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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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UK economy will be back to its pre-COVID-19 level around the middle of next year

UK economy will be back to its pre-COVID-19 level around the middle of next year, according to economists in a Reuters poll who said unemployment would peak at 6.2% as 2021 draws to a close and the pandemic job support scheme ends.

The UK has suffered the highest coronavirus-related death toll in Europe. But a swift vaccine rollout and plummeting infections has allowed the government to begin easing restrictions and on Monday non-essential retail and outside hospitality reopened.

Last year the economy shrank by the most in more than three centuries, but the April 7-12 poll of around 70 economists said it would expand 5.0% this year and 5.5% in 2022. In a March poll those forecasts were 4.6% and 5.7%, respectively.

With much of the country’s dominant service industry closed, and citizens encouraged to stay at home, the poll suggested the economy contracted 2.3% last quarter. Now that lockdowns are being loosened, it was expected to grow 3.5% this quarter and 3.0% next.

“There are mounting signs that the effects on the UK economy from the third COVID-19 lockdown have started to thaw,” said Paul Dales at Capital Economics.

“We are sticking to our relatively optimistic view that the reopening of the economy and the vaccine programme will allow GDP to regain its pre-pandemic level early next year.”

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But asked when the British economy would be back to its pre-pandemic size the majority of respondents to an additional question thought it would take a bit longer, with 10 expecting it to be a quarter or two later.

Finance Minister Rishi Sunak said last month he expected the UK economy would return to its pre-pandemic size in mid-2022. Six respondents in the poll said it would take longer and five said it would be sooner.


Britain’s job market has been protected by a huge government furlough scheme which is due to run until end-September, keeping unemployment levels relatively low. It was 5.0% in the three months to January.

The median response to a question asking where it would peak was 6.2%, most likely towards the end of this year when the furlough scheme finishes.

“Some rise in unemployment is probable once furlough ends. But the evidence from around the world is that labour markets can recover quickly and if scarring is contained, jobs growth can recover through 2022,” said Brian Martin at ANZ.

Like many of its global counterparts, during the height of the pandemic the Bank of England slashed borrowing costs to a record low and restarted its asset purchase programme to try and support the economy.

None of the 60 economists polled expected Bank Rate to move from 0.1% when the Monetary Policy Committee meets on May 6 and medians in the survey suggest it won’t increase until 2023. The earliest anyone had a hike pencilled in was for Q3 next year.

Inflation has held well below the Bank’s 2.0% target, allowing it to remain accommodative with policy.

The poll showed inflation would not reach that goal until towards the end of this year although an overwhelming majority of respondents to an additional question, 15 of 17, said the risks to their forecasts were skewed more to the upside.

“Higher inflationary pressures are still evident – with shipping costs, input costs indices and commodity prices still up,” said James Pomeroy at HSBC.

Reporting by Jonathan Cable

Source: UK Reuters

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Furlough scheme has cushioned Covid blow, but job losses loom

It is clear from the latest unemployment figures that the furlough scheme is working. With more than 5 million people on the government’s main wage subsidy, it has proved its worth yet again as a method of job protection, cushioning the blow from the pandemic as the UK entered a third lockdown.

Thousands of British companies have learned from the first two lockdowns. They have adapted to life online and kept goods and services moving, albeit mostly within the boundaries of the UK after the government left exporters to deal with the worst possible exit from the EU short of leaving without a deal.

Larger companies especially have looked ahead to a time when restrictions are lifted and opportunities for improved sales present themselves again.

But that is where the good news ends for the jobs market. If we look at the figures produced by the Office for National Statistics for the three months to the end of January, the fall in the unemployment rate to 5% from 5.1% is not so cheery.

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The data shows that most of the ups and downs in the rate can be attributed to the short-term decisions of employers that operate in the worst affected industries.

Students who would normally have worked in the hospitality sector have not signed on as unemployed, they have disappeared from the employment register altogether. This has the effect, along with other young people who give up trying to find a job, of bringing down total participation rate to 79% in the three months to January, its lowest level since August 2019.

It shows, said Tony Wilson, the head of the Institute for Employment Studies, that new hiring by companies outside the very largest firms is continuing to fall back and all of the improvement is being driven by fewer people leaving work rather than more people getting new jobs.

“This is proving to be a disaster for young people, who now account for nearly two-thirds of the fall in employment and none of the recent growth,” he said.

Then there are the number of workers not being paid while their job is on hold, which has climbed from 200,000 to more than 300,000.

It is likely that the lower rate of redundancies in the three months to January of 11%, down from a peak of 14.2% in November, can be attributed to greater use of the furlough scheme.

It shows the lockdown and government support schemes mask a weakening labour market and when the furlough scheme ends in September, a spike in unemployment will follow.

There is a different way to deal with the situation. If the chancellor, Rishi Sunak, ditched his day-by-day approach to dealing with the pandemic and made a promise to maintain support for as long as it takes, employers could stop planning for cliff edges in subsidy schemes and plan for growth instead.

By Phillip Inman

Source: The Guardian

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Covid-19, a year on: the need for a more diverse UK economy

The UK economy was hit by a 10 per cent drop in GDP last year, the largest contraction of any G7 country. This is despite the fact that the health effects of Covid were broadly comparable across most other advanced economies, with the UK spending a similar amount of time in lockdown as Germany, France and Spain.

The damage has been disproportionately catastophic for London. Office for National Statistics figures show the capital’s unemployment stands at 6.9 per cent compared to the UK rate of 5.1 per cent.

The chancellor likes to point out that the UK measures GDP differently from other nations and so our headline figure for 2020 was lower than in reality. However, the UK’s economic contraction was still “significantly bigger than Germany’s” and among the lowest in the G7 even when taking these differences into account, according to Capital Economics.

One explanation for the poor performance is our economy’s over-reliance on services. Services – such as financial, legal, education, tourism, hospitality retail and real estate for example – make up 80 per cent of the UK’s GDP, while 14 per cent is construction and just 6 per cent is manufacturing. Shutting down the economy and locking people indoors for most of a year will naturally put a halt to much of the service industry, however there are still lessons to be learnt about the ability of the UK’s ability to handle future shocks. Covid-19 should be a serious wake up call to policymakers that they need to fundamentally alter the make-up of the economy.

As it stands, the UK is far too reliant on a model that sees its workforce act as service providers. Put simply – the UK needs to make things again. This doesn’t mean overturning the changes of the 1980s and trying to restart a swathe of industries that have long disappeared. Nor does it necessarily mean completely gutting or ignoring the financial services industry (this is City A.M. after all).

Instead, the UK needs to build up manufacturing and product development in sectors like green energy, tech, science and pharmaceuticals to ensure the economy can better weather future economic storms. Just as the sensible investor diversifies their portfolio to hedge for inherent market risk, so too should the UK diversify its economy for when the country is hit by future recessions or financial crises. This is particularly salient in the wake of Boris Johnson’s UK-EU trade deal, which included no provisions for services.

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Johnson’s levelling up agenda, and investment in skills training, shows he already understood the need for a larger manufacturing base, but this now needs to be turbocharged. The typical conservative levers to pull would be in the form of tax credits and deductions, much like Rishi Sunak’s recently announced super deduction that aims to stoke private sector investment. However, the government will need to go much further than this.

Theresa May earlier this month told the House of Commons that the only way to drive innovation and growth was through research and development funding.

“If we want an innovation economy what we need to do is to invest and support investment in areas which encourage growth and innovation – that means R and D,” she said.

What better time for a large increase in government R and D funding into green technologies as the UK gets ready to host the 2021 United Nations Climate Change Conference (Cop26)? There is a serious opportunity for this government to make the UK a global leader in renewable energy manufacturing and production, which would future-proof the economy for decades to come.

A readymade example for how increased R and D spending could benefit the UK and create new industries can be seen across the pond, according to Canadian policy wonk Marshall Auerback.

Auerback, a fellow at the Levy Institute think tank, told City A.M.: “The government should take an active role in terms of funding basic research and development…and the private sector can determine the most profitable venues for that R and D development.

“For instance, the foundation of Silicon Valley was largely built on the R and D provided through by US government through the Department of Defence and the National Institute for Health and Science.”

The dual disruptions of Covid-19 and Brexit provide the perfect opportunity for the UK to reset course and forge a dynamic economy for generations to come. Free of EU state aid rules and in a time of mass disruption to the way people work, the UK must embark on growing its economy by increasing its manufacturing base. Let’s hope Johnson takes the advice of former Barack Obama chief of staff Rahm Emanuel and does not let a serious crisis to go to waste.

By Stefan Boscia

Source: City AM

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UK unemployment falls for first time in Covid-19 pandemic

Unemployment in the UK has fallen for the first time since the coronavirus pandemic began despite the toughest lockdown measures since the first wave spread a year ago, according to official figures.

The Office for National Statistics said the unemployment rate fell back slightly to 5% in the three months to January, representing 1.7 million people – down from 5.1% in the three months to December. City economists had forecast a rise in the jobless rate to 5.2%. The government’s furlough scheme continues to support the jobs market, with millions of people still on the emergency wage scheme.

The latest snapshot showed a 68,000 increase in the number of workers on company payrolls in February, compared with January, as the roadmap out of lockdown restrictions boosted prospects. It was the third consecutive monthly increase.

However, the number of people on payroll has plunged by 693,000 since the start of the pandemic, with younger workers under the age of 25 accounting for 60% of the jobs lost since February 2020. More than half of the fall was in hospitality, while almost a third was in London.

The unemployment rate remains 1.1 percentage points higher than a year ago before the pandemic struck. Figures compiled by the ONS also showed the number of non-UK born workers in the final quarter of 2020 was half a million lower than a year ago.

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Suren Thiru, the head of economics at the British Chambers of Commerce, said furlough and greater clarity provided by the government’s unlocking roadmap, as well as firms adapting to lockdown restrictions, had helped the jobs market.

“Extending furlough will limit the peak in job losses. However, with many firms struggling with the damage done to their cashflow by a year of Covid restrictions, unemployment is likely to remain on an upward trajectory until well beyond a full reopening of the economy,” he said.

The number of workers on furlough has risen to almost 5 million as the toughest lockdown measures since the first wave of the pandemic weigh on the economy. After repeated attempts to close the scheme last autumn when redundancies were rising at the fastest rate on record, Rishi Sunak used this month’s budget to extend furlough until the end of September.

Unemployment is expected to peak at 6.5% at the end of this year after the scheme ends, according to forecasts from the Office for Budget Responsibility.

The chancellor said supporting and creating jobs had been his focus throughout the pandemic. “The continued success of the vaccine rollout provides us with hope for the future, and through our plan for jobs, we will continue to support people throughout the months to come,” he said.

Source: The Guardian

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UK Economy Has Endured A Torrid Start To 2021, Hit By A New COVID-19 Lockdown

UK economy has endured a torrid start to 2021, hit by a new COVID-19 lockdown and disruption caused by the country’s less open trade relationship with the European Union.

While better days are ahead, Bank of England officials meeting ahead of Thursday’s monetary policy announcement must weigh up the likely strength of the recovery, the lasting damage caused by the pandemic, and how much inflation might result.

Here are a selection of indicators that chart the progress of Britain’s economy so far this year:


The latest official data showed UK economy contracted in January, although not by as much as feared by some economists. Output remained 9% below its level in February 2020.

Tax office estimates of the number of employees on payrolls showed tentative signs of recovery in January. But they remain more than 700,000 below the pre-pandemic norm.

BoE Governor Andrew Bailey said on Monday he thought economic output would recover to its late-2019 level by around the end of 2021, helped by Britain’s speedy roll-out of COVID-19 vaccines.


BoE Chief Economist Andy Haldane last month described the threat of inflation as a tiger that was beginning to stir. Most of his Monetary Policy Committee colleagues sound less worried.

Gauges of price pressure in Britain paint a mixed picture.

The BoE’s rate-setters will find no cause for alarm in the latest surveys of inflation expectations among the British public, which have shown little change of late.

But companies are increasingly reporting increased cost pressures, especially among manufacturers and construction companies that are struggling with supply chain problems, according to the latest IHS Markit/CIPS surveys.

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Trade between the United Kingdom and the European Union was hammered in the first month of their new post-Brexit relationship, with record falls in goods shipments in both directions as COVID-19 restrictions continued on both sides.

British goods exports to the EU, excluding non-monetary gold and other precious metals, slumped by 40.7% in January compared to December, the Office for National Statistics said on Friday. Imports fell by 28.8% – another record.

The ONS said the COVID-19 pandemic, which put Britain back under lockdown measures in January, made it hard to quantify the Brexit impact from new customs arrangements, and there were changes in the way data was collected.

But there were also signs of a Brexit hit.


British government borrowing costs – measured by the yield on the benchmark 10-year gilt – have increased by more than 50 basis points over the last three months, the biggest increase in over four years.

The rise reflects the better prospects for UK economy as the country races ahead with its coronavirus vaccination campaign and a jump in U.S. Treasury bond yields on the back of U.S. President Joe Biden’s $1.9 trillion stimulus plan.

Finance minister Rishi Sunak says Britain’s stock of government debt is increasingly sensitive to rising interest rates. Some economists think that would only be a problem if borrowing costs went up without an economic recovery that would boost tax revenues for the government.

Despite the recent rise, borrowing costs are at historically low levels, with the 10-year gilt yielding 0.833% on Wednesday – similar to rates seen in late 2019 and way down from more than 5% shortly before the 2008-09 global financial crisis.

Reporting by Andy Bruce

Source: Reuters

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UK GDP 2020 – not quite as bad as it looks like

It says something about the world we’re in that a 9.9% contraction in the UK economy in 2020 is seen as good news by economists. But with the economy expanding by a healthy 1.0% in the fourth quarter of last year, despite November’s lockdown, GDP ended up shrinking slightly less in 2020 than had been feared.

Still, the big story is that the UK economy last year suffered its biggest annual contraction in over 300 years, far worse than anything seen in the Great Depression. A 9.9% decline in GDP is also the largest of any sizeable economy other than Spain. Why has the UK economy been so hard hit by the global pandemic?

Most obviously high levels of infections in the UK have resulted in more severe and sustained restrictions on movement than most other major countries. That has generated a corresponding decline in mobility and economic activity. The UK has had more confirmed COVID-19 deaths as a share of its population than any country other than Slovenia, Belgium and San Marino. Differing national recording practices make such comparisons tricky – that is why excess deaths, the death rate relative to a seasonal norm, are seen as giving a more reliable picture. UK excess deaths during the pandemic exceed every industrialised nation bar Belgium, but are lower than in several middle-income countries including South Africa, Russia and Mexico.

The severity of the pandemic and the UK lockdown explain some but not all of the shortfall in UK GDP. Differences in the composition of GDP, and the way in which public sector output is measured, have also played a part.

As a consumption-heavy economy the UK has been especially badly hit by lockdowns. Consumer spending accounts for 64% of UK GDP, higher than any rich economy other than the US, and far higher than the 53% average for the euro area. Moreover, an unusually high proportion of UK consumer spending, 21%, more than in any G7 nation, goes on so-called socially consumed services such as meals out, leisure activities and holidays. Lockdowns have put paid to such spending, reinforcing the UK downturn.

I thought reduced spending on restaurants and so on might have been offset by increased spending on durables like coffee makers, swivel chairs, monitors, to name three I’ve bought. Yet the latest data, which cover the first nine months of 2020, show that UK consumers reduced spending on durable goods, even as consumers in other G7 countries increased their durable goods purchases.

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The final factor in the outsize decline in activity lies in the way in which UK government activity is measured. Gauging public sector output is difficult. How, for instance, can one begin to measure the ‘output’ of the army, the NHS and schools? Most countries get around this problem by using readily available proxies, such as levels of spending and the number of staff. In recent years UK statisticians developed improved measures using actual ‘outputs’, including the numbers of operations carried out and classroom teaching hours. During the pandemic, with hospitals postponing elective surgery and schools closed, this has resulted in sharp declines in the measured ‘output’ of health and education in the UK, even as public expenditure, and numbers employed, have surged. This better captures the experience of patients and pupils in the last year, but with other countries using input measures, it creates a misleadingly depressed picture of UK GDP relative to other rich countries.

There are two implications from all of this.

First, adjusting for differences in the measurement of public sector output UK GDP probably contracted at a similar rate to other, hard-hit European economies, such as France and Italy, last year. Britain has suffered an unprecedented downturn, albeit one that is not wholly out of line with major European peers.

Second, some of the factors that drove the downturn will, in reverse, help lift it. An easing of restrictions would enable consumers to start spending. Overall consumer wealth and savings have risen over the last year and there is a lot of money sitting on the sidelines. Last week the Bank of England’s chief economist Andy Haldane said that UK consumers had amassed some £250bn during the pandemic and the economy could bounce back like a “coiled spring” once restrictions are eased. The reopening of schools and a return to elective surgery should similarly turbo-charge public sector output this year.

Before we get there we have to navigate the current lockdown that we see depressing GDP by 4.1% in the first quarter. But from spring, and assuming restrictions are eased, we see a powerful recovery unfolding, with GDP rebounding by 3.9% in the second quarter and 5.4% in the third quarter.

However you measure it, 2020 was an awful year for UK growth. 2021 is likely to deliver an exceptional rebound.

By Ian Stewart

Source: Reaction

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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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“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 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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UK economy to take at least two years to return to pre-COVID-19 level

It will take more than two years for Britain’s economy to recover to its pre-COVID-19 level, a Reuters poll found, but the Bank of England was still expected to keep rates steady until at least 2024 and to avoid negative borrowing costs.

The British government has been ramping up its coronavirus vaccination programme in one of the hardest hit countries by the pandemic but another national lockdown, which is hurting the dominant service industry the most, means the economy will shrink again this quarter.

Median forecasts in the Jan. 11-14 poll of over 70 economists said the economy would contract 1.4% this quarter after shrinking 2.0% in the final three months of 2020. In December, before the new national lockdown was announced, the economy was predicted to grow 1.7% this quarter.

“While we expect strict lockdowns to trigger a 3% fall in UK GDP in the first quarter, the more optimistic outlook for vaccinations means a sustained recovery could start in the spring,” said James Smith at ING.

Prime Minister Boris Johnson said on Wednesday, with daily coronavirus deaths at record levels, Britain was targeting a 24-hour, 7-day a week vaccination programme as soon as possible as it seeks to inoculate 15 million people by mid-February.

“Realistically that could enable a very gradual removal of restrictions from March, and more meaningfully beyond Easter,” Smith said.

So next quarter the economy was expected to expand 3.9% and then grow 2.5% the quarter after, the poll showed. For 2021 as a whole growth was pegged at 4.9% and for 2022 it was 5.3%

When asked how long it would take for the economy to recover to its pre-COVID-19 level 14 of 23 respondents to an additional question said it would be at least two years. Nine said within two years and none said within a year.

“Even though the UK is among the first in class with the rollout of the vaccines, we think the economic recovery will lag most of its European peers as the UK is in a relatively weak position due to the simultaneous shock of Brexit,” said Stefan Koopman at Rabobank.

Johnson reached an eleventh-hour deal with the EU on Dec. 24, averting tariffs on goods trade with the EU. However, trade between the two economic areas will still face significant extra paperwork.

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Bank of England Governor Andrew Bailey said on Tuesday Britain’s economy was facing its “darkest hour” but played down suggestions cutting interest rates below zero would be a straightforward way to boost growth.

Fellow BoE rate-setter Silvana Tenreyro on Monday outlined possible benefits from such a policy and Deputy Governor Ben Broadbent said on Tuesday the key judgment would be whether negative rates risked lowering lending volumes by reducing banks’ profitability.

Sixteen respondents to an additional question said the Bank was unlikely or very unlikely to take borrowing costs into negative territory and eight said it was likely or very likely. In an October poll only five said the Bank would go sub-zero.

Only three of 57 economists expected a cut at the Bank’s Feb. 4 meeting and medians in the poll suggested Bank Rate wouldn’t move from its record low of 0.1% until 2024 at the earliest.

However, six of the near 60 respondents expected negative rates by the end of 2021.

“As the experience from other central banks has shown, negative interest rates have very limited effects while at the same time producing large-scale side effects,” said Martin Weder at ZKB.

“The BoE is unlikely to go down this path unless it is forced to do so in case of another deep downturn.”

Reporting by Jonathan Cable

Source: UK Reuters

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