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UK economy facing “capital destruction” event as furlough ends

Major sectors across the UK equity market are facing a “capital destruction” event in the next few months as the real impact of coronavirus feeds through to their bottom lines, Smith & Williamson Investment Management’s Enterprise Fund team has warned.

The furlough scheme has protected a number of businesses, including many in the retail and leisure industries, which have been some of the worst impacted by the coronavirus.

However, as the scheme is wound up, many businesses will not be able to return to trade as normal. Mark Swain, co-manager of the Smith & Williamson Enterprise Fund, said the impact of this was about to be felt across several industries.

“Markets have held up relatively well in the face of coronavirus, including in the UK, but capital destruction is coming now,” he said.

“We are at the tipping point as the furlough scheme comes to an end, and unfortunately coronavirus is going to create ‘survivor’ companies and remove a lot of weaker ones.”

Swain, who manages the Enterprise fund alongside co-manager Mark Boucher, said various sectors are seeing long-running trends – both positive and negative – being accelerated by the pandemic.

“Some companies are benefiting from this and will continue to do so and some, particularly those relying on cheap and abundant leverage, no longer have viable business models,” Swain said.

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“Pandemics accelerate existing structural trends, and so this time companies with a strong internet presence are thriving, and those relying on high footfall, or those overburdened with too much debt for example, are really struggling.”

Swain said as a result of the nature of the crisis, the sectors in the eye of the storm, including retail and travel and leisure, were polarising, with winners likely to benefit from better business models and healthier balance sheets, but also a decline in competitors.

“If you look at retail, for example, a lot of capacity is coming out of that market and the better operators – those that are good at retailing and have a strong internet presence – are going to prosper.”

By contrast, the duo expect the “zombie” companies being kept afloat by the furlough scheme to face an uphill struggle for survival.

“If you are a business that is currently not open because of Covid-19 restrictions then the future looks very bleak, and there are large swathes of struggling companies across the UK that will not get through this,” he said.

By Peter Wilson

Source: IFA Magazine

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Pound lingers above 10-day lows as Brexit talks enter crunch week

The British pound held above a 10-day low on Monday as investors cut their holdings with British and European negotiators scrambling to salvage post-Brexit trade talks.

British Prime Minister Boris Johnson said on Friday there was no point in continuing talks and it was time to prepare for a ‘no-deal’ exit when transitional arrangements end on Dec. 31 while the European Union said Britain needed to give ground.

EU chief negotiator Michel Barnier had been due in London for talks with his British counterpart David Frost this week. Instead, they will now speak by telephone on Monday to discuss the structure of future talks.

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With only 11 weeks to go before the end of the transition period, Berenberg economists estimate the probability of a hard Brexit at as much as 50% with both sides taking steps to soften the blow on their respective economies.

“We thus have to watch carefully the risk that neither side blinks and, in the end, the two sides finally part ways without a deal,” they said in a note.

Against a broadly steady U.S. dollar, the pound edged 0.2% higher at $1.2936 hovering just above a Oct. 7 low of $1.2860 hit on Friday. Against the euro, the pound weakened 0.3% to 90.49 pence.

Latest positioning data for the week ending Oct. 13 showed investors have been steadily reducing their holdings in the British pound.

While the overall picture showed a small reduction in net short pound positions, the overall picture was worrying with hedge funds cutting both their bought and sold bets.

In derivative markets, one-month implied volatility gauges for the pound firmed above 11%, the highest levels in more than a month, pointing to rising uncertainty.

Source: UK Reuters

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UK sees largest jump in redundancies since 2009

The United Kingdom’s jobless rate witnessed a higher increase than expected in the three months to August, intensifying anxieties about the imminent end to the government’s £50bn ($65bn, €55bn) Covid-19 work-protection scheme.

The Office for National Statistics (ONS) found that unemployment rose to 4.5 per cent in the quarter, its highest reading in more than three years and higher than analyst projections of around 4.3 per cent.

The body’s deputy national statistician Jonathan Athow said: “Since the start of the pandemic there has been a sharp increase in those out of work and job hunting but more people telling us they are not actively looking for work.”

Athow added: “There has also been a stark rise in the number of people who have recently been made redundant.”

Indeed, redundancies witnessed a record jump of 114,000 from the previous quarter to 227,000, their highest level since 2009 and the global financial crisis.

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Before the novel coronavirus outbreak began and governments around the world imposed lockdowns, the unemployment rate in Britain was at its lowest point in almost 50 years.

The latest reading of 4.5 per cent is still below the jobless rate seen throughout the relatively prosperous pre-GFC 2000s.

As the October 31 deadline of the government’s seven-month-long furlough scheme approaches, there is growing concern that unemployment could skyrocket, with the economic consequences of the nationwide lockdown finally coming home to roost once government support is lifted.

The Bank of England has forecast that the jobless rate will reach 7.5 per cent by the end of the year.

Chancellor of the Exchequer Rishi Sunak reaffirmed his determination to stem the rise in job losses. The 40-year-old politician hopes to achieve this with a more targeted job protection scheme, which will cover the wages of employees whose businesses have been forced to close as a result of government restrictions.

With the recent launch of a three-tier Covid-19 rules system for England, many workers in parts of the north could continue to find their wages subsidised by the state.

By Lawrence Gash

Source: Capital

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UK economy stumbles in August, setting back recovery from COVID-19 slump

UK economy struggled to grow in August, setting back its recovery from the coronavirus lockdown, and finance minister Rishi Sunak was due to announce more help to slow a rise in jobs losses as a second wave of COVID-19 infections hits.

Gross domestic product rose by 2.1% from July, official data showed, not even half the median forecast in a Reuters poll of economists and the slowest increase since the economy began to recover in May from a record slump.

Much of what growth there was in August was down to a one-off government restaurant subsidy programme.

Finance minister Rishi Sunak was due to announce later on Friday a plan to support jobs in businesses that may be ordered to close to slow a resurgence of COVID-19 infections. Economists said the data also raised the chance of more stimulus from the Bank of England.

“The sharp slowdown in growth indicates that the recovery may be running out of steam, with output still well below pre-crisis levels,” Suren Thiru, head of economics at the British Chambers of Commerce said.

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“The increase in activity in August largely reflects a temporary boost from the economy reopening and government stimulus, including the Eat Out to Help Out Scheme, rather than proof of a sustained ‘V’-shaped recovery.”

More than half of the economy’s growth in August came from accommodation and food, where output surged by 71.4% thanks to the government’s one-month meals subsidies, more people taking holidays in Britain and the easing of lockdown restrictions.

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Kate Nicholls, head of the UK Hospitality trade body, said new COVID-19 restrictions introduced in September had weighed on the hospitality sector again.

“Today’s figures show our economy has grown for 4 consecutive months, but I know that many people are worried about the coming winter months,” Sunak said.

“Throughout this crisis, my single-focus has been jobs – protecting as many jobs as possible, and providing support for people to find other opportunities where this isn’t possible. This goal remains unchanged.”

Sunak’s new jobs plan would subsidise two thirds of the wages of workers in pubs, restaurants and other businesses forced to close to slow the spread of the coronavirus, the Times reported.

His wage subsidy plan for workers across the economy expires at the end of this month and will be replaced by less generous support for employers, raising fears of a jump in job losses.

Friday’s data showed the economy – which shrank by more than any other Group of Seven nation in the April-June period – remained 9.2% smaller than its pre-the pandemic level.

The huge services sector grew by 2.4% from July, half the pace expected by economists. Growth in the smaller manufacturing and construction sectors also fell short of forecasts.

Bank of England Governor Andrew Bailey said on Thursday that risks to the economy were “very much on the downside” and the central bank was ready to use its policy firepower.

Dean Turner, an economist at UBS Global Wealth Management, said recent surveys had pointed to the economy slowing in September which could be made worse by local COVID-19 restrictions on activity.

“Sluggish progress is likely to encourage the Bank of England to increase its bond buying program at its November meeting,” he said.

Britain is also facing the risk that it fails to secure a trade deal with the European Union with negotiations still ongoing ahead of the Dec. 31 expiry of the country’s post-Brexit transition period.

Reporting by William Schomberg and Andy Bruce

Source: UK Reuters

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UK economy 7-10% below pre-Covid levels

Bank of England governor Andrew Bailey on Thursday said UK economic output in the third quarter was between seven and ten per cent below pre-pandemic levels.

While this was far better than at the start of the pandemic, Mr Bailey warned there was still an unprecedented level of uncertainty and that the risks to the economy are still to the downside.

“We think, in the third quarter, on average, activity in the economy will probably (have been) somewhere between seven and ten per cent below pre-Covid levels,” he said in an online conference.

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“And while that number was obviously much better than we had in the spring, it’s still… produced a very big recession.” Recent official data have shown that the UK economy shrank by a fifth in the second quarter which coincided with Britain being in lockdown.

Mr Bailey added that the economy faced the prospect of an “uneven” recovery as the British government battles a second wave of rising infections with tighter restrictions, particularly on the hospitality sector.

“When you look at areas of activity in the economy that require more close social interaction, it’s no surprise that they have been the weakest to recover,” he said.

“Other areas of the economy have actually recovered very strongly – and a few areas of the UK are ahead of where they were pre-Covid.”

Source: The Business Times

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Covid: Nearly 500,000 redundancies planned since crisis began

British employers planned 58,000 redundancies in August, taking the total to 498,000 for the first five months of the Covid crisis.

Some 966 separate employers told the government of plans to cut 20 or more jobs, compared with 214 last August, a more than fourfold increase.

However, the figures were down from the levels seen in June and July, which both saw 150,000 job cuts planned.

The figures were released to the BBC after a freedom of information request.

The economy bounced back in the summer after the unprecedented economic downturn earlier in the year, as workers were urged to return to the office, and customers encouraged to spend more by schemes such as the Eat Out To Help Out restaurant vouchers.

However a number of big businesses from many of the hardest-hit sectors, such as retail and restaurants, announced big redundancy plans, including Debenhams, DW Sports, Marks & Spencer, Pret a Manger, currency exchange company Travelex, and WH Smith.

The 58,000 positions put at risk in August was considerably lower than previous months, but it was still more than 150% up on the previous year.

“There was a sense of optimism in August, we were starting to see more spending and more activity, there were hopes for a quick recovery,” said Rebecca McDonald, senior economist at the Joseph Rowntree Foundation think tank. “That seems a lot less likely now.”

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A government spokesperson said: “Supporting jobs is an absolute priority, which is why we have set out our plan for jobs to protect, create and support jobs across the UK.

“We are helping employees get back to work through a £1,000 retention bonus, creating new roles for young people with our £2bn Kickstart scheme and doubling the number of frontline work coaches.”

How will the end of the furlough scheme affect redundancies?

The big summer rush may have been partly caused by firms preparing to cut staff before the end of the furlough scheme on 31 October.

That scheme, where the government pays part of workers’ wages when their employers cannot, has helped to reduce the number of pandemic-related redundancies. A total of 9.6 million jobs were furloughed.

But given that most redundancy processes take months to complete, firms planning significant dismissals by the end of furlough would have had to notify government in the summer.

The Chancellor, Rishi Sunak, unveiled a new employment support scheme last month, where government will subsidise the pay of employees who are working fewer than their usual hours due to reduced demand.

By Ben King

Source: BBC

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UK GDP forecast to shrink by around 10 per cent in 2020

Economic forecasters expect UK GDP to contract by around 10 per cent in 2020 following a tightening of coronavirus restrictions.

New research published today by PwC has forecast a contraction of between 11 and 12 per cent for the year, while S&P Global has predicted the UK economy will contract by 9.7 per cent.

Both firms anticipate GDP to rebound going into 2021, but uncertainty caused by Covid-19 means the UK’s recovery could take several years.

PwC believes there could be growth of around 10 per cent or 4 per cent next year, depending on the spread of the virus and the measures needed to control it.

If Covid-19 remains relatively contained, the economy could return to pre-lockdown levels by the end of 2021, the report said. However, further outbreaks and lockdowns could see any recovery last until mid 2023.

Meanwhile, S&P said the economy was on course to grow by 15 per cent in the third quarter, and could rebound by as much as 7.9 per cent next year.

Slow recovery

However, the report said the UK would not reach pre-pandemic levels until 2024 at least. It cited the tightening of measures and local lockdowns, as well as an “abrupt switch to a bare-bones trade agreement with the EU in the new year” as reasons for the lower forecast.

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“Despite the promising start, many hurdles are ahead on the path to recovery, and we now see the economy slightly worse off over the next three years, compared with our previous forecast. Most importantly, COVID-19 is proving hard to beat,” S&P Global Ratings senior economist Boris Glass said.

Most sectors are predicted to return to growth in 2021, according to PwC, including retail and hospitality.

However, in its report it noted that there may be regional variation due to the sectoral mix across regions.

“Regions which have seen targeted lockdown measures are more likely to experience bigger economic impacts, whereas London may recover more quickly as it was less impacted by the drop in output in 2020,” the report said.

Senior economist at PwC, Jing Teow, said: “Uncertainty over the economic outlook and job security, as well as the desire for more precautionary savings, mean that it will take time to recover to normality, even once economies are fully open, although a recovery in 2021 could be buoyed if there is a vaccine.”

He added: “For businesses, too, uncertainty over the outlook, potential overcapacity – especially in structurally challenged sectors such as air travel and tourism – as well as higher debt levels as a result of necessary crisis survival measures, could impact innovation and future productivity growth.

“However, with more money available once recovery has been achieved, a deals-led recovery is likely, with investment opportunities available for savvy businesses.”

By Michael Searles

Source: City AM

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Sunak warned winter economy plan not enough to stop wave of job losses

Rishi Sunak’s winter economy plan will not be enough to stop a wave of redundancies unless hard-hit industries such as hospitality and the arts receive further support, the government has been warned.

After cancelling the budget, Sunak announced a series of measures on Thursday, including a new wage subsidy scheme, to support jobs. They received cautious applause from several major trade bodies and business lobby groups.

But the UK chancellor also faced accusations of abandoning millions of freelancers and whole sectors of the economy such as nightclubs, live music venues and theatres, that cannot access wage subsidies because they are not allowed to reopen.

Sunak’s plans included a long-awaited replacement for the furlough scheme that will see the government and employers share the cost of paying wages.

July’s VAT cut for hospitality – from 20% to 5% – will be extended to the end of March, while struggling businesses will get longer to pay back government loans.

Dame Carolyn Fairbairn, director general of the UK’s leading business lobby group the Confederation of British Industry (CBI), praised Sunak for “bold steps” that she said would preserve hundreds of thousands of jobs through the winter. She insisted that 2021 could be a year of “growth and renewal” as a result.

Adam Marshall, director general of the British Chambers of Commerce, said the plan was a “shot in the arm” for businesses.

But the measures were not met with universal optimism. The Institute of Directors, which represents business leaders who will be making hiring and firing decisions over the coming months, said it was “not yet clear how much the job support scheme will help hard-pressed firms hold onto staff”.

The IPPR thinktank said the time taken to come up with the plan had already cost thousands of jobs and the measures did not go far enough.

UK coronavirus job losses: the latest data on redundancies and furloughs
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IPPR’s executive director, Carys Roberts, said the plan “does not support businesses enough to prevent layoffs, and will be cold comfort to firms that are fundamentally viable but can’t operate at all due to local or sector restrictions.”

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Hospitality has been hit particularly hard by the pandemic and multiple trade bodies had warned earlier this week that a quarter of the UK’s 100,000 pubs, bars and restaurants could close, with the loss of 675,000 jobs, unless they were given sector-specific support.

The sector includes thousands of businesses, including small city-centre pubs and nightclubs, that are unable to reopen or are not permitted to do so, and are therefore unable to make use of wage subsidies.

Speaking after Sunak’s announcement, which included an extension of the VAT cut on food, UK Hospitality’s chief executive, Kate Nicholls, said the chancellor needed to provide more support for a sector that was “not out of the woods”.

“Things were looking grim for our sector yesterday and we were desperately hoping for some good news,” she said.

“The chancellor has given us some reason to be positive again, but we urge him to engage with the trade on specific measures to keep people in work.

“We need government to go further in hospitality, recognising the greater restrictions imposed upon us, and pick up the full cost of unworked hours,” she said.

“This would be a relatively low cost for huge reward for our workforce. Full support to sustain people in their jobs during what could be a pretty bleak winter for hospitality would be a great step forward.”

Sunak was also accused of letting freelancers slip through the cracks, particularly those working in creative industries such as theatre, where venues remain closed and are therefore also unable to tap into government wage subsidies.

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“The job support scheme may help some employers, but it will not help to save theatres that are still not able to open due to government restrictions and are already making thousands of workers redundant,” said Philippa Childs, head of creative industries union Bectu.

“The army of freelancers and self-employed who make up the backbone of the UK creative industries face being excluded from support once again as the chancellor continues to turn a deaf ear to their hardship,” she said.

“Without more support the UK creative sector will not get through the winter, we desperately need a targeted plan to save jobs and ensure that one of the most productive parts of our economy can survive the winter.”

Conservative MP Julian Knight, who chairs the culture select committee, said workers in the industry had been left facing a “grim future”.

Three million people who were left out of the self-employment income support scheme (SEISS) will also not benefit from the new measures, according to law firm Blick Rothenberg.

“For a Conservative government which is meant to support entrepreneurship, it appears illogical to continue ignoring such a large number of workers,” said director Robert Salter.

SIBA, the trade body for independent breweries, said its members had not had access to business grants and warned that the continued exclusion of alcohol from the VAT cut would further hurt them and the “wet-led” alcohol-focused pubs they sell to.

By Rob Davies

Source: The Guardian

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Coronavirus: UK economy slumped by a fifth in second quarter

The UK economy suffered a record-breaking collapse in the second quarter, slumping 19.8 per cent as the coronavirus pandemic hammered demand and left swathes of the economy unable to operate.

Gross domestic product shrank by 19.8 per cent in between April and June, the Office for National Statistics said, slightly less than the initial 20.4 per cent estimate but still more than any other major advanced economy.

The fall in GDP was the biggest since ONS records began in 1955, with output slumping to its lowest level since 2003. Britain’s economy had already shrunk 2.5 per cent in the first quarter.

The ONS said that the UK’s economy shrank more in the first half of 2020 than any other G7 nation.

Output has rebounded in recent months but the recovery looks to be fading with rising coronavirus cases and forecasts of a jump in unemployment as the government scales back job support.

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“The bulk of the pain of the second quarter’s slump in GDP had been borne by the government rather than households and businesses,” said Capital Economics’ Ruth Gregory.

“But with the recovery already flattening off, fiscal support fading and the full scale of the fallout in unemployment yet to be felt, that will change in the second half of 2020,” she added.

Households saved a record 29.1 per cent of their income in the three months to June, the data showed, compared to 9.6 per cent in the first quarter.

The increase in savings came as consumers were unable to spend in many shops and restaurants during the lockdown, while many incomes were supported by the furlough scheme, which comes to an end next month.

“Of course, all this backward-looking news is less important than the timelier data which has suggested the rapid rebound phase has already come to an end in September,” said Gregory.

“The renewed Covid-19 restrictions will probably mean that GDP stagnates in the fourth quarter, leaving economic activity marooned 5.5 per cent short of its pre-crisis level. And the risk now is that renewed containment measures send the recovery into reverse.”

Source: City AM

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No-deal Brexit could hit UK economy three times as hard as coronavirus

Failure to reach an agreement with the EU in post-Brexit trade talks could hit Britain’s economy three times harder in the long term than coronavirus, a think tank has warned.

Queues at the border, shortages of fresh food and medicine as well as more “hassle” travelling to the continent are also possible, according to the UK in a Changing Europe group.

A report by the organisation, based on modelling with the London School of Economics, said the impacts of coronavirus may mitigate or obscure the impact of a no-deal exit.

But it warned that not forming an agreement with Brussels would have a significant impact in the long term.

The authors wrote: “The claim that the economic impacts of Covid-19 dwarf those of Brexit is almost certainly correct in the short term.

“Not even the most pessimistic scenarios suggest that a no-deal Brexit would lead to a fall in output comparable to that seen in the second quarter of 2020.

“However – assuming a reasonably strong recovery, and that government policies succeed in avoiding persistent mass unemployment – in the long run, Brexit is likely to be more significant.

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“Our modelling with LSE of the impact of a no-deal Brexit suggests that the total cost to the UK economy over the longer term will be two to three times as large as that implied by the Bank of England’s forecast for the impact of Covid-19.”

The transition period, which kept the UK aligned to the EU’s single market and customs union rules to allow trade to flow smoothly after Brexit, expires at the end of the year unless both sides agree to an extension – something Boris Johnson has ruled out.

Trade deal talks between the two sides are continuing, but the Prime Minister has set a deadline of October 15 for an agreement to be reached, otherwise he has said he will simply walk away from the negotiating table.

Professor Anand Menon, director of the UK in a Changing Europe, said: “While the Prime Minister said no deal is a ‘good outcome’ our report shows that it may lead to significant disruption and will have a significant negative economic impact.

“As significant will be the political fallout of no deal, particularly with the UK and EU, but also inside the UK, particularly Northern Ireland, and internationally too.”

Source: iTV