Chief Economist’s Weekly Briefing – Mixed feelings

It’s usually the time of year when Christmas cheer spreads far and wide. But we seem to be ending 2020 on a mixed note. Growth continues to falter and signs of deeper damage to the economy are surfacing. All our hopes are pinned on the vaccine and that we swerve a Brexit left hook.

Stalling. The pace of the UK recovery slowed further in October, with output rising just 0.4% in the month. Look past the contribution from schools and health, the rest of the economy grew a meagre 0.2%.  Not great when GDP remains 8% below its pre-COVID peak. Manufacturing and construction were bright spots, supported by growth in car production and house building respectively. But progressively tighter COVID restrictions weighed on service sector activity. A painful 14% drop in accommodation and food service output is particularly concerning, coming ahead of England’s Lockdown 2.0. And this is widely believed to have contributed to an outright contraction in GDP in November.

Counting Losses and Wins. While one may brand 2020 as uniformly bad, there’s more variability under the surface. April and May were the worst for all, and some industries shrank by up to 90% compared to the previous year. Business size didn’t matter this year. What mattered was what you produced. For chemists or online retailers, demand worked in their favour. But for the accommodation and food services, revenue still lurks below the pre-lockdown levels despite the overall economic recovery. For information and communications, this has been like any other year given the ease of wfh setups. Here’s hoping 2021 is more uniformly decent, or even good.

Sluggish. Such has been the state of UK trade in the three months to October 2020. This was evident in the trade surplus, which decreased by £6.5 billion. Import of textile and fabrics (masks and surgical gowns) saw a massive surge causing net imports to grow by £14.3 billion. But exports grew by less (£7.8 billion) due to the listlessness in the markets in the Covid-era. The unpredictability of a Brexit deal has only exacerbated uncertainty. The fate of the economy will become clearer in the months to come as the dust around these issues settles!

Elevated. The UK public’s expectations for inflation remained largely unchanged in November (vs August), both over the near-term as well as five-year horizon. Despite this year’s trend of moderation in prices, inflation expectations remain relatively high, 2.7% over the next year and 2.9% over the longer term. What’s driving this? Brexit related uncertainty, but more importantly the unavoidable COVID-related reconfiguration of the UK economy. What does mean for the interest rate outlook? A majority expect the rates to remain unchanged over the next year, but a close second is a rise in the rates, albeit by a little!

Still vulnerable. There’s a lot to be hopeful and thankful for as the year ends. The number of COVID cases in England continued to decrease in the week ending 5th December. Hospital admissions fell to 13.7 per 100,000 people from 14.2 the previous week. Vaccines –created in record time – are being administered to people who need it the most. This is fantastic but the situation remains fragile. Only 4-7% of the population have developed antibodies, that means everyone else vulnerable to infection. In November, 19% of adults experienced some form of depression –almost double the pre-pandemic levels. The ride is not over yet, hang in there.

Mixed bag. As lockdown rules around the country diverge, businesses located in different parts of the UK face different trading conditions. Based on the latest wave of the Business Impact of Coronavirus survey, during the second half of November England had the lowest share of single site businesses currently trading (76%), with the North East of England having the lowest share among the English regions (66%). Northern Ireland had the largest proportion of businesses trading (89%). Across the UK 47% of businesses experienced a decrease and 7% an increase in turnover compared with normal expectations for this time of year.

Resilience and risks. Amidst the pandemic it’s easy to forget the jaw-dropping sums involved in helping to limit the economic fallout. Businesses had borrowed £20bn by this time last year. In 2020, with the support of government guarantees, that figure has quadrupled to £80bn. The Bank of England highlighted the importance of that in its latest Financial Stability Review. But also pointed out that they can’t mitigate risk entirely. Further disruption from Covid and adjusting to new trading arrangements with the EU loom large. Another feather in the cap of financial resilience is banks’ capital positions – their cushion against unexpected losses – are healthy, clocking in at three times the level in the run-up to the financial crisis.

Larger and longer. As expected, the ECB increased the Pandemic Emergency Purchasing Programme (PEPP) by Eur500bn, totaling Eur1.85 trillion. The PEPP will be extended until “at least spring 2022”. The ECB unveiled several measures to ensure continued favourable lending conditions. The Pandemic longer-term refinancing operations (PELTROs), the ECB’s emergency funding scheme, will continue into 2021 whilst the targeted longer-term refinancing operations (TLTROs) will be extended by 12 months to June 2022. In addition, the Asset Purchasing Programme, the “traditional” QE programme, will continue to run at Eur20bn per month, open-ended. Continued monetary accommodation should help preventing a de-anchoring of inflation expectations in the Euro area.

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