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Bank of England’s Mark Carney says infrastructure investment needed to boost growth

Bank of England governor Mark Carney has said more public investment in infrastructure and higher corporate spending is needed to boost the UK’s struggling economy.

Speaking to the House of Lords’ economic committee, Carney also said he expects interest rates to remain low for the foreseeable future as structural factors such as weak productivity weigh on the UK and other economies around the world.

Carney said these ultra-low rates – the UK Bank rate is currently at 0.75 per cent – meant borrowing to spend was appropriate to boost the economy.

“The positive of a low interest rate environment is it does add fiscal capacity,” he said, “so debt servicing costs are expected to be low for a while.”

“This is an environment in which the right infrastructure, the right corporate investment projects make sense and will be necessary in order to ultimately get us out of this situation,” he said.

Carney’s intervention will cheer Prime Minister Boris Johnson, who today gave his official approval to the controversial High Speed 2 rail link and said he would appoint a minister to oversee the project.

Johnson told parliament: “You know this country is being held back by our inadequate infrastructure.”

Earlier today Christine Lagarde, Carney’s counterpart at the European Central Bank, also called on governments to get spending to boost the Eurozone economy.

Lagarde said: “Monetary policy cannot, and should not, be the only game in town.”

Carney’s appearance in front of the Lords committee was the last of his eight years at the helm of the BoE. He will hand over to former Financial Conduct Authority chief and Bank veteran Andrew Bailey on 16 March.

Carney also addressed the UK’s long-running productivity crisis, which has seen output per hour worked – a key driver of economic growth – effectively flat-line since 2008.

He said that in recent years productivity had been held back by low investment due to Brexit uncertainty, raising the prospect that it could recover somewhat in the coming years.

However, he said there are signs that productivity growth has settled at a significantly lower rate than its pre-crisis trend.

Carney said if this is true, “it’s a good time to pass on the reigns to my successor as the disinflationary pressures in this economy are even greater than we expected”.

His warning echoes comments by former BoE deputy governor Sir Charlie Bean who told City A.M. this week that wage stagnation caused by weak productivity could undermine belief in capitalism.

Offering the Lords some of his thoughts on the UK’s productivity slowdown, Carney said poor infrastructure was one cause.

He also said that “the skills gaps” in the country and “the cluster effects” of modern economies were important factors, by boosting some regions at the expense of others.

By Harry Robertson

Source: City AM

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UK businesses expect strongest output growth since September 2018 – CBI

UK businesses predict the strongest rebound in output in more than a year over the next three months, after a weak end to 2019, adding to expectations of a post-election pick-up in the economy, a survey showed on Sunday.

The Confederation of British Industry said its monthly output expectations gauge – based on responses to its surveys of manufacturers, retailers and the service sector – rose to +12 in January from +1 in December, its highest since September 2018.

But the measure estimating output over the past three months remained very weak at -16, up only a bit from December’s reading of -20, the weakest since the 2008-09 financial crisis.

“It’s great to see business confidence improve but it remains to be seen whether this will feed through to activity,” Rain Newton-Smith, the CBI’s chief economist, said.

Last month the CBI predicted the economy would grow by 1.2% this year, slowing from 1.3% in 2019.

Britain formally left the European Union at 2300 GMT on Friday, starting an 11-month transition period during which Prime Minister Boris Johnson wants to negotiate a trade deal.

While Johnson aims to avoid tariffs on goods, businesses that are part of complex cross-European supply chains fear new border checks will make them uncompetitive.

“The government must work quickly to establish a future relationship with the EU that can deliver prosperity across the whole economy, as well as refocusing its attention on important domestic priorities,” Newton-Smith said.

Reporting by David Milliken

Source: UK Reuters

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50% of UK firms believe Brexit will Boost business

51% of UK businesses believe geopolitical tensions, including Brexit, will have a positive effect on their business in 2020, according to new research released today by trade finance provider Stenn.

The study, which spoke to 250 senior executives at medium-large sized businesses in the UK conducted prior to the December general election, revealed that despite the prolonged uncertainty, businesses remain upbeat with 29% believing this positive effect will be ‘significant’.

While it’s unlikely a UK-EU trade deal will be in place until the end of the year, 56% of firms believe their company’s import business will grow in 2020, on average by 9%.

Similarly, in terms of exporting services, 57% of UK firms believe revenue will grow this year, on average by 11%.

Breaking this down, 15% of firms believe their export business will grow 11-15% in revenue, and 11% expect a growth of between 21 and 25%.

“The UK is on the cusp of leaving the EU and as we edge closer to the January 31st exit date the country is in an unprecedented stage,” says Dr. Kerstin Braun, President of Stenn Group. “As 2019 was marked by business uncertainty, 2020 will be the year that companies forge ahead with new growth strategies.

Looking across industries, growth for imports and exports is felt highest across financial and professional services.

The study showed 29% of firms in this sector believe their import of services will grow up to 25% in revenue this year, and a further 20% believe it will grow 26-50%.

“The general election provided businesses with much needed clarity surrounding Brexit and it’s wholly encouraging that even prior to the result, businesses have been feeling positive about the impact it will have. Businesses have been given the assurance they need to plan ahead to a post-Brexit era,” says Braun.

When looking at exports, 30% of financial and professional services firms also believe their export business will grow up to 25% in revenue, and 27% predict it will grow 26-50%.

In the manufacturing industry, 41% of senior executives believe their import business will grow up to 25% this year, and 32% believe their export business will also grow between 1-25%.

By comparison, just 12% of wholesalers predict the same high growth of between 26-50% in their import business, and 15% expect equal growth in export. Wholesalers are divided on whether their export business will grow or shrink between 1-25% this year (both 27%).

“While a Brexit trade deal probably won’t be agreed until the end of the year, businesses largely remain confident that both their import and export business activity will grow in 2020,” says Braun. “We know UK firms are looking to non-EU markets.

According to government data, as of October, exports to non-EU countries were growing twice as fast than those to the bloc, largely driven in part by the US and China, with total trade with the USA surpassing £200 billion for the first time.

The UK’s non-EU export business grew by 4.2% in October, in comparison to a rise of 1.6% to EU member countries.

“Some of this rebound will be the result of the expected upswing in global trade, but we can strongly say that UK companies are ready to get back to business,” says Braun.

Source: Pound Sterling Live

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UK braced for weak growth and further interest rate cuts in 2020

Consensus forecasts show UK economic growth of around 1.1% in 2020, down from 1.3% last year, with Britain likely to remain trapped in a low interest rate environment post-Brexit, according to Dr John Ashcroft.

Consensus forecasts show UK economic growth of around 1.1% in 2020, down from 1.3% last year, leaving Britain likely to remain trapped in a low interest rate environment post-Brexit, according to Dr John Ashcroft, author of The Saturday Economist.

‘Further talk of one interest rate cut in the UK and further cuts in the US as growth slows (possibly below 2% this year) suggest long rates will remain under pressure,’ Ashcroft said.

‘We remain trapped on Planet ZIRP [Zero interest-rate policy].’

UK Chancellor reassures firms about ‘no alignment’ with EU rules post-Brexit

Business leaders were eager for clarification after the UK Chancellor Sajid Javid said that there would be ‘no alignment’ with EU regulations in a post-Brexit trade deal with the EU last week.

‘Manufacturers like common standards on products and components in many markets,’ Ashcroft wrote in a blog post. ‘Common standards guarantee quality, generate lower unit costs, economies of scale and improve productivity.’

‘The Chancellor claimed the Treasury would not lend support to manufacturers favouring EU rules,’ he added. ‘That just does not make sense.’

However, the Chancellor has since toned down his rhetoric, which initially shocked British industry, with Javid clarifying that divergence from EU rules will only occur if it is in the UK’s economic interest.

FTSE 100 bogged down by uncertainty

The blue-chip index has had a mixed start to the new year, with it climbing more than 130 points in the first half of January, only to see those early gains eroded, with it tumbling a little over 2% this week.

The FTSE remains bogged by uncertainty on economic growth and the direction of sterling, according to Ashcroft.

A clear direction on Brexit with a planned exit at the end of the January this year saw the pound bounce to test the $1.34 level only to fall back to $1.31.

‘A test and proof of the $1.30 level may now continue for some time,’ Ashcroft added.

The FTSE 100 is trading at 7628 as of 10:15 (GMT) on Friday.

By Aaran Fronda

Source: IG

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Business leaders call for clarity on post-Brexit trade talks

UK business leaders have urged Boris Johnson to spell out his plans for post-Brexit trade talks with the European Union.

A new poll for the Institute of Directors (IoD) found that just 35 per cent of firms believe the existing Withdrawal Agreement between the UK and the EU gives them the “certainty needed to make planning and investment decisions”.

Meanwhile a majority of businesses – 55 per cent – said they would “only be able to make planning and investment decisions with certainty when we understand our future relationship with the EU”.

The findings come after Chancellor Sajid Javid angered some business groups by warning companies that there will be no alignment with the EU after Brexit – and calling on firms to instead “adjust” to new regulations.

He told the Financial Times: “There will not be alignment, we will not be a rule taker, we will not be in the single market and we will not be in the customs union – and we will do this by the end of the year.

“There will be an impact on businesses one way or the other, some will benefit, some won’t.”

But Allie Renison, head of Europe and trade policy at the IoD, said: “To give businesses any chance of being ready for the new relationship by the end of 2020, the Government needs to be as clear as possible about what its intended destination is.

“With directors clear that negotiations with the EU are the priority right now, clarity is crucial for so many companies.

“Just calling it a free trade agreement gives no indication of the balance between alignment and divergence, which is essential for firms to do any kind of advance planning. Directors need to know what the Government’s priorities for market access are for the EU.”

More than 60 per cent of the 952 company directors surveyed by the IoD meanwhile said striking a post-Brexit deal with the EU was “more important” to their company than agreeing a pact with the United States.

Just a fifth (20 per cent) said a deal with the US and other countries outside of the EU was “important” to their firm.

The Times reported on Tuesday that Johnson will attempt to increase his influence in trade talks by publishing plans for parallel discussions with the EU and the US in the coming weeks.

According to the paper, the Prime Minister will deliver a speech and publish a series of documents after Britain leaves the EU on 31 January setting out Britain’s formal negotiating mandate for both sets of talks.

A third batch of papers will meanwhile outline plans for agreements with other countries.

Under the terms of the current Withdrawal Agreement, the UK will enter a transition period after it leaves on 31 January, during which time it will stay broadly aligned with EU rules and standards.

Johnson has vowed not to extend that period beyond the end of this year.

Number 10 said: “We are free to begin discussions with countries around the world from February 1. We are ready to begin discussions with the EU from February 1.

“The EU have various processes to go through before they are ready to sit down and have those discussions with us. The EU have agreed formally to complete this process by December 2020, that is what we would expect to be achieved.”

The European Commission, meanwhile, will not sit down to agree its negotiation demands until 25 February.

Spokesman Eric Mamer said: “This, we know, will take some time, which is why we have said we will start negotiations as quickly as we can, but it will certainly not be before the end of February, beginning of March.

“This is not a slowing down or speeding up of the process.

“This is simply the nature of the institutional process and the consultations that need to take place before the negotiation directives can be formally adopted.”

By Matt Honeycombe-Foster

Source: HOLYROOD

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UK confidence signs grow as Bank of England nears rate decision

British households grew more confident about their finances and a measure of house prices rose by a record amount for January, according to surveys which added to other signs of a brightening mood in the economy since last month’s election.

Ten days before the Bank of England decides whether to cut interest rates, the surveys published on Monday suggested that some of the uncertainty that has weighed on the economy has lifted after Prime Minister Boris Johnson’s big election win.

IHS Markit, a data firm, said its Household Finance Index rose to a one-year high of 44.6 in January from 43.2 in December, chiming with other sentiment surveys from both businesses and consumers that have shown an increase in optimism.

Earlier on Monday, property website Rightmove said asking prices for houses increased in January at a record pace for the month, up 2.3% compared with December.

Still, BoE officials are likely to want to see whether the cheerier mood has translated into actual spending as they weigh up whether to cut rates on Jan. 30.

“What data there has been released capturing the post-election period suggests that the outcome has had a positive effect on consumer and business sentiment,” analysts at RBC said in a research note.

“Our view remains that a majority of (BoE officials) will prefer to wait for evidence of how the economy is responding to the outcome of December’s election and the removal of near-term Brexit uncertainty before deciding on a policy move.”

Money markets currently price in a roughly 65% chance that the BoE will cut interest rates on Jan. 30, although economists in a Reuters poll of economists published last week are more skeptical. Sixty out of 68 forecast no change to rates.

Investors will be watching Friday’s “flash” IHS Markit/CIPS purchasing managers’ indexes carefully for an early indication of the economy’s health this month.

Retail sales data last Friday showed an unexpected drop in December and investors will be eyeing Tuesday’s official labor market data for November carefully.

“Latest survey data certainly show some post-election bounce for UK households, with the headline index up to a one-year high and house price expectations at their strongest since October 2018,” Joe Hayes, an economist at IHS Markit, said.

Weakening inflation had helped to ease pressure on living costs, the survey showed.

However, a separate index measuring households’ expectations of future financial wellbeing slid back into negative territory in January, as gauges of perceptions of workplace activity and income weakened.

The proportion of households expecting a BoE rate cut “at some time” increased to 23.1%, while those expecting a rate hike in the next three months went down slightly to 19.5%, IHS Markit said.

Editing by William Schomberg and Andrew Heavens

Source: UK Reuters

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UK economy sees worst growth since 2012

The UK economy grew at its slowest rate since 2012 in November, meaning an interest rate cut from the Bank of England (BoE) could be on the cards soon.

UK GDP grew at 0.6% in the 12 months to November, the Office for National Statistics said today (13 January), down from 1% in October, representing the slowest annual growth rate for more than seven years.

The figures come after Monetary Policy Committee member Gertjan Vlieghe told the Financial Times he would “need to see an imminent and significant improvement in the UK data to justify waiting a little longer” to cut rates.

Sterling continued its decline on the news, with a 0.6% decline on Monday (13 January) seeing the currency drop below $1.30 once more. That buoyed the stockmarket, though, with the blue-chip FTSE 100 index rising 0.5% and FTSE 250 advancing 1%.

The economy declined by 0.3% in November alone, well below consensus expectations of zero month-on-month growth.

This was likely due to businesses bringing activity forward to before the 31 October Brexit deadline, said Andrew Wishart, UK economist at Capital Economics.

Upwards revisions of 0.2% and 0.1% to September and October’s figures respectively left growth in the three months to November at 0.1%, meanwhile.

However, November’s sharp decline “nonetheless leaves the economy on course to contract by 0.1% in Q4 as a whole”, Wishart said.

Rob Kent-Smith, head of GDP at the ONS, said growth in construction was offset by “weakening services and another lacklustre performance from manufacturing”.

“Long term, the economy continues to slow, with growth in the economy compared with the same time last year at its lowest since the spring of 2012,” he added.

Interest rate cut more likely

The figures fuelled speculation an interest rate cut could be closer than previously thought, particularly allied with Vlieghe’s comment.

Last week, both BoE Governor Mark Carney and fellow MPC member Silvana Tenreyro spoke positively about the possibility of a rate cut sooner rather than later.

Michael Saunders, one of two who voted for a cut at the last meeting, is set to speak on Wednesday.

Matthew Cady, investment strategist at Brooks Macdonald, said markets are currently pricing in close to a 50/50 chance of a 25 basis point cut to the UK’s current 0.75% Bank Rate.

“The weaker GDP print today puts beyond doubt that the next Bank of England meeting at the end of January is going to be a ‘live’ meeting,” said Cady.

With the BoE having already cut both growth and inflation forecasts and the next Brexit deadline of 31 January looming, Cady said “UK investors will need this monetary and fiscal support to fall back on, and any disappointment here could be difficult for markets to swallow”.

However, Wishart said a weak UK economy is “old news”, meaning today’s GDP figures “won’t seal an interest rate cut”, despite noting “it will be a close call”.

“In normal times, the MPC would already have cut rates. But it held off to see if the general election produced a revival in sentiment,” Wishart said.

“What really matters is what happens in the data for January. At the moment, we think the MPC may hold off from cutting rates.”

By David Brenchley

Source: Professional Adviser

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UK economic growth weakest since 2012 in November

Britain’s economy grew at its weakest annual pace in more than seven years in November, raising expectations that the Bank of England will cut interest rates later this month.

Monday’s official figures showed the economy in November – before last month’s decisive election win for Prime Minister Boris Johnson – was just 0.6% larger than a year before, the weakest expansion since June 2012.

The November figure represented a slowdown from annual growth of 1.0% in October, after that month’s growth pace was revised up from previously reported data.

Output in November alone shrank by 0.3%, the biggest drop since April. Economists polled by Reuters had expected unchanged output for the month.

The weak data, reflected the uncertainty of last autumn about Brexit and the election, said John Hawksworth, chief economist for accountants PwC.

“It is too early to say for sure if economic momentum will pick up in the new year now the political situation is clearer, but our latest survey of the financial services sector with the CBI does suggest some boost to optimism since the election,” he said.

Sterling fell and government bond yields headed lower as financial markets priced in a 50% chance the Bank of England will cut interest rates on Jan. 30, after its next meeting.

The BoE predicted in November that the economy would eke out limited growth in the fourth quarter, before recovering in 2020. That forecast assumes progress towards a post-Brexit trade deal and a reduction in U.S.-China trade tensions.

In the past week, BoE Governor Mark Carney – who steps down in March – and two other rate-setters, Silvana Tenreyro and Gertjan Vlieghe, said a rate cut could be needed if those assumptions prove over-optimistic.

Two more policymakers, Michael Saunders and Jonathan Haskel, already support a rate cut.

However, there have been some signs that business confidence has revived since Johnson’s Conservatives won an unexpectedly large majority in the Dec. 12 election.

That victory put Britain on course to leave the European Union on Jan. 31 with a transition deal. However, Johnson has only given himself 11 months to reach a long-term trade deal with the EU, and some businesses fear they could face tariffs and other obstacles to trade with the EU from 2021.

Looking at the three months to November, which smoothes out some volatility, the economy grew by 0.1% versus poll forecasts for a 0.1% fall, due to unexpected upward revisions to September and October output, which the ONS said reflected late survey returns.

“Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing,” ONS statistician Rob Kent-Smith said.

Editing by William Schomberg, Larry King

Source: UK Reuters

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Confidence rises in UK economy after election, but will it last?

Prime Minister Boris Johnson’s emphatic election win last month has led to a burst of optimism among British businesses and consumers, according to some early signals from the economy.

Johnson’s success in securing a large parliamentary majority, which ended a period of deadlock in Westminster, means Britain is on course to leave the European Union on Jan. 31 and start an 11-month, no-change transition period.

It also ended the prospect of a shift to the left in British politics. The opposition Labour Party had proposed nationalising key industries, taking stakes in many other companies and more state intervention.

However, some economists are sceptical about whether the pickup in confidence will translate into a meaningful boost to growth, which has lost momentum since the Brexit referendum in 2016 and slowed to a crawl in late 2019.

Some businesses worry that Johnson’s refusal to contemplate asking for an extension to the Brexit transition period – even if Britain has not sealed a new trade deal with the EU before the end of 2020 – risks creating another “cliff edge.”

Below are some of the early signals that show an improvement in optimism after the Dec. 12 election.

CFOs CHEER UP

Accountants Deloitte said on Friday that 53% of chief financial officers were more optimistic about their companies’ prospects than three months previously, the highest share since records started in 2008.

The Deloitte survey was conducted entirely after the election and chimed with the business expectations component of the IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) – a closely watched gauge of British business – which hit its highest level in December since September 2018.

The PMI was up markedly from a preliminary reading for the month that was based only on responses before the election, indicating a clear improvement in sentiment after the vote.

Nonetheless, the overall picture of the economy from the PMI remained consistent with no growth in the fourth quarter.

CONSUMERS MORE CONFIDENT

The public became much more upbeat about the prospects for Britain’s economy after the election, according to a survey commissioned by payment card company Barclaycard.

The proportion of people who said they were confident about the economy’s future rose 10 points to 41%, the highest since March 2017, according to the survey of 2,000 people conducted by Longitude Research from Dec. 17 to 19.

However, in recent years analysts have doubted how much consumer confidence in the economy really matters.

Britons have been among the most downbeat about their country’s economic prospects of all European Union countries, according to European Commission data, but their spending has continued to power the economy.

Conversely, while the Barclaycard survey showed an increase in optimism among consumers, the British Retail Consortium reported dismal Christmas trading for major store chains.

JOBS BOOST?

British employers increased hiring of permanent staff from job agencies last month for the first time in a year, a survey from the Recruitment and Employment Confederation (REC) showed, another sign of higher business confidence.

The survey was conducted Dec. 5 to Dec. 17, straddling the election result.

“With a new government in place and the path ahead looking more predictable, some businesses have decided that they have waited long enough,” REC chief executive Neil Carberry said.

Reporting by Andy Bruce

Source: UK Reuters

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Financial sector contributed record level of UK tax in 2019

Britain’s financial services sector contributed a record £75.5bn in tax in 2019, according to a new report on behalf of the City of London Corporation, amounting to 10.5 per cent of all government tax receipts.

The report, carried out by accounting giant PwC and released today, highlighted the value of financial services to the UK economy. Across the country the sector employs around three per cent of the UK workforce but contributed 11.6 per cent of all UK employment taxes thanks to significantly higher average salaries.

The figures will also put pressure on ministers to consider the importance of financial and professional services in a post-Brexit trade deal with the EU.

Catherine McGuiness, policy chair at the City of London Corporation, told City A.M.: “We mustn’t allow our enthusiasm to strike an early trade agreement either with the EU or with other partners around the world to lead us to a position where we accept a very flimsy trade agreement when it comes to services.”

The £75.5bn figure was only a slight increase from the £75bn collected in the year to March 2018, reflecting a challenging year for the sector. It was a notable slowdown from the £2.9bn growth in tax contributions seen between 2017 and 2018.

PwC’s report showed that of the 2019 figure, £33.4bn was paid by companies directly. The other £42.1bn was paid by employees through income tax and customers through levies such as VAT.

The amount of corporation tax financial services firms paid fell by 9.5 per cent year on year, meaning the sector paid less than it did in 2008. McGuiness said this was a “worry” and said it was due to the lower profitability of firms. Global trade tensions, political uncertainty and persistently low interest rates have created challenging conditions for much of the sector.

Barney Reynolds, head of financial regulation at law firm Shearman & Sterling, said he was positive about the trade negotiations with the EU. He said the City is “not only important to the UK, it’s an important global asset”.

Henry Parkes, senior economist at the Institute for Public Policy Research, said the report suggested the UK economy is “overly hooked on the finance sector”, however, and needs to “diversify”.

McGuinness said the City was about to face another challenging year. “We obviously will lose some EU-facing business but we need to make sure we make up for it in other ways,” she said.

By Harry Robertson

Source: City AM