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UK economy shrank by close to 11% in 2020, says Deutsche Bank

The UK economy likely shrank by close to 11% in 2020, according to Deutsche Bank, marking the worst annual contraction in three centuries.

The bank said growth prospects for 2021 on the other hand remained positive on the whole.

“While tighter restrictions and some Brexit disruption will likely further disrupt the UK’s recovery in the first quarter of 2021, an earlier-than-expected rollout of vaccines should support the UK’s journey toward normalcy next year,” it said.

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DB said that while it’s early days, it expects the recovery to firmly begin from the second quarter of this year.

“We see growth coming in closer to 5% next year,” it said, adding that risks to its forecasts are firmly tilted to the upside.

By Michele Maatouk

Source: Sharecast

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UK economy may be 6% smaller in early 2021 than initially forecast

The UK economy could be up to 6% weaker in early 2021 than expected in initial forecasts.

The latest report from the Resolution Foundation found that due to the new Covid-19 restrictions to stop the rising infection rate it is likely that the country’s economy for 2021 will be negatively impacted.

The report said that the duration of those restrictions will determine the effect on the economy.

The report said that a possible path for the economy, takes the Office for Budget Responsibility’s November forecast and assumes that monthly output remains at its November level (reflecting the fact that Tier 4 is the equivalent of repeating the second lockdown) until Easter before returning to its forecast path (which included the impact of some ongoing restrictions).

This would see the economy being 6% smaller by Easter than forecast by the OBR just last month and reduce growth for 2021 as a whole from 5.5% to 4.3%.

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Sectors reliant on social consumption, specifically hospitality, leisure and non-essential retail, will remain hardest hit and government support should be focused on them, said the Resolution Foundation report.

The thinktank also said that widespread vaccination in 2021 would lead to a swift drop in deaths from coronavirus and enable a gradual return to normality. It assumes that those over 65 will be vaccinated by Easter.

The report said spending will bounce back very quickly once normality is achieved and it should lead to a big labour market boost. The report believes this improvement will be noticeable towards the second half of 2021.

Nevertheless, “2021 is going to be a rough ride. The early months of the year will try the patience of a nation fatigued by the trauma that was 2020. And with unemployment rising and incomes possibly falling in 2021, it certainly won’t be roaring for everyone”, said the report.

By Caoimhe Toman

Source: ShareCast

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Analysis: Brexit trade deal sparks relief but UK market will bear scars

Britain’s trade agreement with the European Union removes a 4-1/2-year old fear of crashing out of the bloc without trading arrangements in place, but it will take UK financial markets years to lose their Brexit-inflicted scars.

The “no-deal Brexit” risk has weighed on Britain’s growth and investment prospects since June 2016, when citizens voted to sever ties with the country’s biggest financial services customer that accounts for $1 trillion of bilateral commerce a year.

So Thursday’s deal, seven days before the deadline, is an undoubted relief. Analysts are urging clients to snap up undervalued UK stocks, the worst performing of any major market since 2016 and many say they been buying sterling, which is near 2-1/2-year highs above $1.36..

But those hoping the deal will allow British assets to catch up with high-flying overseas markets may be disappointed.

The bare-bones nature of the deal leaves Britain far more detached from the EU than was thought likely in 2016. Further negotiations are inevitable in 2021 to flesh out the agreement.

It all means the discount that has dogged UK assets since 2016 will not vanish soon.

“Brexit does mean that the UK will likely lose some of its sheen,” said Seema Shah, chief strategist at Principal Global Investors.

While the news could lend some traction to British markets it would not protect the economy from long-term scarring, inflicted by a combination of Brexit and COVID-19, she said.

“Being excluded from the world’s largest single market area will see jobs, people, and capital flows trickle away from the UK, in search of destinations which instead embrace globalisation,” Shah added.

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Ilustrating the discount, UK stocks have underperformed since 2016 and lagged the global recovery since March that has sent rival indexes to record highs.

The British currency remains around 20% below its long-term fair value. Few expect it to recover fully in the near term.

The underperformance is largely driven by foreign investors dumping UK assets. Financial data provider eVestment estimates European and U.S.-domiciled investors have pulled more money than they have added into UK stocks almost every quarter between the referendum and the third 2020 quarter.

And because the size of the UK market has shrunk as a percentage of the global index, to 4% from 10% pre-referendum, foreign investors no longer need to hold as many UK stocks, said Caroline Simmons, CIO, UK, at UBS Global Wealth Management,

British equities may perform well against a backdrop where other markets look expensive – Simmons says UK shares trade at a 30% discount relative to global markets against a typical 10% discount.

But she does not expect them to recover fully.

“As for the Brexit discount, I do think some of it goes away but will it completely disappear? The drag on cumulative UK GDP as a result of Brexit is still sizeable,” she said.

COVID-19 COMPOUNDS BREXIT

As further shadow on the outlook, Britain’s economy, already weakened by Brexit uncertainty, has suffered the worst damage of any major country from the COVID-19 pandemic, with the second-quarter of 2020 witnessing the worst recession in 300 years.

That has forced the government to lift its borrowing to a peacetime record.

Economic recovery is complicated by weak “bricks-and-mortar” foreign direct investment. The net value of foreign direct investment (FDI) into the United Kingdom dropped to 49.3 billion pounds in 2018, a quarter of 2016 levels, official data shows.

This year will have seen 30%-45% fewer FDI projects than 2019, consultancy EY estimates, mostly because of the pandemic.

Hinesh Patel, a portfolio manager at Quilter Investors, said the Brexit deal “could unblock the backlog of international investment that has been waiting for some sort of outcome before institutions begin investing in UK plc once again.”

Others are less optimistic and say the watered-down ties with Brussels will inflict lasting damage.

“There’s a bit of short term versus long term story here,” Morgan Stanley head of cross asset strategy Andrew Sheets said, speaking before the deal announcement.

Removing the no-deal risk will raise average asset prices, Sheets said, but said: “It doesn’t fix the underlying economic challenges…You are facing a negative shock to services which are a large majority of the UK economy.”

Source: UK Reuters

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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 saw partial recovery in Q3, recession risks ahead

Britain’s economic recovery from its coronavirus crash was quicker than previously thought in the third quarter, according to official data, but new lockdowns are threatening to cause a another recession.

Tuesday’s data also showed government borrowing sped up last month to pay for the mounting cost of the coronavirus crisis.

Gross domestic product grew by a record 16.0% from July to September, revised up from a previous estimate of 15.5%.

But that still did not make up for its 18.8% slump in the second quarter, when much of the economy was shut down.

Britain’s economy was hit harder by the pandemic than most others as it went into a longer lockdown. Only Italy has recorded more deaths in Europe.

Now London and nearby areas are back under tough restrictions as the government tries to slow the spread of a new variant of the virus that spreads more easily.

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Capital Economics, a consultancy, said a double-dip recession was a clear possibility if the latest COVID-19 restrictions continue into 2021.

The economy almost ground to a halt in October and is expected to shrink again in the fourth quarter as worries about the Dec. 31 deadline for a Brexit trade deal with the European Union compound the damage from COVID-19.

But Capital Economics said a high savings rate among households “provides optimism that as long as vaccines are effective and widespread, GDP will stage a strong rebound in the second half of next year.”

Tuesday’s data showed the economy was 8.6% below where it was at the end of 2019.

It also showed household incomes grew in the third quarter as workers returned from temporary layoffs. Consumer spending rose by almost 20%.

The Office for National Statistics also said Britain borrowed a record 241 billion pounds ($323 billion) in the first eight months of the financial year, nearly 190 billion pounds more than in the same period a year earlier.

Borrowing in November alone reached 31.6 billion pounds, up more than 40% from October as the government extended its job- retention scheme to cover workers hit by the latest lockdowns.

The deficit is on course to widen to about 400 billion pounds in the 2020/21 year, close to 20% of GDP, double the hit from the global financial crisis.

Public debt stood at almost 2.1 trillion pounds or 99.5% of GDP, the highest ratio since 1962.

Finance minister Rishi Sunak reiterated his pledge to tackle the huge shortfall, but not immediately.

“When our economy recovers, it’s right that we take the necessary steps to put the public finances on a more sustainable footing,” he said.

The International Monetary Fund has said Britain will probably need to raise taxes after the pandemic to fill the gap.

Britain’s current account deficit – one of the economy’s weak spots – widened to 15.7 billion pounds, or 2.9% of GDP.

($1 = 0.7462 pounds)

Reporting by Andy Bruce

Source: UK Reuters

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Pound traders brace for tense week as Brexit talks continue

Sterling traders are gearing themselves up for another nervy week amid fears that a collapse in Brexit talks could spark a sharp sell-off in the pound.

Negotiations are ongoing, but noises from both camps suggest they remain stuck on fishing rights and competition policy.

British health secretary Matt Hancock this morning told Sky News that the European Union was making “unreasonable” demands.

France appears to be taking a tough stand on fishing rights, arguing that it will not take a sub-standard deal.

The pound is currently trading at around two year highs of around $1.35. Yet it slipped back from even higher towards the end of last week as doubts about a Brexit deal emerged.

No-deal Brexit: Pound could hit $1.15 or lower

Economists at consultancy Capital Economics said last week that the pound could tumble to $1.15 in the event of a no-deal Brexit.

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Such an outcome would lead to disruption for businesses as well as higher tariffs for certain sectors. The UK’s budget watchdog has said it could knock two per cent off the economy next year.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said no deal could see sterling fall to $1.23. He said it could fall to about €1.04 against the euro, from its current price of €1.103.

Nomura currency analyst Jordan Rochester said the pound could even plunge to $1.01 in a worst-case scenario where “capital markets struggle to function” amid financial disruption.

However, Tombs said the pound was “less vulnerable” than in 2016, when it dropped sharply after the Brexit referendum.

He said it is now less dependent on external finance thanks to a lower current account deficit. And he said the Bank of England also has less scope to cut interest rates, which would hurt the pound.

Analysts and investors are torn on whether the UK and EU will reach a deal. Analysts at UBS said that if a deal is struck and vaccines aid the economy then sterling could hit $1.37 by the end of 2021.

By Harry Robertson

Source: City AM

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FTSE 100 falls and pound plunges as Tier 4 lockdown puts UK economy back into hibernation and Brexit talks drag on

The FTSE 100 was set to fall nearly 1% in early trading today as sterling plunged following Boris Johnson’s shock U-turn on Covid-19 lockdowns at the weekend.

The sudden and dramatic change of government rules over swathes of the South East wrongfooted investors and chief executives alike, sending early calls on the FTSE down 54.6 points to 6462 on the IG Index spread betting platform.

That fall would have been deeper were it not for sterling also plunging – a factor that generally helps FTSE shares because big company earnings are largely generally in dollars, so a weak pound makes them stronger when translated back into pounds.

The pound fell 1.2% this morning during Asian trading with both the lockdown measures and continuing stalemate on the Brexit trade talks hitting the market’s view of Britain’s economic prospects.

The pound fell to $1.3360, further pressurised downwards by dollar strength on the back of a deal from Washington politicians over a $900 billion covid stimulus deal to boost the US economy.

Relief that a deal had been struck after so many months of stalling negotiations meant markets could now focus on Brexit trade talks and the West’s varying response to Covid.

As borders closed to UK travellers over fears of the British mutant strain of the disease, share prices were expected to plunge as trade was set to be jammed at UK ports.

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Freight transport was already backing up badly at Dover on Saturday due to traders’ attempts to stockpile ahead of the end of the Brexit transition period next week, but that was worsened by border stops by Germany, France, Italy, Belgium, Austria, Ireland and the Netherlands.

Dover usually handles 10,000 trucks a day but France yesterday put an immediate 48 hour ban on entry, jamming the crucial Dover-Calais route.

Half of all goods traded between the UK and EU and 90% of truck traffic cross on that route.

The hope is that the EU will have formulated a response to the UK mutant virus by tomorrow, involving Covid tests prior to departure from Britain.

While hauliers were still allowed to enter the UK, truck companies from the continent were delaying shipments for fear that they may not be allowed to return.

Eurotunnel, Port of Dover and Eurostar all shut the UK-France route yesterday.

Shares in easyJet, British Airways owner IAG and Ryanair were all expected to fall sharply, along with hoteliers such as InterContinental and Premier Inn owner Whitbread.

However, investors with longer term horizons still believe the vaccines will make 2021 a strong year for economic growth and company profits, so any short-term share price falls are likely to be leaped upon by bulls seeking bargains.

Further concerns over TalkTalk’s lowball takeover by Toscafund were heightened today as The Times revealed that the hedge fund had told its investors in the summer that it would make strong returns on its investment in the firm at a far higher price than it is offering to buy it for.

By Jim Armitage

Source: Evening Standard

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UK jobless rate rises again, redundancies hit record high

UK jobless rate rose again in the three months to October and redundancies reached a record high as companies were hit by new coronavirus restrictions and prepared for the end of government job subsidies that were eventually extended into 2021.

Official data showed the unemployment rate reached 4.9%, up from 4.8% in the three months to September, its highest in more than four years.

However, the increase was smaller than expected by most economists. A Reuters poll had forecast a jump to 5.1%.

The number of redundancies reached a record high of 370,000 in the August-to-October period, although it decreased in October alone, the Office for National Statistics said.

“Overall we have seen a continuation of recent trends, with a further weakening in the labour market,” said Darren Morgan, ONS director of economic statistics.

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For much of the period covered by Tuesday’s data, finance minister Rishi Sunak rejected calls to extend his broad job- retention scheme beyond a scheduled Oct. 31 expiry, raising fears of an acceleration in job losses.

But, as a second wave COVID-19 cases hit, Sunak was forced to extend the scheme until the end of March 2021.

“The … extension of furloughing will provide a lifeline for many jobs over the difficult winter months, but the big question is what happens after,” said Tej Parikh, chief economist at the Institute of Directors.

The introduction of vaccines offered some hope, but hiring plans remained stuck in neutral, he said, calling for new measures to help job creation, such as a social security contributions cut.

The Bank of England has forecast that the unemployment rate is likely to peak at nearly 8% in the second quarter of 2021.

The Arcadia fashion group fell into administration late in November putting more than 13,000 jobs at risk, and retail chain Debenhams is closing all its shops, jeopardising 12,000 jobs.

As well as COVID-19, Britain’s economy faces the risk of a shock from the end of its post-Brexit transition period on Dec. 31. London and Brussels remain locked in negotiations little more than two weeks before the possible introduction of tariffs and other barriers to trade with the European Union.

Tax office data showed the number of staff on company payrolls slipped by a monthly 28,000 in November, taking the total number of job losses since February, according to the payrolls measure, to 819,000, a third of them in hospitality.

Job vacancies rose to 547,000 in the three months to November, about 60% higher than during the depths of the pandemic slump but down by about a third from a year earlier.

Reporting by William Schomberg

Source: UK Reuters

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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 hiring outlook weakest in Europe as Covid hits London jobs market

UK companies are the most pessimistic in Europe about hiring in the first quarter of next year, according to a major survey, with London’s jobs outlook hitting its lowest level on record as the hospitality industry is battered by coronavirus.

However, the overall jobs outlook for the UK for the first three months of next year improved by three points to minus six, according to the closely watched Manpower jobs survey. It was the second increase since the record low of minus 12 for the third quarter.

Positive vaccine announcements from various drug companies have sparked optimism that economies could begin to return to normal next year.

This has cheered business-owners, but they remain wary that they face a tough few months before any vaccine can have an impact.

In the UK, a tough system of tiered coronavirus restrictions has hit businesses. Companies are also worried about Brexit, with a great deal of uncertainty about the future regardless of whether there is a deal or not.

These worries contributed to the UK having the lowest net employment outlook score in Europe, according to Manpower Group’s quarterly survey. By comparison to the UK’s minus six, Germany’s score was eight and France’s was zero.

A negative score means more firms intend to reduce the size of their workforce than increase it. Manpower, a global recruitment company, asked 1,306 UK employers their hiring plans.

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London hiring outlook at record low

London registered its worst hiring outlook on record, Manpower said.

Despite usually being the powerhouse of the economy, it had the second-worst outlook in the UK behind Northern Ireland. This was in part due to its large retail and hospitality sector.

The employment outlook for retail and hospitality in the UK as a whole dropped to minus 13, its lowest ever figure.

“The headline numbers are steadily moving in the right direction,” said Manpower’s UK managing director Mark Cahill.

“However, despite this positive trajectory, the UK remains the least optimistic in Europe.” Cahill said the “continued uncertainty over Brexit and the effects of a second Covid-19 wave [are] still looming large”.

The UK’s budget watchdog last month predicted that unemployment would peak at 7.5 per cent next year, putting around 2.6m people out of work.

It rose to 4.8 per cent in the three months to September from below four per cent before the pandemic.

The Bank of England has made similar forecasts, predicting the worst downturn in 300 years. Bank chief economist Andy Haldane has said Covid-19 vaccines improve the outlook, although another BoE policymaker last week was less optimistic.

Nonetheless, the UK’s finance and business services sector’s hiring outlook improved to a score of two for the first quarter of 2021. The change highlights a divide in the UK economy between stay-at-home workers in unscathed sectors and face-to-face service providers.

By Harry Robertson

Source: City AM

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