jobs will support businesses in the months ahead, and businesses required to close due to local lockdowns can claim £3,000 a month. On top of this firms can continue to access billions of loans and guarantees, cuts to VAT and business rate relief.”

By Poppy Wood

Source: City AM

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UK jobless rate hits 4.5% as work-protection plan nears end

UK jobless rate rose by more than expected in the three months to August, before the end of the government’s broad coronavirus job-protection plan and the imposition of new restrictions to slow the pandemic.

The jobless rate hit 4.5%, its highest in more than three years and above the forecast of 4.3% in a Reuters poll of economists.

The number of people counted as unemployed rose by the most since 2009, during the global financial crisis, and the Office for National Statistics revised up its estimate of job losses earlier this year, raising its estimate of unemployment in the three months to July to 4.3%.

“Since the start of the pandemic there has been a sharp increase in those out of work and job hunting but more people telling us they are not actively looking for work,” Jonathan Athow, the ONS’s deputy national statistician, said.

“There has also been a stark rise in the number of people who have recently been made redundant.”

The ONS data showed redundancies jumped by a record 114,000 on the quarter to 227,000, their highest level since 2009.

The number of people in employment fell by 153,000, much higher than a median forecast for a fall of 30,000 in the Reuters poll.

Finance minister Rishi Sunak reiterated on Tuesday that his priority remained to slow the rising job losses. However, he is replacing a 50 billion-pound wage-subsidy scheme, which expires at the end of this month, with a less generous programme.

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“I’ve been honest with people from the start that we would unfortunately not be able to save every job,” he said.

Prime Minister Boris Johnson introduced a new system of restrictions for England on Monday that will hit the hospitality industry, and a minister said the government may have to go further.

“With economic support falling just as lockdown restrictions increase across the country, we should prepare for a major increase in unemployment over the coming months,” said Nye Cominetti, an economist at the Resolution Foundation think tank.

The Confederation of British Industry said ramping up testing was key to securing an economic recovery.

There were some positive signs in Tuesday’s data.

Tax office figures showed the number of staff on company payrolls rose by a monthly 20,000 in September, slightly reducing the total number of job losses by that measure since March to 673,000.

The number of job vacancies rose by the most on record in the three months to September, although the total remained down 40% compared with a year earlier.

The Bank of England has forecast that the unemployment rate will hit 7.5% by the end of the year. But BoE Governor Andrew Bailey on Monday repeated his warning that the recovery could prove weaker than the central bank’s forecasts.

Britain’s economy grew in August at its slowest pace since May as its recovery from the lockdown slowed.

Scores of companies have announced plans to cut jobs since the pandemic struck. Last week the owner of clothing retailers Edinburgh Woollen Mills, Peacock’s and Jaeger put 24,000 jobs at risk by saying it was set for administration.

Reporting by William Schomberg and Andy Bruce

Source: UK Reuters

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UK economy 7-10% below pre-Covid levels

Bank of England governor Andrew Bailey on Thursday said UK economic output in the third quarter was between seven and ten per cent below pre-pandemic levels.

While this was far better than at the start of the pandemic, Mr Bailey warned there was still an unprecedented level of uncertainty and that the risks to the economy are still to the downside.

“We think, in the third quarter, on average, activity in the economy will probably (have been) somewhere between seven and ten per cent below pre-Covid levels,” he said in an online conference.

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“And while that number was obviously much better than we had in the spring, it’s still… produced a very big recession.” Recent official data have shown that the UK economy shrank by a fifth in the second quarter which coincided with Britain being in lockdown.

Mr Bailey added that the economy faced the prospect of an “uneven” recovery as the British government battles a second wave of rising infections with tighter restrictions, particularly on the hospitality sector.

“When you look at areas of activity in the economy that require more close social interaction, it’s no surprise that they have been the weakest to recover,” he said.

“Other areas of the economy have actually recovered very strongly – and a few areas of the UK are ahead of where they were pre-Covid.”

Source: The Business Times