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BoE’s Haldane says UK recovering ‘faster than anyone expected’

Britain is recovering faster than anyone had expected from the economic impact of COVID-19, but businesses need better incentives and access to finance to invest in technology, BoE’s chief economist Andy Haldane said.

“UK GDP had, by July, recovered around half of its Covid-related losses, rebounding further and faster than anyone expected,” Haldane said in an article for the Mail on Sunday newspaper written jointly with the former chairman of John Lewis Partnership, Charlie Mayfield.

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Britain’s central bank said in a policy statement on Thursday the economy was recovering faster than it had forecast in August, though prior to that several policymakers had struck a more cautious tone than Haldane.

Haldane said he was writing in his capacity as chairman of a government commission to boost economic productivity.

Reporting by David Milliken; Editing by Chris Reese

Source: UK Reuters

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UK economy grows 6.6 per cent in July as recovery continues

The UK economy grew 6.6 per cent in July as it bounced back from the coronavirus lockdown of the spring, setting the stage for rapid GDP growth in the third quarter, official figures showed.

The growth was slower than the 8.7 per cent expansion seen in June, however, and was from a low base after the historic collapse in output in the second quarter.

“While it has continued steadily on the path towards recovery, the UK economy still has to make up nearly half of the GDP lost since the start of the pandemic,” said Darren Morgan, director of economic statistics at the Office for National Statistics (ONS), which released the figures.

In July, the UK’s all-important services sector grew 6.1 per cent. It makes up around 80 per cent of the economy. The sector was boosted by the reopening of pubs and restaurants at the start of the month.

Production, which includes manufacturing, expanded by 5.2 per cent. But construction shone, growing a huge 17.6 per cent after expanding by 23.6 per cent in June.

Nonetheless, July output in the massive UK services sector remained 12.6 per cent lower than in February despite the quick GDP growth. And rising coronavirus cases could derail the recovery.

Chancellor Rishi Sunak said: “Today’s figures are welcome.” But he added: “I know that many people are rightly worried about the coming months or have already had their job or incomes affected.”

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“That’s why supporting jobs is our first priority.” He flagged the Eat Out to Help Out scheme, VAT cuts and the £1,000 retention bonus for jobs brought back from furlough.

UK economy 11.7 per cent smaller than in February

Some parts of the services sector were running at almost full capacity. Output in wholesale and retail trade rebounded to higher than its February level. Financial and insurance activities and real estate were only slightly off.

But other sub-sectors lagged far behind, highlighting the unequal effect of the coronavirus crisis.

Output in accommodation and food services grew strongly but was nonetheless only running at 40 per cent of its February level in July. Arts, entertainment and recreation was also well off.

Tej Parikh, chief economist at the Institute of Directors business group, said: “The economy continued its rebound in July, but the hard part is still to come.

“The recovery will start to hit speed bumps into the end of the year. Local lockdowns and new restrictions heap uncertainty on businesses, and demand remains limited in many areas.”

The ONS said the UK economy was 18.6 per cent bigger in July than it was at its April low.

Yet in July UK GDP remained 11.7 per cent below its level in February, before the full impact of the coronavirus pandemic.

GDP recovery ‘likely to stall’

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said growth was likely to be strong in August and September.

He said it would be “assisted by far greater than usual numbers of people staying in the UK during the summer holiday season” and “the full reopening of schools”.

But he said: “Thereafter, the recovery likely will stall if, as looks likely, new Covid-19 infections continue to rise.” Tombs said that would keep “people working from home and avoiding consuming services that require close human contact”.

Coronavirus cases have risen sharply in recent days. The number of daily new cases has consistently been just below 3,000 this week, whereas they were consistently half that the week before.

In response to the spike, the government has limited the number of people who can meet socially to six.

Yael Selfin, chief economist at auditing giant KPMG, said: “The risk of a second wave of infections in the autumn could derail the nascent recovery and put the economy into a lower gear.”

By Harry Robertson

Source: City AM

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Bank of England: Downturn better than feared but UK faces longer recovery

The Bank of England has significantly improved its prediction for the path of the UK economy this year, but said the recovery will take longer than initially expected.

The Bank’s projection, released today, said the UK economy was likely to shrink by 9.5 per cent this year and then grow by nine per cent in 2021.

It is still more optimistic than many forecasts, but predicts a slower rebound that the Bank expected in May. Then, it said GDP would shrink by 14 per cent this year and grow by 15 per cent in 2021.

Threadneedle Street’s latest monetary policy report predicted UK GDP would not recover its pre-coronavirus size until the end of 2021. It had previously expected it to recover by “the second half of 2021”.

It came as the Bank left interest rates on hold at their record low level of 0.1 per cent. And it left its bond-buying target at £745bn, both in 9-0 votes among the monetary policy committee (MPC).

The MPC flagged that rates could stay lower for longer, however. It changed its guidance to say it “does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the two per cent inflation target sustainably”.

The pound jumped in the wake of the decision. It was last up 0.4 per cent at $1.317.

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Bank of England: 2020 better than expected but 2021 worse

Bank of England governor Andrew Bailey told journalists: “We have had a strong recovery in the last few months.”

“The pace of recovery in the data that we’ve had since May puts the economy ahead of where we thought it would be in May.” This was largely due to the lockdown being eased earlier than expected, the Bank said.

It predicted that unemployment is likely to touch 7.5 per cent this year and then drop to six per cent in the fourth quarter of 2021.

That would put 2.5m people out of work but is an improvement on May’s rough estimate of eight per cent unemployment on average in 2020 and seven per cent in 2021. It means unemployment would stay lower than during the financial crisis.

But unemployment is set to stay higher for longer, at 4.5 per cent by the end of 2022 compared to May’s expectation of a fall to four per cent for the year on average.

The Bank warned that much of the economy was still suffering. “Household spending that involves high levels of interactions with others fell the furthest and has recovered only partially,” it said.

Bailey said the recent rebound in growth is not “necessarily a good guide to the immediate future”. He said elevated concerns about coronavirus are likely to constrain spending. And heightened business uncertainty would likely weigh on investment.

Some analysts said the Bank was being too optimistic about the UK economy. Yael Selfin, chief economist at KPMG, said that “the cloud of a second wave and further localised lockdowns” pose a threat to the Bank’s forecasts.

Negative interest rates in ‘toolbox’ for the first time

The Bank today said that negative interest rates have been added to the ‘toolbox’ of possible measures for the first time. But Bailey said: “We’re not planning to use them at the moment.”

Negative interest rates mean banks who hold their spare money in the Bank’s virtual vaults would have to pay money to do so. The idea is that this forces them to lend their extra cash out to the benefit of the economy.

“I would say that this is, I think, the first time the Bank of England has said definitively, yes they’re in the toolbox,” Bailey said. “We don’t have a plan to use them at the moment but they are in the toolbox.”

Bailey said the Bank had concluded that they could be useful in some scenarios. It came to a different conclusion in the financial crisis, but Bailey said: “10 years is a long time in monetary policy. That was a different crisis.”

However, as negative interest rates squeeze banks’ profits, the Bank could face opposition from lenders over the move.

Analysts had expected the MPC to leave monetary policy on hold. Rain Newton-Smith, CBI chief economist, said: “It’s unsurprising that the monetary policy committee kept its powder dry this time around.”

She said there were “early signs of a recovery gathering pace”. But she added: “Downside risks to the outlook are still looming large, so a ‘wait and see’ approach seems like the right one at present.”

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said it was a “missed opportunity” to support the economy.

“The recovery in consumers’ spending could have been reinforced today by targeted action to get borrowing costs down,” he said.

Banks strong enough to take Covid hit

Britain’s lenders are strong enough to keep giving out loans and take a big hit from during coronavirus, the Bank of England said in a new financial stability report that was also published today.

It said banks are likely to lose £80bn through bad loans. But it said they “have buffers of capital more than sufficient to absorb the losses”.

Since the financial crisis exposed banks’ weak balance sheets, central banks such as the BoE have forced them to keep more cash at hand.

The Bank’s financial policy committee (FPC) said UK lenders would need to take around £120bn of credit losses to deplete their capital. And that would take a GDP hit much bigger than the Bank expects.

Capital buffers have helped banks keep lending to companies during the coronavirus pandemic.

The FPC said companies could well face a “cash-flow deficit” of up to around £200bn. That is more than double its normal size, than Bank said.

So far, banks have lent about £70bn to cash-strapped firms, the BoE said. Deputy government Jon Cunliffe said it was in banks’ own interests to continue to support lend to hard-hit firms.

“The financial sector needs to continue to support the economy,” he said.

Harry Robertson

Source: City AM

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UK economy suffers unprecedented slump amid coronavirus lockdown

The UK economy suffered an unprecedented blow in April as the coronavirus lockdown choked off demand, according to a closely watched gauge which slumped to its lowest level since records began.

The IHS Markit/Cips composite purchasing managers’ index (PMI) crashed to a reading of 12.9 in April. This was the worst score since the survey began more than 20 years ago.

April’s reading was even worse than analysts’ dire predictions and well below March’s record low of 36. A score of below 50 indicates contraction. The worst score seen during the financial crisis was 38.1.

The data was “eye-watering,” said Ruth Gregory, senior UK economist at Capital Economics. She said the lockdown “has pushed the economy into a recession of unprecedented speed and depth”.

The unprecedented collapse in the PMI highlights the devastation coronavirus is wreaking on the UK economy. It is one of the most up-to-date economic indicators.

Lockdown measures, which were last week extended until early May, have caused businesses to close and demand to evaporate as people stay at home and lose their jobs.

Chris Williamson, chief business economist at data firm IHS Markit, said the PMI reading was consistent with UK GDP falling at a rate of seven per cent per quarter.

Such an economic contraction has not been seen since World War II. Yet many groups, such as the UK’s budget watchdog, predict a steeper fall in GDP.

Coronavirus batters UK services sector

Britain’s enormous services sector bore the brunt of the pain. The coronavirus lockdown sent the sector to its worst month since records began in 1996.

“Business closures and social distancing measures have caused business activity to collapse at a rate vastly exceeding that seen even during the global financial crisis,” said Williamson.

More than 80 per cent of UK services providers reported lower business activity in April. Duncan Brock, group director at Cips, the Chartered Institute of Procurement & Supply, said this “compared with 38 per cent during the worst single month of the global financial crisis”.

Around half of all firms’ purchasing managers reported lower numbers of staff in April.

However, numerous respondents said this was due to their firm using the government’s job retention scheme that pays 80 per cent of a worker’s wages if they temporarily stop working, or “furloughed”.

The government has rolled out a number of very large support schemes for the UK economy that seek to limit the damage from coronavirus.

Dire figures will spark debate among policymakers

Yet April’s PMI data will raise questions about whether support is getting to businesses quickly enough. There have been a number of complaints about the coronavirus business interruption loan scheme (CBILS) for example.

Williamson said the dire performance of the UK economy in April will also spark debate about the length of the lockdown.

The cabinet is reportedly split about when to start lifting stay-at-home orders and letting people go back to work.

“Hawks” such as chancellor Rishi Sunak and cabinet secretary Michael Gove arguing that the economy needs to be returned to normal quickly.

On the other side are the “doves”. These include Prime Minister Boris Johnson and health secretary Matt Hancock, who fear the damage a second wave of infections could do.

By Harry Robertson

Source: City AM

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UK GDP could fall by 30 per cent in second quarter

Chancellor Rishi Sunak has reportedly told ministers to expect GDP to fall by as much as 30 per cent between April and June.

The government’s draconian social distancing measures will be reviewed next week, with an extension considered a formality.

The coronavirus lockdown has already begun to bite the UK economy, with activity in the manufacturing sector hit with its largely monthly decline in March for almost a decade.

Claims for Universal Credit also increased fivefold last month, according to the Department for Work and Pensions.

The Times reports today that the chancellor has told ministers that GDP could fall by “25 per cent to 30 per cent” in the second quarter.

Sunak has yet to give a public estimate of how much Treasury is expecting GDP to fall due to the Covid-19 outbreak, however some banks are predicting up to 25 per cent.

When asked about the predicted drop in GDP today, the Prime Minister’s official spokesman declined to comment.

Some members of cabinet are reportedly urging for the lockdown to be eased next month among fears of long-lasting damage to the economy.

One minister told The Times: “It’s important that we don’t end up doing more damage with the lockdown.

“We’re looking at another three weeks of lockdown and then we can start to ease it.”

The UK has recorded the fourth most coronavirus deaths in the world, after Italy, Spain and France.

Italian Prime Minister Giuseppe Conte announced last week that the country would stay in complete lockdown until May 3, meaning the measures will be in place for at least two months.

Spain has moved to ease some of its tougher restrictions, such as closing down construction sites, but remains in a lockdown similar to the UK.

By Stefan Boscia

Source: City AM

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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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Positive UK GDP helps the Pound against the Euro

UK GDP figures gave the Pound a lift against the Euro on Friday morning coming out at 1.8% which was an improvement compared to the previous quarter. However, the increase in Sterling was limited as the figures came out as expected.

One of the main reasons for the increase in GDP for the first quarter of 2019 was because this was the period when the Brexit deadline was due to take place on 29th March. Huge amounts of firms were stockpiling goods in the event that the UK would leave the European Union and so the figures were arguably inflated so this lift in GDP could be relatively short-lived.

With the Brexit deadline now being extended until the end of October we could also potentially see another strong third quarter for UK GDP if the same idea of stockpiling happens once again. However, as we are now into the second quarter of 2019 I think this could be a rather worrying period when the figures are released in a couple of months.

The other bit of good news on Friday was the release of UK Industrial and Manufacturing data which came out a lot higher than expected.

After having a difficult week for the Pound vs the Euro it managed to stabilise at just above 1.16 towards the end of Friday’s trading session.

Next week brings with it little in terms of economic data for the UK so eyes will turn towards what is happening on the continent. On Tuesday morning German inflation figures are due out and they have been falling recently and are predicted to fall once again.

As Germany is the Eurozone’s leading economy the impact of negative data will often negatively affect the value of the Euro so Tuesday could be a good short term opportunity if you’re looking at buying Euros in the near future.

Indeed, if inflation falls a central bank will often consider cutting interest rates in order to combat the problem. Therefore, if inflation continues to decrease then this could put pressure on the European Central Bank to consider what to do in terms of monetary policy when it meets next month.

By Tom Holian

Source: Pound Sterling Forecast

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Brexit stockpiling helps UK economy bounce back in first quarter of 2019

Experts hailed the UK economy’s “resilience” today as it rebounded in the first quarter of 2019 with growth of 0.5 per cent, according to the Office for National Statistics (ONS).

That is more than double the low 0.2 per cent rate of quarterly expansion that capped 2018, ONS data showed today.

Meanwhile UK GDP increased 1.8 per cent from the same quarter a year ago, better than the 1.4 per cent growth recorded in the previous quarter.

“The strength in quarterly growth is in part due to the low December 2018 monthly growth in the base period, which makes the current period look stronger in comparison,” the ONS said.

GDP fell 0.3 per cent in December but was followed by rises of 0.5 per cent in January and 0.2 per cent in February before a 0.1 per cent real growth contraction in March.

However, services sector growth slowed to 0.3 per cent, though UK production industries picked up, with manufacturing providing a 2.2 per cent boost.

Brexit stockpiling delivers rush of growth

The ONS said “it is difficult to unpick” the part Brexit stockpiling has played in pushing up manufacturing output, but others said it made a “sizeable contribution” to growth.

Stockpiling pushed the industry to a 13-month high in March, according to a closely-followed index.

PwC’s senior economist, Mike Jakeman, said it reflects companies’ preparations to avoid the consequences of a no-deal Brexit in time for the UK’s original 29 March departure date.

“With warehouses bulging, we now expect inventories to subtract from growth in the coming months,” he warned.

“Manufacturing output was clearly the star performer on the output side of the economy as it markedly outstripped quarter-on-quarter growth in the services sector,” added Howard Archer, chief economic adviser to the EY Item Club.

He said stockpiling “provided a major boost” to the sector.

Construction grew just one per cent while the services sector saw a slowdown to 0.3 per cent growth, though industrial production rose 1.4 per cent compared to the previous quarter.

Consumer spending grew 0.7 per cent quarter on quarter as purchasing power and a record employment rate both helped the economy.

Business spending creeps back up after Brexit uncertainty

Meanwhile business investment rose for the first time in five quarters, growing 0.5 per cent. Archer called it a “very welcome development”, but noted that it was still 1.4 per cent lower year on year due to Brexit uncertainty.

PwC’s Jakeman said the data showed the economy has offered “considerable resilience to acute political uncertainty”.

“The return to growth in the first quarter was not because any certainty was provided by politicians,” he said.

“Instead, firms are likely to have spent more on contingency planning and perhaps decided that some investment decisions could be delayed no longer.”

GDP boost a flash in the pan?

Tej Parikh, senior economist at the Institute of Directors, warned the spur from stockpiling could mean the quarter’s growth is “a flash in the pan”.

“Some businesses brought activity forward early this year in preparation for leaving the EU, so higher stocks and earlier orders have artificially bumped up the growth numbers,” he said.

“In Q2 many firms will be keen to run down their Brexit caches, which will drag on economic growth. Keen consumers also played a key role in lifting sales in the first quarter, but barring temporary boosts due to weather, households will overall remain cautious in the months ahead.”

KPMG’s chief economist, Yael Selfin, concurred, adding: “The worry is that a significant part of that was related to stockpiling activities ahead of an expected Brexit at the end of March, rather than a sign that businesses were finally moving on with their investment plans thanks to renewed confidence.

”Looking ahead, the unwinding of potential stockpiling effects in Q1 is likely to see a weaker Q2, leaving the UK economy only marginally stronger than expectations at the start of the year.”

By Joe Curtis

Source: City AM

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Britain’s economy has defied gloomy Brexit predictions, Moody’s says

  • Moody’s says the impact of Brexit on UK gross domestic product is “more benign than the pre-referendum forecasts.”
  • The credit ratings agency’s chart shows actual GDP vs pre-referendum predictions.
  • Doomsday hasn’t shown up … yet.

An analysis of Britain’s creditworthiness conducted by Moody’s, the debt rating service, shows that the impact of Brexit on UK gross domestic product is “more benign than the pre-referendum forecasts.”

The chart — which shows UK GDP indexed back to 2015 — features actual GDP growth in green, alongside pre-EU referendum forecasts from the Office for Budget Responsibility and Her Majesty’s Treasury. Actual GDP is only one point away from the pre-vote forecast; but the OBR and HMT forecasts are far wide of the mark.

Colin Ellis, Moody’s chief credit officer EMEA and co-author of the Brexit Monitor, told Business Insider, “Although Brexit’s impact on UK GDP has been relatively muted since the 2016 referendum, it has become more pronounced in recent months. That said, it is still more benign than forecasts before the UK voted to leave the European Union and is in line with our pre-referendum baseline scenario of a modest but manageable economic impact.” Moody’s rates UK credit as “Aa2 stable.”

The chart will be greeted with cheer by Leavers, who believe that the government and the media are conducting a “Project Fear” campaign against Brexit by suggesting that leaving the EU will wreak economic havoc on Britain. As evidence, they cite Bank of England Governor Mark Carney’s belief that the risk of a no-deal Brexit was “uncomfortably high.” His remarks have helped drive the pound below USD$1.30 for the first time in about a year.

Moody’s said that while the UK’s progress has been surprisingly strong so far, the full effects of Brexit have yet to kick in. “Business activity appears to be weakening alongside recent deterioration in consumption indicators,” its presentation said.

Source: Business Insider UK