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UK economy to face ‘enormous strains’ following lockdown

Rishi Sunak is expected to include a host of actions to kickstart the UK economy in Wednesday’s Budget.

Chancellor Rishi Sunak has warned that Britain’s public finances will face “enormous strains” in the wake of the latest national lockdown.

Ahead of Wednesday’s Budget announcement, Mr Sunak told the Financial Times a bill for the government’s £280bn investment in coronavirus support will eventually have to be paid, with low interest rates leaving the nation’s finances “exposed”

Mr Sunak said: “We now have far more debt than we used to and because interest rates… at least a month or two ago were exceptionally low, that means we remain exposed to changes in those rates.

“That’s why I talk about levelling with people about the public finances [challenges] and our plans to address them.”

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While Mr Sunak did not reveal any details on specific tax measures, the Budget is expected to include a swathe of actions aimed at kickstarting the UK economy as lockdown eases over the coming months.

These include a £126m boost for traineeships and a mortgage guarantee scheme aimed at helping aspiring homeowners with small deposits on to the property ladder.

He plans to incentivise lenders to provide mortgages to first-time buyers, and current homeowners, with just 5% deposits to buy properties worth up to £600,000.

Mr Sunak added that while there is a challenge facing the nation’s economy, he believes the Budget will be a much-needed boon for those hit hardest by the pandemic.

He said: “I stood up at the beginning of this [coronavirus] thing and said I will do whatever it takes to protect the British people through this crisis and I remain committed to that.

“We went big, we went early, but there is more to come and there will be more to come in the Budget. But there is a challenge [in the public finances] and I want to level with people about the challenge.

“Some 750,000 people have lost their jobs and I want to make sure we provide those people with hope and opportunity. Next week’s Budget will do that.”

Source: Sky News

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Unemployment in the UK rises as COVID lockdowns hit economy

The United Kingdom’s unemployment rate edged up to 5.1 percent in the final three months of last year, its highest level in nearly five years, official data shows, as severe COVID-19 lockdown restrictions pressured the economy.

Figures published by the UK’s Office for National Statistics (ONS) on Tuesday showed that the jobless rate rose 0.4 percentage points between the beginning of October and the end of December 2020.

The rise came against the backdrop of regional and national restrictions put in place to curb the spread of the coronavirus pandemic, which has struck the UK hard, killing more than 120,000 people and triggering its biggest fiscal slump in more than 300 years.

Despite a historic government-backed job-retention scheme rolled out in response to the COVID-19 crisis, overall, unemployment had climbed 1.3 percent higher by the end of last year compared with December 2019, the ONS figures showed.

The number of payroll employees tumbled by 726,000 between February 2020 and January 2021, it said.

PM sets out a plan to ease lockdown

The grim ONS figures come as the UK’s finance minister, Rishi Sunak, is reportedly readying to spend billions of pounds in extra support for the economy over the next four months, in line with Prime Minister Boris Johnson’s plan to gradually ease England’s lockdown by late June.

Sunak delivers an annual budget on March 3, when he intends to set out the future of government assistance programmes including the furlough scheme and a 20-pound ($28) weekly supplement to the main unemployment benefit.

Announcing his so-called “roadmap” for easing restrictions on Monday, Johnson said his government would not abandon people and businesses in need of ongoing help from the state.

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Non-essential retailers will not reopen before April 12, at the earliest, under Johnson’s four-step strategy, while some businesses will remain closed until at least June 21.

“People may be concerned about what these changes mean for the various support packages for livelihoods, for people and for the economy,” Johnson told Parliament.

“We will not pull the rug out. For the duration of the pandemic, the government will continue to do whatever it takes to protect jobs and livelihoods across the UK.”

‘Every job lost is a tragedy’

Johnson’s remarks put pressure on Sunak to extend the state-supported 70-billion-pound ($98bn) furlough programme, which is due to expire on April 30, well before most social-distancing restrictions will be lifted.

Under current lockdown rules, people are encouraged to work from home where possible, while hotels and restaurants are closed to the public.

“At the budget next week I will set out the next stage of our Plan for Jobs, and the support we’ll provide through the remainder of the pandemic and our recovery,” Sunak said in a statement.

“I know how incredibly tough the past year has been for everyone and every job lost is a personal tragedy.”

So far, Sunak has spent more than 280 billion pounds ($395bn) on COVID-19 measures, including healthcare, support payments and tax breaks, and government borrowing in the financial year just ending will be the highest as a share of the economy since World War II.

He was keen to rein back the job-support scheme and unemployment benefit last year before a surge in infections in the autumn forced the government to extend support and belatedly tighten lockdown rules.

The government said in a statement that Sunak would set out more details on his longer-term fiscal plans during next week’s annual budget announcement.

“It is not sustainable to borrow at this current level over the medium term,” the document stated. “This means the government has a responsibility, once the economy recovers, to return to a sustainable fiscal position.”

Source: Al Jazeera

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UK Redundancies Are Rising Faster Now Than In 2008

New figures have found that UK redundancies are rising at a faster rate as a result of the coronavirus pandemic than they did during the 2008-2009 financial crash.

Stark new analysis from the Office for National Statistics (ONS) has found the rate of job losses linked to the pandemic has already exceeded the highest rate seen during the financial crash with those working in the admin and support services industry hit the hardest.

The ONS’s quarterly analysis of the labour market up to December 2020 found the UK’s redundancy rate was has risen consistently since the beginning of the pandemic and is currently sitting at a record peak of 14.2 per thousand employees, compared to a maximum of 12.2 per thousand during the previous financial downturn.

But the ONS warned the economic impacts of the pandemic, which are higher than during 2008-2009, would continue “manifesting themselves in the economy”.

“Policy measures introduced to contain the spread of the virus, such as public health restrictions and voluntary social distancing, have had pronounced impacts on the UK economy,” they said.

“Major shocks to the economy, such as the coronavirus pandemic in 2020 and the recession between 2008 and 2009 have different causes and policy responses, but they have a common consequence: they cause the economy to contract and unemployment and redundancies to increase.”

Meanwhile, the stats watchdog found a major rise in the number of companies who expected large redundancies of 20 or more employees, rising from 485 in March 2020 to 1,734 in September.

The ONS analysis found the highest rates of redundancy had been recorded in the administrative and support services industry with 35.8 per thousand employees, followed by those in the “other” category, which includes arts, entertainment and recreation, which had rates of 30.5 per thousand.

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They also found that job losses were markedly higher among disabled people, with 21.1 per thousand being made redundant between July to November 2020, compared to 13.0 per thousand among non-disabled workers.

It comes after a recent report from The Resolution Foundation found that almost two million people have not been able to work for six months during the pandemic, including 700,000 who had been unemployed for at least six months.

The grim job figures come ahead of Rishi Sunak’s planned Budget on 3 March where he is expected to announce fresh measures to shore up the economy.

But business chiefs have already called for a further extension of the furlough scheme beyond the proposed April end date and more financial support to avert further job cuts.

Speaking on Thursday, Adam Marshall, director general of the British Chambers of Commerce, said the Chancellor would be making a “huge mistake” if he chose to “pull the plug” on the support schemes too early.

And he warned that removing the support would be “akin to writing off the billions that have already been spent helping firms survive and preserving jobs”.

He told the BBC’s Today programme: “I liken this to a marathon. Businesses have been running it and they are in the 25th mile right now, they can see the finish line ahead.

“You want them to get over the finish line and then you want to get them an energy drink and a blanket to help them start to recover.

“That is why extending the scheme is so important. You don’t want them falling within sight of the finish line.”

By John Johnston

Source: Politics Home

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UK Economy Risks Jobless Recovery From Covid Crisis – BoE

The UK economy risks a jobless recovery from the coronavirus, with surging gross domestic product and lingering unemployment, a policy maker at the Bank of England said.

Michael Saunders, a member of the central bank’s Monetary Policy Committee, said the pandemic has gone on longer than anticipated and is hurting the finances of businesses and households.

“Strong quarterly growth rates that leave GDP well below its pre-Covid level and unemployment relatively high are not a boom,” Saunders said in a video conference in London on Thursday. “As time goes on, corporate balance sheets especially among small firms are steadily getting worse. The longer the crisis goes on, the greater the risk of long-term scarring effects that will weigh on demand subsequently.”

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The remarks indicate divisions at the central bank about the strength of the recovery and confirm some of the concerns raised by the Resolution Foundation, which hosted the event. Bank of England Chief Economist Andy Haldane expects a sharp recovery in the second half of the year that will absorb workers out of a job because of the crisis. That contrasts with rising alarm about the damage a third national lockdown is doing to huge parts of the economy.

The Resolution Foundation warned that 2.6 million people in the U.K., or 8% of workers, expect to lose their jobs in the next three months. Its analysis found about 2 million people had been unemployed or on furlough for the past six months, a length of time that leaves them at higher risk.

A separate report from the British Chambers of Commerce found a quarter of the 1,100 businesses polled planning job cuts if government support programs end as planned. Saunders said it’s possible to see a benign outlook for the UK economy, where demand recovers quickly.

“There is a less benign one in which rising unemployment itself weighs on spending because fears of job losses make people anxious — keen to ensure their own household budget will be OK — and firms fearing weak demand also don’t hire as much,” Saunders said.

Prime Minister Boris Johnson hopes a rapid vaccination program will allow shops, restaurants and bars to reopen by the summer, returning most of those unemployed to work.

“While the U.K.’s economic prospects are finally looking up, job insecurity remains high, particularly among those who have spent long periods not working, or who are currently furloughed,” said Nye Cominetti, senior economist at the Resolution Foundation.

Those comments help feed a debate about how aggressively Chancellor of Exchequer Rishi Sunak should support workers through the pandemic in his budget statement on March 3. The central bank is forecasting unemployment will rise from 5% currently to 7.8% by the third quarter, leaving the total number of jobless at around 2.7 million.

Resolution called on the Treasury to extend furlough beyond the end of Covid restrictions. Earlier this week, the Institute for Fiscal Studies also recommended Sunak taper back the program, which is current due to expire in April, giving companies an incentive to adjust to the new economic reality.

“In setting policy, our key focus is to try to give businesses and households confidence that demand will recover strongly,” Saunders said. “That’s the best way to ensure that if unemployment does go up as the furlough scheme comes to an end, then the rise is short-lived and we get back to full employment as quickly as possible.”

By Lucy Meakin

Source: Bloomberg

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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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UK IS G7’S ‘LAGGARD’

“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 suffers worst annual slump since 1709

The UK economy contracted by 9.9% in 2020, its largest annual contraction since the Great Frost of 1709, as the coronavirus pandemic ravaged economic activity.

In the final quarter of the year, gross domestic product (GDP) grew by 1%, according to the Office for National Statistics, as the country re-imposed nationwide lockdown measures in a bid to combat a resurgence of Covid-19 cases.

The 9.9% annual contraction is more than twice that seen in 2009 in the aftermath of the global financial crisis, and narrowly worse than the 9.7% slump during the crisis of 1921.

Economists polled by Refinitiv had expected an 8% annual decline, in 2020 with a fourth-quarter expansion of 0.5%. This follows a revised 16.1% rebound in the third quarter as social, travel and business restrictions were eased.

As of Friday morning, the UK has recorded more than 4 million cases of Covid-19 and 115,000 deaths, according to data compiled by Johns Hopkins University. The UK has been blighted by new and more transmissible variants of the virus in recent months.

Hitesh Patel, portfolio manager at Quilter Investors, said the U.K. had experienced an “annus horribilis” in the form of the “trifecta” of a public health crisis, economic shutdowns and uncertainty surrounding Brexit.

“However, 2020 is in the past and the UK arguably has a promising second half of the year ahead given the success of the vaccine rollout,” he said.

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“This could easily be derailed should one of the mutations prevent the vaccines properly taking effect, but for now a double dip recession has been avoided and soon lockdowns may potentially be the thing of the past.”

England remains in a nationwide lockdown with no clear end date, although British Prime Minister Boris Johnson confirmed on Wednesday that around one in four adults, approximately 13 million people, have now received the first dose of a Covid vaccine.

Monthly GDP in December increased by 1.2% from the previous the month, but remained 6.3% below the level of February 2020. Fourth-quarter GDP remained 6.6% below the level seen in the fourth quarter of 2019.

The services sector grew by 1.7% in December having contracted by 3.1% in November, while manufacturing posted its eighth consecutive month of growth, the ONS said, albeit its smallest incline since May 2020.

“The tighter restrictions imposed towards the end of last year, which are likely to remain in place for much of the current quarter, suggest that the economy may shrink again,” said Dean Turner, economist at UBS Global Wealth Management.

“However, what is clear from the data is the resilience and adaptability of firms and households, so any contraction will be modest. As and when restrictions are eased, we continue to expect a vigorous rebound in the UK economy.”

By Elliot Smith

Source: CNBC

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Don’t expect sharp post-Covid rebound for UK economy, warn Niesr economists

The UK economy will grow by little more than three per centin 2021 after a 10 per cent slump last year, with a double-whammy from Covid and Brexit likely to be felt for years.

Leading economists at the National Institute of Economic and Social Research (Niesr) are also pushing chancellor Rishi Sunak to raid the coffers once more for extra emergency support.

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Niesr slashed its growth forecast for 2021 to 3.4 per cent from a previous estimate of 5.9 per cent, after taking into account the UK’s third lockdown and Covid-19 wave.

It’ll be 2023 before the UK economy returned to pre-Covid levels, it said.

Last week, the Bank of England said it expected that to happen in the first quarter of next year.

“Despite the roll-out of vaccines, Covid-19 will have long-lasting economic effects,” Niesr’s deputy director Hande Kucuk said today.

By 2025, the UK’s economy was likely to be about six per cent smaller than expected before the pandemic, reflecting higher unemployment, weaker business investment and Britain’s more restricted trading relationship with the European Union.

Sunak – who has promised to spend £280bn on the UK Covid-19 response this financial year, taking the budget deficit to a peacetime high – is due to announce his plans for the next 12 months in a budget statement on 3 March.

By Josh Martin

Source: City AM

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Bank of England: Cautious optimism reduces need for negative rates this year

The rapid vaccine rollout and the corresponding likelihood of a spring recovery has taken the pressure off the Bank of England to offer further stimulus. Policymakers will be careful not to shut the door on negative rates, but we don’t expect further rate cuts this cycle

The brighter outlook has taken the pressure off the Bank

The Bank of England is poised to unveil its latest decision this Thursday, and it’s now widely expected that policymakers will shy away from taking the plunge into negative interest rates this month. In fact, we think it’s unlikely they will do so at all in this cycle.

The outlook is brighter, and we expect the Bank’s new forecasts to continue to signal a full economic recovery around the turn of the year (albeit with some inevitable downgrades to growth this quarter). We are a little more cautious – we expect the combination of higher unemployment and ongoing disruption related to Brexit to prevent a full return to pre-virus levels for at least another 18 months.

But the conclusion is the same – with the vaccine rollout going well, and cases now falling rapidly, there is a good chance that the economy will record a rapid bounce in activity through the middle of the year. That in turn reduces the pressure to inject additional stimulus.

The BoE’s November forecasts assumed more-or-less a full recovery this year

Negative rates unlikely this cycle, but don’t expect the BoE to close the door on them

Of course, there are plenty of uncertainties in the outlook – not least how the new Covid-19 strains will affect the current batch of vaccines and therefore the need for future restrictions. But even so, what’s become increasingly evident from MPC commentary over recent weeks is that the willingness to enact negative rates is mixed.

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Some ‘external’ committee members, most notably Silvana Tenreyro, have signalled it is a move they are willing to make – though we suspect there won’t be any dissent this week. But the overall majority, including Governor Andrew Bailey, have played up some of the challenges.

On that note, we will get an update this week on the review that’s been carried out with the banking sector to see how negative rates might play out in practice. We suspect the general conclusion is likely to be that there are challenges, but that the sector could probably cope.

We don’t expect negative rates in this cycle

What’s less clear is how far the committee will go in passing judgement on how these findings affect the policy outlook. In theory, the findings are coming from the Prudential Regulation Authority (PRA), so it is entirely possible that the MPC passes no further judgement at this stage. However the findings could prompt the MPC to formally reduce its estimate for the ‘effective lower bound’ this week – which is a fancy way of signalling they are prepared to take rates below zero.

Either way, the key message is likely to be one of cautious optimism. We don’t expect negative rates in this cycle, though we could at some point see a step in this direction if the Bank decides to offer a negative rate on its Term-Funding Scheme, a policy designed to incentivise lending to SMEs.

If the outlook goes as planned, we also don’t foresee a further extension in the Bank’s QE programme beyond this year.

GBP rates: one last hurrah for negative Sonia forwards

The BoE meets at a time of benign market developments, with an improving economic outlook but still significant discount for negative rates. Something has to give. As we explained above, we do not see a strong case for taking the Bank rate below zero, but the conclusion to the PRA’s review on negative rates, and possible dovish dissent at this meeting, could be the cause of greater confidence in negative rates in the near term.

Some of the easing benefit of negative rates has been achieved already

We think this would be misguided. As the outlook improves, the case for negative rates will weaken. In a sense, some of the easing benefit of negative rate expectations has been achieved already with 1Y1Y Sonia swaps staying below zero since June last year. After a possible dovish reaction on Thursday, we expect this rate to move back above zero, and eventually above Sonia fixings (currently around 0.05%).

Sonia 1Y1Y to cross above zero, but curve flattening potential limited

In the grand scheme of things, this would be a fairly mild re-adjustment, and not something that threatens to invert dynamics at the long end of the curve. A more significant force in the pricing of longer rates is the impending recovery, and eventual tightening of policy.

As Bailey has stated, the BoE might start balance sheet reduction (quantitative tightening) before or during its rate hikes. This normalisation at both ends of the curve implies the flattening potential could be more limited than in the previous (shallow) hiking cycle in 2017-18.

Source: ThinkIng

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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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