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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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STAY POSITIVE

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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Almost 300,000 redundancies since Covid pandemic hit UK

The UK’s unemployment rate soared during 2020 as some of the country’s largest businesses were forced to lay off hundreds of thousands of staff, with some of the biggest casualties in the retail, hospitality and travel sectors.

This year the PA news agency tracked nearly 280,000 announced redundancies or jobs that were put at risk since March 23, when the first lockdown started.

It is a clear demonstration of the cost to people of the economic chaos caused by coronavirus.

Some of the cuts, including 5,500 at Cineworld, are likely to be temporary, but the PA figures also hide a large number of job losses, many among smaller companies.

The Office for National Statistics said this month that the number of employees on payrolls had fallen by 819,000, most of which were at the beginning of the pandemic.

According to PA’s analysis, June was the worst month, with nearly 75,000 redundancies or possible job losses announced. However, this included HSBC and BP, whose plans for 35,000 and 10,000 possible redundancies were global, and not just limited to UK jobs.

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The fewest number of job losses announced in a full month was in April, shortly after lockdown started on March 23.

Retail jobs were the hardest hit, according to PA’s analysis, with more than 85,000 potential redundancies. Hospitality and travel companies both announced more than 42,000 losses.

The Bank of England said in November that it expected unemployment to peak at 7.75% next year, far ahead of the current 4.9%.

The Government hoped its furlough plan would save jobs, and has paid £46billion to cover up to 80% of the salaries of 9.9 million people at some point.

But between August and October, as the scheme was being phased out, redundancies reached a record high, at 370,000 in that quarter alone.

The furlough scheme, which was meant to come to an end in the autumn, was extended until April as more restrictions hit the economy.

A Government spokeswoman said: “We have put in place one of the world’s most comprehensive economic responses, spending over £280bn to protect jobs, incomes, and business throughout the pandemic.

“Our Plan for Jobs continues to support people of all ages to get back on the jobs ladder, levelling up the nation as we build back better. We’re doubling the number of Work Coaches across our jobcentres ensuring those in need have access to bespoke support, creating hundreds of thousands of opportunities for young people through our Kickstart Scheme and our SWAPs (sector-based work academy programmes) are helping people retrain for new industries.”

By Daniel Smith

Source: Wales Online

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ONS: UK Government borrowing hits record for November at £31.6bn as country battled Covid-19

OFFICIAL figures today show UK Government borrowing surged to a record £31.6 billion in November as efforts were ramped up to support the economy through the second wave of the pandemic.

But numbers from the Office for National Statistics also show, that in the third quarter, the economy grew by 16 per cent, more than the initial estimate of 15.5 per cent, as it bounced back from the deepest economic hit in more than 60 years. This new figure represents the fastest quarterly increase since records began in 1955.

The ONS said last month’s borrowing – excluding state-owned banks – soared by £26bn year on year and marked the highest seen in November and the third highest in any month since records began in 1993.

The latest estimate saw public sector net debt reach a new all-time high of £2.1 trillion at the end of last month.

It means the UK’s overall debt is now around 99.5% of gross domestic product, which is a measure of the size of the economy; a level not seen since 1962.

Borrowing has hit £240.9bn for the first eight months of the financial year; £188.6bn more year on year and breaking yet more records.

Recent official forecasts from the Office for Budget Responsibility predict borrowing could reach as high as £393.5bn by the end of the financial year in March, which would be the highest seen since the Second World War.

It comes after the Government launched more than 40 schemes across the UK to help households and businesses through the coronavirus crisis.

One of the costliest has been the furlough scheme for workers, which was last week extended again until April 2021.

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The most recent figures from HM Revenue & Customs showed another £3.4bn worth of claims were made between November 15 and December 13, taking total claims to £46.4bn with 9.9m furloughed jobs.

The ONS said borrowing rose as tax and National Insurance receipts fell by £38.3bn, some 8.6%, year on year in the eight months to November.

But Government support for individuals and businesses during the pandemic contributed to a 30% or £147.3bn hike in central government spending.

The ONS’s new figure of 16% growth for Q3, while the fastest on record, was still not enough to make up the ground that the UK had lost in the preceding three months.

Between April and June, GDP dropped by 18.8%, revised down from earlier estimates of 19.8%, as the effects of the Covid-19 pandemic hit the economy. The first lockdown was launched on March 23.

Taken together, it means that the level of UK GDP was still 8.6% lower in the third quarter than it had been at the end of 2019.

The UK has also proven to be the worst-hit country among some of the world’s biggest economies.

When compared to other Group of Seven members, the UK economy was twice as badly hit.

It fell by 21.2% in the second quarter compared to the end of 2019. Only France at 18.9% and Italy at 17.8% came close to the hit that the UK took during that quarter.

The recovery in France and Italy has also seemed to be speedier than the UK, the ONS showed.

It suggested the differences between countries could be a reflection of how the virus spread and how the lockdowns were implemented in the countries in question. The official body pointed out some impacts could be measured differently in different countries.

Countries where the economy was heavily based on face-to-face interaction could also be more likely to be economically impacted by the virus.

By Michael Settle

Source: Herald Scotland

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UK economy won’t reach pre-COVID-19 level for at least two years

UK economy will contract this quarter and it will take at least two years for GDP to reach pre-COVID-19 levels, according to a Reuters poll which also found London would agree a free-trade deal with the European Union.

As a second wave of the coronavirus swept across Europe, Britain, which has suffered the continent’s highest death toll from the pandemic, reimposed tough restrictions on economic activity.

Those lockdowns have particularly hurt its huge services industry as hospitality venues were forced to close and shops to shut their doors.

After a roaring third quarter in which it grew 15.5%, the economy is likely to contract 2.7% this quarter, deeper than the 2.5% contraction pencilled in last month, the poll found. Next quarter it will grow 1.7%.

“The scope for a swift bounce back in the first quarter is muted,” said Stefan Koopman at Rabobank.

“Even when the vaccine is rolled out relatively quickly and successfully, restrictions will largely remain in place and firms and households will have to adjust to the new trading relationship with the EU.”

After the historic 19.8% contraction in the second quarter the economy is expected to shrink 11.2% this year and expand 5.3% in 2021, little changed from last month, the Nov. 26-Dec. 1 poll of around 60 economists found.

Last month the Bank of England ramped up its stimulus to support the economy, increasing its bond-buying programme by an additional 150 billion pounds. Bank Rate was not expected to move from its record low of 0.10% until 2024 at least.

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Despite all the stimulus, when asked how long it would take for GDP to reach pre-COVID-19 levels, 18 of 26 respondents said at least two years. Seven said within two years and one said within a year.

“At the moment, forecasting UK GDP growth is highly uncertain and, given the massive GDP fall in 2020 alongside the still-unknown economic implications of the end of the Brexit transition period, scarring could turn out to be larger,” said Elizabeth Martins at HSBC.

Britain’s transition period of informal European Union membership following its departure from the bloc is due to finish at the end of the year and the two sides have still not agreed terms for their future trading relationship.

The EU will launch contingency measures on Wednesday or Thursday if it is unable to reach an agreement with Britain by then, a senior EU diplomat said. Michael Gove, who oversees Brexit talks for London, said on Tuesday talks were still stuck on fishing, governance rules and dispute resolution.

Asked if a “no deal” scenario was closer than anyone would admit, Gove told ITV: “It’s certainly the case that there is a chance that we may not get a negotiated outcome.”

But the poll found only a median 35% chance no deal is reached, down from 40% given last month. As in all Reuters polls since the June 2016 referendum vote to leave the bloc, respondents said the most likely outcome was still some form of free trade deal for goods.

“It is in the interests of both sides to reach an agreement,” said Peter Dixon at Commerzbank.

Reporting by Jonathan Cable

Source: UK Reuters

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The UK government’s Covid spending may lead to inflation

The UK government is spending an enormous amount on COVID-19 – supporting the health service, helping to relieve the suffering of those who have lost their incomes, and helping businesses keep afloat.

This spending policy has now been endorsed by the International Monetary Fund. Governments of advanced economies should spend more, says the IMF, not just to keep their economies in good shape until the pandemic passes, but also to invest in preparation for a post-COVID recovery.

And we should not worry that all this extra spending is causing a big rise in government debt. Although the UK debt/GDP ratio has already risen above 100%, the government should spend even more. This will stimulate GDP growth and thus stabilise debt/GDP.

The way to cope with high government debts, the IMF says, is no longer austerity – higher tax and lower spending – but rather the opposite, at least while the pandemic is with us.

A vital ingredient for the success of this high-spend policy is low interest rates. The UK government’s cost of new borrowing for 10 years is currently 0.3%; it has never been so cheap. The Bank of England is playing an important part in keeping it that way.

How are we paying for it?

To pay for all the extra spending, the government is borrowing in the usual way from the private sector – from pension funds and insurance companies, for instance. It does this by selling bonds, which are promises to pay back with interest. In the period April 2020 to June 2020 it borrowed an extra £150bn. Yet, as fast as the government is selling bonds, the Bank of England is buying them from their private sector holders – paying with newly created money. Technically, this money is “reserve” deposits, which are claims against the Bank of England itself.

Indirectly the Bank of England is therefore financing much of the government’s new spending. And, crucially, its continuing demand for government debt is holding down the interest rate that the government has to pay to borrow.

The Bank of England insists that this massive quantitative easing (QE) programme of bond-buying is not driven by a need to support government finances. Rather, the motive is to fulfil its mandate to control inflation, which has been falling increasingly below the 2% target for over a year. The government’s need for finance and the Bank of England’s bond purchases are both consequences of the recessionary conditions, and it is a coincidence that its purchases of bonds and the government’s sales have been at similar rates.

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You might think that this is splitting hairs, but it matters. If the government can rely on the Bank of England to buy its bonds as necessary to prevent interest rates from rising, then it is hard to be confident that the bank will raise rates enough when needed to stop inflation rising.

And the current low-inflation environment may be short lived.

Inflation may rise

Consumer spending has fallen markedly during 2020. Among the causes, restrictions on several sectors of the economy, notably tourism and leisure, have forced people to save rather than spend. When the restrictions are relaxed, pent-up demand may lead to rising prices, especially if the supply of goods and services is reduced because some businesses have not survived.

On the other hand, some argue that rising unemployment will hold down wages and hence prices, and others expect the recovery to be gradual, giving time for supply to adjust. Moreover, with consumption patterns changing, price changes will vary across sectors, leading to doubt about the overall effect on inflation.

A deeper reason to expect inflation has been proposed in a new book by economists Charles Goodhart and Manoj Pradhan. They argue that the current low-interest rate, low-inflation conditions are associated with a favourable dependency ratio. This measures the numbers of young and old people (0 to 14 and over 65 years of age) relative to those in between who are presumed to be the working population. For the last three decades we have been in a “sweet spot”, they say, with plenty of workers globally to support the non-workers. This has held down wages and led to high saving which, in turn, has contributed to the long-term decline in interest rates.

But the age composition of populations is changing. With people living longer and birth rates declining, the dependency ratio is rising. There are fewer workers and more people who depend on their output; moreover, the old are requiring increasing care. To balance supply and demand, wages and prices must rise.

If inflation starts rising, the Bank of England’s response should be to choke off demand by raising interest rates. However, this will dampen economic growth, which may still be fragile. It will depress the price of assets, including property, and it will make debts more expensive to service, including public and private sector debts, both of which have been elevated by the pandemic. Under the IMF’s projected increase in government debt to 117% of GDP, even a small increase in rates would make this debt significantly harder to sustain.

While the Bank of England is adamant that it will not divert its attention from the 2% inflation target, other central banks are more equivocal. In the United States for example, Jay Powell, the chairman of the Federal Reserve Board, which sets monetary policy, has recently announced that future US inflation will be allowed to exceed its target for a period of time before monetary policy is tightened.

Despite the Bank of England’s insistence, its accommodating behaviour during the Covid crisis suggests that it, too, may take a more flexible attitude towards future inflation.

BY JOHN WHITTAKER

Source: Reaction

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UK economy to suffer ‘largest fall in output for 300 years’ as GDP down 11.3% in 2020, says Sunak

Britain’s finance minister Rishi Sunak is outlining the UK government’s spending plans for the next year, against the backdrop of huge damage to the public finances wrought by the coronavirus pandemic.

Appearing before MPs, the Chancellor of the Exchequer said that while the health emergency was not yet over, the economic emergency was only just beginning.

Citing OBR (Office for Budget Responsibility) forecasts, he said the economy was due to contract by 11.3% this year, calling it the largest fall in output for 300 years.

Even as growth returned in the coming years, economic output would not go back to pre-crisis levels until the fourth quarter of 2022, and the economic damage from COVID-19 was likely to be lasting.

The pandemic and the response to it had caused a significant increase in borrowing and debt, Sunak said. Borrowing would be £394 billion (€441.8 billion) this year, or 19% of the country’s GDP, the highest in the UK’s peacetime history.

Funding for jobs and public services

The chancellor gave more details of spending plans for public services and to fight unemployment, having already announced £4.3 billion (€4.82 billion) in programmes to help people find work.

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Unemployment is set to rise to 7.5%, Sunak said, before falling to 4.4% by the end of 2024.

The government was spending £280 billion (€313.9 billion) to get the UK through the coronavirus pandemic, he added. The immediate priority was to save lives and livelihoods, but there would also be investment in hospitals, schools, infrastructure, creating jobs and growing the economy.

The Chancellor said there could not be an across-the-board pay rise in the public sector, but increases would instead target those most in need.

One million nurses and doctors in the NHS (the UK’s health service) will get a pay rise, he said. But increases will be paused in the rest of the public sector.

The government’s objective was to protect low incomes, he added, saying the 2.1 million lowest paid workers would get a £250 (€280) minimum rise. This meant most public sector workers would get a pay rise, Sunak said.

Waste ‘on an industrial scale’

Responding for the opposition Labour Party, shadow chancellor Anneliese Dodds said many key workers faced a pay freeze.

She criticised the amount of money spent on government contracts, saying those with connections to ministers had been many times more likely to get deals than others.

This was waste “on an industrial scale”, she added.

Dodds also highlighted the fact that the chancellor had made no mention of Brexit, despite the fact that no trade deal has yet been struck with the EU with only weeks to go before the transition period expires.

UK overseas aid to be cut

The finance minister confirmed that the UK would abandon its target of spending 0.7% of national income on overseas aid, instead reducing the proportion to 0.5% next year.

Spending so much on international aid was difficult to justify during a “domestic fiscal emergency” with borrowing so high, Sunak said. At a time of unprecedented crisis the government had to make tough decisions.

The UK was still the second biggest aid spender in the G7, he added.

Some in the Conservative government had argued for such a move. But it has been criticised by many, including several former prime ministers.

Nobel Prize laureate Malala Yousafzai joined the calls for Sunak to make sure that the commitment was not ditched.

“COVID-19 could force 20 million more girls out of school,” she said. “To keep girls learning, we need leaders to prioritise education,” she said, speaking before the minister’s announcement.

Source: Euro News

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UK redundancies rise most since 2009 as Covid-19 takes toll

The number of redundancies in the UK rose in July by the most since 2009 as the Covid-19 pandemic took its toll.

Figures released on Tuesday by the Office for National Statistics showed that 156,000 people were made redundant in the May to July quarter, up 58,000 from the same period a year ago and 48,000 higher than between February and April. The ONS said these were the largest annual and quarterly increases since 2009.

“While redundancies are at their highest level since September to November 2012, the level remains well below that seen during the 2008 downturn,” it said.

Meanwhile, the unemployment rate increased to 4.1% in July from 3.9% the month before. The data showed that the number of employees on payrolls declined by 695,000 in August compared to March and by 36,000 compared to July.

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The claimant count reached 2.7m in August, up 120.8% since March.

ONS director of economic statistics Darren Morgan said: “Some effects of the pandemic on the labour market were beginning to unwind in July as parts of the economy reopened. Fewer workers were away on furlough and average hours rose. The number of job vacancies continued to recover into August, too.

“Nonetheless, with the number of employees on the payroll down again in August and both unemployment and UK redundancies sharply up in July, it is clear that coronavirus is still having a big impact on the world of work.”

By Michele Maatouk

Source: Sharecast