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Severity of Omicron to determine UK economy’s fate, analysts warn

The severity of the Omicron variant will determine the strength of the UK’s economic recovery from the pandemic over the coming year, according to City economists.

The British economy could reach its pre-pandemic size by the third quarter of next year if the new strain of coronavirus proves to be less deadly than first thought, economists at KPMG have predicted.

In the consultancy’s best case scenario, in which no further restrictions on economic activity are needed to curb the spread of Omicron, the UK economy will grow 4.2 per cent in 2022 and 2.2 per cent in the following year.

Although growth could be tempered by an initial hit to consumer spending due to Brits becoming “more worried about catching the new strain of the virus… spending patterns could be restored if the milder nature of the virus is confirmed by the end of the year,” KPMG said.

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The bullish predictions mirror those made by the business lobby group the Confederation of British Industry (CBI), who expect the economy to expand 6.9 per cent this year and 5.1 per cent next. These new projections are, however, downgrades from the CBI’s previous forecasts, underlining the damage supply chain issues have inflicted on confidence in the recovery.

Consumers are set to drive economic growth, with spending surging 7.6 per cent next year. Household spending will generate around 90 per cent of growth in 2022, according to the CBI.

However, ongoing supply chain breakdowns caused by demand for goods staying elevated and roaring inflation present significant headwinds to the recovery, both organisations warned.

“A turn to the worse in Covid-19 cases could see more disruption to ports and logistics in the short-term, putting upward pressure on goods prices,” KPMG added.

Even if no further restrictions are imposed over winter, inflation will hit 5.8 per cent next spring, KPMG said. The CBI expects the rate to scale to over five per cent as well, a warning that will agitate officials at the Bank of England.

The Old Lady has come under intense pressure to get a handle on inflation running wild in the UK.

Prices are rising at their fastest pace in nearly a decade, scaling 4.2 per cent in the year to October.

The Bank will announce its latest decision on interest rates on December 16.

The City was adamant the Old Lady would hike rates this month.

However, the emergence of the Omicron variant has clouded the outlook for the UK economy, prompting analysts to rein their bets on a first rate rise in three years.

Experts are already painting a bleak picture of whether the economy can withstand a reintroduction of lockdown measures.

In KPMG’s worst case scenario in which Omicron evades vaccines, the UK will squeeze out anaemic growth of 1.8 per cent.

Meanwhile, an upsurge in case rates in South Africa driven by the rapid spread of the new strain has sparked experts to redraw their projections for the year ahead.

Goldman Sachs has revised down its forecasts for US growth due to the variant “slow[ing] economic reopening,” the Wall Street giant said in a research note.

By JACK BARNETT

Source: City AM

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Bank of England to look through Omicron and hike rates this month

The Bank of England will plough ahead and hike interest rates for the first time three years this month despite concerns the Omicron variant could whack the UK economy, according to City analysts.

Strong booster jab take up and high levels of existing immunity stemming from the successful vaccination programme has put the British economy in a strong position to withstand a fourth wave of coronavirus triggered by the new variant, experts at Goldman Sachs have predicted.

The emergence of the heavily mutated strain of coronavirus last week initially sparked fears over the health of the British economy due to the likelihood of strict restrictions to curb the spread of the disease.

These downbeat assessments cast doubt over whether the Bank would raise interest rates at its next meeting on December 16.

However, under Goldman’s baseline scenario, “the UK economy will hold up relatively well during the fourth wave, given high vaccine take-up and a successful booster programme,” the Wall Street investment banking giant said.

“As a result, we still believe that a 15 basis points BoE hike is more likely than not at the December meeting.”

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Bullish assessments from global health leaders have emerged this week downplaying the severity of the Omicron, potentially pushing members of the Old Lady’s rate setting committee into lifting rates.

The World Health Organisation (WHO) tempered speculation that the existing crop of Covid-19 vaccines could be scuppered by the new variant by signaling there is no evidence the new strain reduces their efficacy.

GlaxoSmithKline also announced today its Covid-19 antiviral treatment is effective against Omicron.

Those upbeat health assessments have been echoed by economists this week, who have stressed the UK economy is in a much better position to function effectively even amid Covid-19 curbs.

A waning impact of the virus on the economy suggests it will be able to stand on its own two feet without ultra-loose monetary policy, paving the way for a rate hike.

Even before the emergence of the variant, the Bank was under intense pressure to hike rates to hose down runaway inflation.

The Old Lady stunned markets last month when it left rates unchanged at a record low 0.1 per cent despite expecting inflation to hit five per cent next spring.

Prices are already 4.2 per cent higher than they were a year ago, the highest rate of increase in nearly a decade, according to the Office for National Statistics.

Goldman also expects the Bank of England to hike again in May next year, taking rates to 0.75 per cent by the end of 2022.

By JACK BARNETT

Source: City AM

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UK economy to return to anaemic growth as cost of living crisis spikes Brits

A triple threat of a worsening cost of living crisis, higher interest rates and a pulling of government Covid-19 support will throw the UK economy back into an anaemic state, according to new research published today.

Swelling energy bills and rising costs for basic necessities will cause households on tight budgets to rein in spending, according to predictions made by accountancy firm PwC.

Weaker spending from low income households will clamp down on the UK’s economic recovery from the Covid-19 crisis.

The forecast underlines the impact soaring inflation is having on the economy’s capacity for growth.

The UK economy is heavily reliant on consumer spending to generate output, meaning a reduction in spending from low income households would constrain growth.

Brits living on tight budgets “will feel the pinch from a combination of rising inflation, higher interest rates, and fiscal changes” and a looming 1.25 percentage point national insurance hike, cautioned Hoa Duong, economist at PwC.

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PwC’s experts said richer households would be able to shake off the impact of rising prices due to them having greater bandwidth to absorb a higher cost of living.

A surge in spending “will likely be concentrated on higher income households” as a result, the firm said.

Inflation in the UK has taken off in recent months, triggered by a combination of global supply chains breaking down, soaring wholesale energy costs and rising commodity prices.

The Office for National Statistics estimates prices are 4.2 per cent higher than they were a year ago, the highest rate of inflation in nearly a decade.

Yet, PwC expects the rate to scale even further and hit its highest level in three decades next spring.

“The rise in the energy price cap and the reversal of the VAT cuts for hospitality and tourism create a perfect storm that is set to push headline inflation rates to around five per cent and six per cent,” the firm said.

The downbeat projections will be a cause for concern for the Bank of England, which has a mandate to keep inflation at two per cent.

The Old Lady has come under intense scrutiny for keeping interest rates at a record low 0.1 per cent despite expecting inflation to rise to more than double its target.

Officials on Threadneedle Street will announce their next decision on rates on December 16. Earlier this month, they stunned markets when they left rates unchanged.

By JACK BARNETT

Source: City AM

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The economic outlook for the UK and Wales post-pandemic and Brexit

UK businesses, especially in North Wales, have demonstrated strong resilience and most have performed better than the economic predictions.

The main reason for the economic bounce back was the furlough scheme, which mirrored that of Germany’s normal economic support policy of intervention during financial crises in order to save the economy and jobs.

As the businesses are opening, these furloughed high skilled workers have resumed work and production. The machines which were lying idle for a while have started producing.

The economic downturn from the pandemic will be short-lived, as long as we are all very vigilant and the UK and Welsh governments do not attempt to completely stop their support.

In contrast, during the 1980s, 1990s and 2008 economic crises, the UK government did not provide economic support and allowed many good quality, viable businesses to go bust; permanently damaging the economy and jobs. Hopefully, we have all learned a lesson from the past.

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In this current crisis we have also witnessed the key roles which devolved nations can play.

The Welsh government’s targeted support not only saved many viable businesses, it also had a major positive social impact within the most deprived communities in North Wales.

This again signifies how the powers passed to a devolved nation can enhance the social and economic wellbeing of the whole of the UK.

The Welsh government’s support and intervention complemented the national support and tackled locally-focused challenges.

Welsh government’s development bank (DBW) also targeted its support to areas of the economy that were missed by the UK government and the large international banks.

The Office for Budget Responsibility (OBR) predicts that, although the UK economy will almost fully bounce back from the pandemic, it’s economy and eventually the jobs market will suffer for decades due to Brexit.

We are now facing mountains of bureaucratic paperwork in order to trade with the EU.

Some of the EU businesses do not want to go through the bureaucratic hassles of purchasing or selling to UK companies.

The only way my organisation can maintain a good trading relationship with EU businesses is through our Belfast or German offices.

The UK has already seen a dramatic drop in exports to the EU. Building trade deals with most countries outside the EU is now proving to be a long and horribly complex process which will take many years to achieve.

The Welsh government administration has proved its maturity and economic competence during the pandemic.

If Wales has greater power to manage its economic activity and was allowed to have its own direct independent trading relationship with the EU; it would deliver significant economic growth and social wellbeing.

Sadly, the UK government will not grant further autonomy to Wales and will very likely erode the autonomy it presently has.

Source: The Leader

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UK economic bounce-back to weaken, analysts say

The United Kingdom’s economic recovery from the coronavirus pandemic slowed between July and September and is expected to be weaker than previously predicted in the coming months, largely because of supply-chain problems and higher energy costs.

Official figures from the Office for National Statistics, or ONS, show consumer spending increased as the UK emerged from pandemic-battling lockdowns, but other sectors of the economy shrank disappointingly.

Overall, growth during the three-month period stood at 1.3 percent, which was well down on the 5.5 percent recorded between April and June. The slowdown leaves the UK economy 2.1 percent smaller today than in the final quarter of 2019.

Grant Fitzner, chief economist at the ONS, told the BBC the service-sector growth was largely down to a tax holiday for property purchases.

“However, these were partially offset by falls in both the manufacture and sale of cars,” he said.

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The Guardian newspaper reported on Monday that EY Item Club had used the results, and other data, to predict the “tougher” part of the UK’s economic recovery is yet to happen.

EY said in its autumn forecasts there will be “higher and more sustained inflation” in the coming months, with rises in energy prices and supply chain disruption denting previous estimates.

EY said the UK’s GDP could rise by 6.9 percent this year, instead of the 7.6 percent it had expected. GDP fell by almost 10 percent last year. And EY said GDP growth in 2022 could run at 5.6 percent, instead of the 6.5 percent it had previously predicted.

Martin Beck, chief economic adviser to EY Item Club, told The Guardian: “With the boost from reopening the economy now largely passed, the UK was always expected to enter a tougher phase of the recovery. …Although inflation looks like it’ll peak higher-and stay higher for longer-than first anticipated, it doesn’t look like this will tip into ‘stagflation’; the combination of sluggish growth and persistent high inflation.”

But EY did have some good news. It said unemployment will likely run at 4.3 percent in the final quarter, instead of the 5.1 percent it had previously predicted.

Sky News added on Monday that recent disappointing economic data and a lack of investment had led the head of the Confederation of British Industry, or CBI, to say the British economy now feels second-rate.

Tony Danker said in a speech on Monday at the CBI’s annual conference that the government must find ways to deliver economic growth to all parts of the nation. “I don’t know a country in the world… where governments aren’t active in economic geography,” he said in an apparent swipe at London’s decision to cancel part of a planned upgrade of railway lines in the North of England.

Source: Hellenic Shipping News

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UK economy begins to emerge from Covid but old problems remain

After a bruising couple of weeks, the government was in need of some good news and that was provided by the latest jobless figures. Fears that the end of the furlough scheme would lead to rising unemployment have proved groundless.

It is, of course, early days. There are still only flash estimates of what happened in October once the Treasury’s wage subsidies had come to an end but the signs are promising.

But rather than the expected surge in redundancies as firms had to cope without government financial support, there was a 160,000 rise in the number of payrolled employees. In the three months from August to October the number of job vacancies hit a new record of close to 1.2m – up almost 400,000 on the pre-pandemic level.

The Office for National Statistics said in the July to September period – the months leading up to the scrapping of the furlough – the number of people moving from job to job was higher than ever before, but this was the result of choice rather than people being forced to move because they had been dismissed.

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Rishi Sunak said the figures were tribute to the “extraordinary success” of the furlough and few would dispute that claim. The unemployment rate fell by 0.5 percentage points to 4.3% in the three months to September and is only marginally higher than it was when Covid-19 arrived in early 2020.

Some of the workers who came off furlough in October may have gone into part-time rather than full-time jobs, but even so the labour market has shown resilience throughout the pandemic.

Andrew Bailey, the governor of the Bank of England, said on Monday that he wanted to see what was happening to employment post-furlough before deciding whether to support higher interest rates. Nothing in the official data suggests the City is wrong in its belief that borrowing costs will rise from 0.1% to 0.25% next month.

Indeed, the economy as a whole is now starting to go post-Covid. The inflation figures due out on Wednesday will still show the impact of the virus on global energy prices and on supply chains but in other respects it is as if the past 18 months never happened.

There are two sides to that. The good news is that the labour market has emerged relatively unscathed. The bad news is that the problems of February 2020 – low investment, low productivity, weak underlying growth – are problems that remain to be tackled in November 2021.

By Larry Elliott

Source: The Guardian

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Soaring inflation and tax hikes to squeeze UK economy

TAX hikes, soaring inflation and an end to pandemic-related government support is souring the UK economy’s prospects, according to City analysts.

Brits’ spending power will be eroded by the intensifying cost of living crisis, restricting their ability to splash the cash and drive the economy, analysts at Deutsche Bank warned today.

Inflation is accelerating at the fastest pace in nearly a decade, climbing to 4.2 per cent last month, up from 3.1 per cent in September, according to the Office for National Statistics.

Fiery price rises are threatening to derail the UK’s economic recovery from the Covid-19 pandemic by crimping consumers’ willingness to spend.

The UK economy is heavily reliant on the services industry to generate growth, meaning a sharp slowdown in consumer spending will produce severe downside shocks to the country’s growth prospects.

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The British economy will grow just 3.6 per cent next year, much lower than the Bank of England’s forecast of five per cent, experts at the German investment bank have predicted.

A combination of historically high inflation and tax hikes will cost the UK economy around £13.5bn next year, roughly 0.6 per cent of GDP.

Sanjay Raja, UK economist at Deutsche Bank, said: “As we turn the page on 2021, one thing is clear: consumers are already starting to feel the pinch of eroding spending power.”

“This has already started to filter through into recent consumer confidence data, which paints a bleaker picture of weakening confidence in both households’ economic and personal financial outlooks.”

In a separate note published today, British bank Barclays estimates the UK economy will expand 6.9 per cent this year, and then 4.1 per cent next year, before cooling to settle around its pre-pandemic trend of 1.3 per cent in 2023.

The lender expects the global economy to grow six per cent this year.

“Supply chain problems have not just persisted; new ones have arisen. Inflation has been much stronger, for far longer, than central banks expected,” Ajay Rajadhyaksha, head of macro research at Barclays, said.

By JACK BARNETT

Source: City AM

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UK inflation surges, fuels expectations interest rates will rise

UK inflation surged to a 10-year high last month, fuelled by a jump in household energy bills and petrol prices, official data show.

Annual UK consumer prices index inflation surged to 4.2% in October, from 3.1% in September, and is now more than double the target set for the Bank of England by the Treasury.

While a sharp rise in inflation had been expected, with economists in a poll by Reuters having projected an October reading of 3.9%, the jump was even greater than expected and fuelled expectations of a rise in UK base rates from a record low of 0.1% next month.

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Colin Dyer, client director at financial services group abrdn, said: “Rising fuel and energy prices, paired with global supply chain disruptions, caused inflation to soar last month after a temporary respite in September.

“The cost of living has been increasing rapidly for much of 2021 because of the strong economic recovery from the coronavirus pandemic, but October’s inflationary rate is the highest we’ve seen in over a decade. And with the Bank of England now warning of it exceeding 5% early next year, it’s likely to remain an uncertain and uncomfortable period for many.”

He added: “For those trying to save, rumours of a rate rise on the horizon might seem positive, but this is unlikely to be substantial enough to show any real returns.”

By Ian McConnell

Source: Herald Scotland

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UK business confidence falls amid record-high inflation expectations

UK business confidence has fallen to its lowest level this year, amid concerns among businesses about supply challenges and inflationary pressures, according to the latest Accenture/ IHS Markit UK Business Outlook.

More than half of UK private sector firms (56%) expect an increase in business activity during the year ahead, compared to 11% that project a decline. The resulting net balance of +45% is a sharp fall from the highs recorded in both June (+58%) and February (+57%) earlier this year.

Despite this sharp fall from the spring and summer, confidence remains higher than seen throughout much of the last five years and UK businesses are more confident than those in every other European country apart from Ireland.

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Firms’ employment expectations also dropped last month, with the net balance of companies confident that they will hire additional staff in the next 12 months, at +32% compared to +41% in June. However, barring the record high seen in the previous survey, hiring intentions are at their peak since June 2015.

The fall reflects ongoing concerns among UK businesses about their ability to hire the skilled staff.Only one-third (35%) of businesses were confident that they will be able to hire the skills they need over the next 12 months. This was lowest for ‘experienced’ workers (29%), when compared with ‘entry level’ (47%) and ‘senior management and executive’ (40%) roles.

Inflation expectations among UK firms continued to surge higher, with forecasts for both staff and non-staff costs rising to unprecedented levels. Whilst primarily driven by global supply-side risks, firms increasingly expect to see wages rise as the labour market tightens and living costs increase. The rapid surge in energy costs also served to exacerbate fears that business expenses will spiral upwards.

Commenting on the survey, Simon Eaves, Market Unit Lead, UK & Ireland at Accenture, said: “The high levels of business confidence we saw earlier this year have been tempered by some strong economic and unanticipated headwinds. Despite this, business optimism in the UK remains higher than in most other European nations and we must capitalise on this sentiment to inspire further growth across the economy.

“Supply chain challenges and labour shortages cannot be fixed overnight, but it is critical that business leaders adapt their operations and invest in the right technologies, such as cloud and data, and bring in the right skills to remain competitive.

“Two areas are dominating every business leaders’ agenda at the moment. There’s the movement to digital as they recover post-Covid and, with it, sustainability which we saw many commitments made at the recent COP26 Summit. Our research shows that businesses that invest in these two important areas will be amongst the winners of the future.”

Source: London Loves Business

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Pound plunges to yearly low against dollar on underwhelming UK GDP figures

The pound has plunged to its lowest level against the dollar this calendar year driven by traders dumping the currency after fresh data showed the UK economic recovery is stalling.

Pound sterling dipped to day low of $1.3365, the weakest the pound/dollar exchange rate in 2021, following the release of new GDP data from the Office for National Statistics (ONS) this morning.

The fall was triggered by currency traders selling off sterling holdings due to a weaker than expected quarterly UK GDP clip, which came in at an underwhelming 1.3 per cent for the three months to September, soured sentiment toward sterling.

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The drop was compounded by currency traders pouring into the dollar after a fiery inflation print published yesterday strengthened the prospect of the US Federal Reserve raising interest rates.

Data from the US Bureau of Labor Statistics shows prices are rising at their fastest pace since 1990 in America.

The pound has rebounded over the last month, but was sent tumbling after the Bank of England last week decided to hold interest rates at a record low 0.1 per cent despite expecting inflation to hit at least five per cent in April next year.

Currencies tend to weaken if inflation is strong due to holders of separate currencies losing purchasing power.

By JACK BARNETT

Source: City AM

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