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UK hits highest borrowing to GDP ratio since the 60s

The UK borrowed a further £17.4bn in November, bringing the overall borrowing to GDP ratio to levels not seen since the 1960s.

Net debt now sits at 2,317bn, around 96.1 per cent of GDP.

While it is around £5bn less than November last year, the figure is also the second-highest November borrowing on record, the Office for National Statistics (ONS) found.

Senior economist at KPMG, Michal Stelmach put the shrinking figure down to the “continuation of economic recovery from the pandemic”, as well as rising VAT receipts, PAYE income tax and a fall in non-interest spending.

However, chief economic advisor Martin Beck, of the EY ITEM Club, cautioned that the near £5bn (£4.9bn) undershoot in comparison to last year’s record figure was due to lockdown restrictions over the period, which ‘greatly flattered’ the comparison.

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Beck added that the lofty figure “was largely due to higher government spending, particularly on debt interest payments, which has been caused by the rise in inflation over the past few months”.

With the prospect of activity slowing around the turn of the year, amid the latest wave of Covid-19 and looming inflation hikes, the EY ITEM Club said it is unlikely that borrowing will fall below the Office for Budget Responsibility’s (OBR) full-year forecast of £183bn.

“Indeed, that forecast might prove to be on the low side,” warned Beck.

Public sector net debt has been forecast to be around £136bn in the year to November 2021, the ONS added.

Which prompted Stelmach at the fellow Big Four firm to project debt interest payments to total £64bn this financial year, swelling from last year’s £39bn.

“Around a half of total public debt is linked to either inflation or the Bank of England’s interest rate via QE, both of which will put further upward pressure on servicing costs next year,” he explained.

“Taken together, with three further rate hikes that we expect by the end of 2022-23, they could add as much as £11bn to borrowing that year, eating up over a half of the Chancellor’s current fiscal headroom.”

By MILLIE TURNER

Source: City AM

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Experts at Pantheon Economics agree.

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

By JACK BARNETT

Source: City AM

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UK economy picks up in August as GDP grows 0.4%

Bars and festivals lifted the UK economy as GDP grew by 0.4% in August, but remained 0.8% below the pre-pandemic level of February 2020, according to the Office for National Statistics (ONS).

The latest snapshot showed activity in the accommodation and food service sectors, as well as arts, entertainment and recreation, contributed most to growth in the UK’s dominant service sector, which makes up about 80% of the UK economy.

The service industries grew by 0.3% in August, bouncing back from a 0.1% drop in July, while manufacturing expanded by 0.5% following July’s 0.6% decline.

Overall production output climbed 0.8%, accelerating from July’s 0.3% rise, as crude oil and natural gas extraction bounced back following a temporary closure of oil field sites for planned maintenance. Construction continued to shrink, by 0.2%, and is now 1.5% below its pre-pandemic level.

Chip shortages which had hampered carmakers eased in August, the ONS said, helping manufacturing return to growth, but car output was still more than 14% below a peak in February.

In the three months to August, the economy grew by 2.9%, against forecasts of 3% growth.

The ONS also revised GDP for July 2021 down, from 0.1% growth to a 0.1% fall, due to a downward revision of data for the manufacture of motor vehicles, oil and gas, and improvements to how health output is measured.

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David Page, head of macro research at AXA Investment Managers, said the figures for August were disappointing. “The Bank of England (BoE) will take account of this latest data as it considers the outlook for monetary policy in the November Monetary Policy Report meeting.

“On the face of it the marked slowdown in economic activity into Q3 should serve as a warning against too swift a tightening in monetary policy, particularly as GDP looks set to face ongoing headwinds from higher utility prices, cuts in Universal Credit and eventually increases in National Insurance all pressuring household incomes over what threatens to be a difficult winter.”

Page said AXA IM changed their forecast to envisage the first hike (0.15% to 0.25%) by the BoE in February next year. “We then consider a second in August (to 0.50%) and a third in May 2023 (to 0.75%),” he added.

Victoria Scholar, head of investment, interactive investor, said: “All sectors of the economy are still smaller than before the pandemic, with consumer facing services around 5% below their peak. Pressure remains on the UK economic outlook with the cost-of-living crisis, above-target inflation and rising Covid cases.”

The IMF warned on Tuesday that the UK’s recovery from coronavirus would probably lag behind other countries and by 2024 the economy would remain 3% smaller than the level forecast. Other countries, it forecast, would return to the growth predicted before the pandemic.

Derrick Dunne, CEO of YOU Asset Management, commented: “With the ONS recording a 0.4% increase in GDP for August, it would be tempting to think that growth may be back on an upward trajectory, but investors should be taking today’s figures with a pinch of salt.

“Sectors like accommodation, food services and entertainment fared the best as infection rates fell and people rushed to socialise with family and friends, however the current picture is somewhat less rosy. The UK is faced with a supply chain crunch, rising prices and labour shortages, all of which could create a drag on GDP growth as we move towards the usually busy festive period.

“While the outlook for the economy remains broadly positive, investors would do well to review their strategy and ensure it’s equipped to withstand a more drawn out recovery.”

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, said: “Festival fans enjoying new-found freedom in August and strong campsite bookings helped lift economic output, with the arts entertainment and recreation sector growing by 9%.

“But the economy can’t rely on happy campers to sustain growth, given the storm clouds that have gathered over supply chains since the summer.”

Streeter predicts the Bank of England will not have an easy choice to make. “It certainly won’t be an easy ride for Bank of England policymakers when they meet next to decide when to raise interest rates. Moving too sharply could see the economy go into reverse, but the Bank won’t want to risk losing credibility if prices keep accelerating,” she said.

Paul Craig, portfolio manager at Quilter Investors, said: “The creaking UK economy is taking its time to spring back to life. The problems lie now not with demand but with supply. Acute labour shortages in several pockets of the economy along with chronic skills shortages have the potential to frustrate the economic recovery, and could well dampen any expectations for a strong economic revival over the winter months.

“Once more, the UK economy will be going through structural changes as we establish our future relationship with Europe and the outside world after Brexit. This structural dislocation will no doubt weaken growth expectations.”

Sarah Giarrusso, investment strategist at Tilney Smith & Williamson, warned that the UK still faces headwinds, such as labour shortages and supply chain disruption which could lead to higher, stickier inflation. “Despite this, consensus forecasts for 2021 and 2022 annualised real GDP remain firmly in expansionary territory at 7.0% and 5.3% respectively.

“We expect the UK economy to continue its recovery and the environment to remain conducive for equities to outperform bonds,” she added.

By Pedro Gonçalves

Source: Investment Week

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The UK economy is well positioned for GDP growth

The avoidance of a no-deal Brexit has removed a major downside risk for the UK economy, says Giles King the CEO at Mayfair Capital

Despite uncertainties surrounding Covid-19, the UK economy is projected to deliver significant GDP growth over the next five years and should find itself among the fastest growing European countries, underpinned by strong consumer spending trends.

The avoidance of a no-deal Brexit has removed a major downside risk for the UK economy.

Business confidence is high, and companies are likely to resume investment after adopting a “wait and see” approach in recent years.

Meanwhile, even though a deal with the EU covering financial services remains elusive, the UK has been increasingly diversifying away from finance since 2012, in favour of technology and professional services.

Consequently, the risk to overall employment is lessening. In addition, the UK’s strong early vaccination programme and high vaccine acceptance should unleash significant pent-up consumer demand.

Business activity has already recovered rapidly, with all sectors witnessing expansion, as evidenced by the 4.8 per cent growth recorded for the UK economy in the second quarter of 2021.

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This provides a firm foundation for increased occupational demand across all types of real estate. In the past, strong real estate performance has followed economic downturns – after the dot-com crash of 2000 and the financial crisis in 2008, for example.

In our view, UK real estate is poised for a strong and rapid performance rebound in the period ahead. Aside from economic fundamentals, there is a clear rationale for UK real estate investment. First, the real estate yield spread over gilts is extremely wide, and UK property appears underpriced relative to European markets.

According to JLL’s Global Transparency Index, the UK’s real estate market, which see more than €60bn (£51bn) in investment per year, is one of the largest in Europe, as well as the most transparent, and this should support demand.

Prime London city office yields in the final quarter of 2020 remained at Q4 2016 levels and were higher than other major European cities. In contrast, in markets such as Paris, Berlin, Munich and Madrid, prime yields have fallen below Q4 2016 levels, in some cases by up to 80 basis points.

While economic trends are positive, the recovery will not be universal. The pandemic has hastened structural changes that have been evolving for several years.

This is evident between sectors and within sectors, as shifting occupational demand creates vast differences between locations and assets.

Conditions in the UK real estate market indicate clear opportunities for growth. But in a polarising market, the risks are numerous.

By Giles King

Source: iNews

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UK economy is expected to accelerate recovery in 2021

OPTIMISM is being felt for the UK economy as the best reading on record has been found in a survey of business activity.

A purchasing index from the IHS Markit saw a surge in growth and employment in the latest reading this month.

IHS credits the surge to the continued unlocking of society and consumers being more confident to visit pubs and restaurants as the Covid-19 vaccine rollout continues.

It follows a rise in business activity seen in March when the retail sector reopened after the third lockdown.

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However, GDP has fallen by 1.5 per cent in the first quarter.

The IHS has warned that although business activity is on the rise, inflation could also surge as consumer prices are increasing.

Early this week it was revealed that the UK’s inflation rate more than doubled to 1.5 per cent in March, it is the highest rate seen in the UK for a decade.

By Gareth Cavanagh

Source: News and Star

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UK economy will grow more than expected in 2021

The UK economy will grow more than expected in 2021 and will regain its pre-crisis peak earlier than predicted, according to one of the country’s most prominent forecasters.

The EY Item Club expects output to increase 6.8% this year rather than the 5% it forecast in January after the economy showed resilience in the past two quarters. As a result, GDP will return to its pre-pandemic high-point in the second quarter of 2022 and not the third, Item said.

The economy shrank by just 1% in the first quarter of 2021 instead of the expected 3-4% and will expand by 4-5% in the current quarter, Item said. Prospects have also been boosted by further support in the February budget, the government’s reopening plan and the NHS’s successful vaccination programme, the research group added.

Item said its forecasts indicated the economy would suffer less permanent damage such as long-term unemployment and the failure of otherwise solid businesses. The forecaster cut its estimate for peak unemployment to 5.8% from 7% forecast in January.

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Surveys on Friday showed services and manufacturing activity accelerating as the economy began to reopen from lockdown and with vaccines increasing confidence in the recovery. Consumer sentiment jumped in the first quarter, paving the way for a sharp rebound in spending, a Deloitte report showed on Monday.

Howard Archer, Item’s chief economic adviser, said: “The UK economy has proven to be more resilient than seemed possible at the outset of the pandemic. Businesses and consumers have been innovative and flexible in adjusting to Covid-19 restrictions and, while restrictions have caused disruption, lessons learned over the last 12 months have helped minimise the economic impact.

“Our latest forecast suggests that the UK economy will emerge from the pandemic with much less long-term ‘scarring’ than was originally envisaged and looks set for a strong recovery over the rest of the year and beyond.”

After plunging by almost 11% in 2020 consumer spending is expected to rise by 4.4% in 2021 and 5.7 in 2022 as unemployment falls and real earnings rise, Item said. Archer said inflation was a risk to watch out for as the economy springs back to life but that the Bank of England was unlikely to increase interest rates until late 2022 at the earliest.

Archer said: “While not every household has been able to save more over the last year, there is likely to be significant pent-up demand released as the economy reopens. Overall, consumers will play a significant role in the economy’s recovery.”

By Sean Farrell

Source: ShareCast

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UK economy improved in February despite lockdown measures

The UK economy rebounded slightly in February amid the third lockdown but was still almost 8% lower than before the pandemic, according to official figures.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.4%, representing an improvement from a 2.2% decline in January, which itself had been revised upwards from a previously predicted 2.9% fall.

Nevertheless, the February reading was slightly below the forecasts of some analysts, with experts at Investec predicting a 0.7% improvement for the month.

The construction sector saw activity jump by 1.6% for the month amid a lift in new work and maintenance.

Production and manufacturing activity also improved, with the two sectors revealing 1% and 1.3% improvements respectively.

Meanwhile, the service sector remained particularly constrained, reporting just 0.2% growth, as hospitality and retail remained constrained by pandemic restrictions.

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The figures also revealed that exports to the EU increased by £3.7 billion – or 46.6% – following a record slump of £5.7 billion in January.

The ONS said the export increases were driven by machinery, transport equipment and chemicals.

It added that the import of goods from the EU also rebounded, increasing by £1.2 billion – or 7.3% – in February.

An ONS spokeswoman said: “The economy showed some improvement in February after the large falls seen at the start of the year but remains around 8% below its pre-pandemic level.

“Wholesalers and retailers both saw sales pick up a little, while manufacturing improved with car producers experiencing a partial recovery from a poor January.

“Construction grew strongly after revised figures showed they had struggled in the last couple of months.

“Exports to the EU recovered significantly from their January fall, though still remain below 2020 levels.

“However, imports from the EU are yet to significantly rebound, with a number of issues hampering trade.”

Suren Thiru, head of economics at the British Chamber of Commerce, said: “The latest data confirms a modest return to growth in February.

“However, coming after a contraction in January, it does little to alter the prospect of a downbeat first quarter for the UK economy.

“The pick-up in output in February reflected a broad-based improvement in activity with all the main sectors recording an increase in growth.

“The clarity provided by February’s announcement of a road map for reopening also helped support output in the month.”

Source: Irvine Times

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UK economy posted largest annual slump of G20 nations – OECD

The Paris-based organisation said the UK economy was 9.6% smaller at the end of the third quarter in 2020 than at the same point last year.

The UK’s economy has shown the largest annual slump of all the G20 nations, despite rebounding to growth in the third quarter, according to the Organisation for Economic Co-operation and Development (OECD).

UK gross domestic product (GDP) jumped by 15.5% in the three months to the end of September, economists confirmed last month.

It highlighted a rebound as shops and hospitality venues reopened following the first national lockdown, which had driven a 19.8% slump in the second quarter.

However, the Paris-based OECD said the UK economy was 9.6% smaller at the end of the third quarter in 2020 than at the same point last year.

The OECD said this represented the “largest fall” over the period among the G20 nations.

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It said GDP across the G20 area as a whole “remained significantly below the levels of the same quarter a year earlier”, with an average 2% slump across the countries.

Only Turkey and China saw growth in GDP compared with the same period in 2019 despite the impact of the pandemic, reporting 5.4% and 4.9% growth respectively.

In the third quarter, the G20 area reported a total rebound of 8.1% as restrictions were lifted globally.

Among the 20 countries, India reported the sharpest quarterly rebound, as its economy jumped by 21.9% following a 25.2% fall in the previous quarter.

Earlier this month, the OECD forecast that the UK’s economic recovery from the coronavirus pandemic will lag behind every other major economy apart from Argentina.

Source: Express & Star

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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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Second local lockdown could cost London more than £2bn

London could face annual costs of more than £2bn if fresh curfew measures are implemented in the capital, according to a new report.

Leading think tank the Centre for Economics and Business Research (CEBR) today warned that 10pm curfews introduced elsewhere in the UK could reverse the country’s economic recovery if slapped on London venues.

It predicted that new lockdown restrictions would decimate a return to health for Britain’s pubs and restaurants, and would likely dent the British economy by more than £250m a day.

The CEBR added that new restrictions could cause GDP to sink between three and five per cent in the final three months of the year compared with the third quarter, when the UK economy plummeted to its deepest recession on record.

The think tank said that though a full second national lockdown is unlikely, partial lockdowns may eradicate progress in the hospitality sector brought about by chancellor Rishi Sunak’s Eat Out To Help Out scheme.

The scheme, which offered diners half price meals from Monday to Wednesday during August, helped shrink UK inflation to 0.2 per cent after providing more than 100,000 discount meals last month.

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Douglas McWilliams, deputy chairman of the CEBR, said that a second national lockdown could “knock the stuffing out of consumer and business confidence”, causing widespread business collapse and unemployment.

“Whereas the first lockdown was bearable on the assumption that it was temporary, a second lockdown will make many people lose confidence in a recovery in the foreseeable future,” he added.

McWilliams said the winding down of the furlough scheme — which sees the UK government pay a portion of workers’ salaries — may also result in wide scale job losses.

“Tens of thousands of businesses are hanging on by a thread and likely to run out of cash,” he said.

It comes as London mayor Sadiq Khan over the weekend warned that the capital is only “two or three days behind” coronavirus hotspots in the north of England.

More than 10m people across the UK are currently living with tougher restrictions as the government attempts to clamp down on a new bout of infections sweeping the country.

Khan said it is “increasingly likely” that lockdown restrictions will soon be introduced in London, adding that it was his “firm view” that action should be taken sooner rather than later.

By Poppy Wood

Source: City AM