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Coronavirus to hit UK economy harder than financial crisis

Business activity crashed at a record pace in March as efforts to contain coronavirus sent the UK economy into a tailspin, preliminary survey data has shown, putting Britain on track for an extreme recession.

The IHS Markit/Cips private sector purchasing managers’ index (PMI) – a gauge of economic performance – plunged to a record low of 37.1 in March from 53 in February. A score of under 50 indicates contraction, meaning the private sector shrank at an unprecedented pace this month.

However, the data was compiled before Prime Minister Boris Johnson yesterday ordered an effective countrywide lockdown to try to halt the spread of the virus, a measure which will dent the UK economy further.

Chris Williamson, chief business economist at data firm IHS Markit, said the March data was consistent with the economy shrinking at a quarterly rate of between 1.5 and two per cent in the first quarter.

Yet he said the lockdown measures mean “this decline will likely be the tip of the iceberg and dwarfed by what we will see in the second quarter”.

“A recession of a scale we have not seen in modern history is looking increasingly likely.”

The overall PMI reading was dragged down by the worst performance on record (IHS Markit has been compiling data since the 1990s) for the UK’s massive services sector in March.

Measures aimed at halting coronavirus caused consumer demand and shop footfall to slump, causing steep downturns for hotels and restaurants and other leisure activities such as sports centres, gyms and hair salons.

Economy to crash despite huge stimulus

The survey data showed that unemployment was falling at its fastest pace since 2009 in March, despite a huge package of measures from the government and Bank of England designed to support businesses.

Chancellor Rishi Sunak has promised the government will pump more than £350bn into the economy and step in to pay the wages of workers who would otherwise be laid off.

The BoE has slashed interest rates to record lows and ramped up its money-printing operations to ensure plenty of credit can reach banks and businesses.

Yet Andrew Wishart, UK economist at Capital Economics, said things are going to get worse for the UK economy.

“The PMI captures the proportion of firms that report a fall in activity, it doesn’t take into account just how poorly each firm is doing,” he said.

“The fact many firms have had to cease trading altogether suggests things could be even worse than the survey suggests. That’s why we are forecasting a 15 per cent fall [annualised] in GDP in the second quarter.”

Despite the dire survey data, the FTSE 100 continued to ride high after the US Federal Reserve pledge to buy an unlimited number of bonds to support markets and the economy.

It was 4.3 per cent higher in morning trading at 5,209. The pound was 1.6 per cent higher against the dollar at $1.172. The dollar has fallen since the Fed announcement.

By Harry Robertson

Source: City AM

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London house prices suffer steepest fall since financial crisis

London house prices fell at their fastest rate since the financial crisis in the third quarter, according to Halifax.

Homes in the capital saw their values sink 1.7 per cent year on year, their worst performance since autumn 2009. Meanwhile south east house prices dropped 1.3 per cent.

UK house prices grew at their slowest rate in six-and-a-half years in the third quarter of 2019, the bank’s house price index showed.

The value of British homes rose just 1.5 per cent year on year in the third quarter, a drop from 1.8 per cent in the previous three months. That is its worst quarterly increase since the start of 2013.

That left the average UK house price at £233,808, a drop from the second quarter average of £234,026.

Quarter to quarter, house prices rose 0.4 per cent in the three months to the end of September, versus a 0.4 per cent decline in the three months to the end of June.

Paul Smith, economics director at IHS Markit, which compiled the data, warned the UK housing market is still “fragile”.

He said Brexit uncertainty is stoking fears for buyers and sellers alike.

“Despite the low mortgage rate environment and rising earnings growth helping to ease affordability constraints, UK-wide house price inflation sank to a six-and-a-half year low,” Smith added.

“We suspect that political and economic uncertainty associated with Brexit continues to weigh on the market. This is especially the case in the south of England, where prices are falling and, in the case of London, at the fastest rate since the height of the financial crisis.”

Still, London house prices still remained above £480,000, almost £160,000 more expensive than prices in the south east, where buyers can expect to pay an average £323,055.

By Joe Curtis

Source: City AM

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UK economy set for slowest growth since 2009 as Brexit nears

British economic growth this year and in 2019 looks set to be the weakest since the country’s last recession, due to a freeze in business investment and weak consumer demand ahead of Brexit, the British Chambers of Commerce forecast on Tuesday.

The business lobby said growth in 2018 was likely to slow to 1.2 percent before inching up to 1.3 percent in 2019, which would be the two weakest years since Britain emerged from recession in 2009 after the global financial crisis.

“While Brexit isn’t the only factor affecting businesses and trade, it is hugely important — and the lack of certainty over the UK’s future relationship with the EU has led to many firms hitting the pause button on their growth plans,” BCC director Adam Marshall said.

Britain’s economy has slowed since the Brexit referendum in 2016 and there is no guarantee that businesses and consumers will retain tariff-free access to European goods when Britain leaves the European Union which is scheduled for March 29.

The BCC said sterling’s weakness against the dollar and the euro was likely to continue to drive inflation, eating into consumers’ disposable income, while business investment was due to contract by 0.6 percent this year and barely grow the next.

Separately, the Royal Institution of Chartered Surveyors predicted that house prices would be flat next year, the first year with no growth since 2012, due to Brexit uncertainty and the inability of many buyers to afford higher prices.

“On the back of this, house price growth at a UK level seems set to lose further momentum, although the lack of supply and a still solid labour market backdrop will likely prevent negative trends,” RICS’s head of policy, Hew Edgar, said.

The number of houses being sold was likely to fall around 5 percent next year, RICS added.

Source: UK Reuters

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UK debt to soar to financial crisis levels over next five years

UK debt could rise to £6.7 trillion by 2023, from £5.1 trillion in 2017, according to new research.

The UK’s debt as a percentage of gross domestic product (GDP) is predicted to rise to nearly 260 per cent of GDP, a level not seen since the financial crisis.

The debt increase is expected to largely come from increased borrowing by companies and households, which are both predicted to borrow at a faster rate than economic growth, the analysis from accountancy firm PwC said.

The government is likely to reduce the size of its debt relative to GDP over the next five years, but even so, the net effect is set to be a gradual rise in the economy’s debt-to-GDP ratio from 252 per cent in 2017 to just under 260 per cent in 2023.

Total debt repayments could rise from a little above £150bn in 2017 to around £250bn by 2023 if interest rates rise two per cent.

Low income households could be hit particularly hard due to rising debt interest payments.

Chief economist at PwC John Hawksworth said: “While the financial crisis led to the private sector deleveraging, we’ve seen a change in behaviour among households and non-financial companies since 2015, when they began to accumulate debt at a faster rate than nominal GDP growth.

“The unusual amount of uncertainty facing the UK economy in 2018-19 due to Brexit, London’s stumbling housing market and the likelihood of further interest rate increases, means a pause in debt accumulation relative to GDP is possible in the short term.

“But if a smooth Brexit transition is agreed with the EU and UK business and consumer confidence recovers, the private sector is likely to resume faster rates of borrowing that could cause the debt stock to rise further relative to GDP.”

Source: City A.M.

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UK recovery is slower than US after Great Depression

A decade on from the financial crisis, the UK economy is now comparatively smaller than the United States was 10 years on from the Great Depression.

Analysis by Sky News of the paths of different recessions throughout UK and US history has found that the UK’s recovery is now comparatively weaker than the American recovery after the Wall Street Crash of 1929.

The UK economy is now 10.8% bigger than it was at the start of the crisis, 42 quarters or 10 and a half years ago.

But while Britain’s recent recession was nowhere near as deep as the Great Depression, where gross domestic product contracted at one stage by 26% (the UK’s slump never exceeded 6%) America’s recovery in the late 1930s means its path has now overtaken Britain’s. At this stage in its recovery, the US economy was around 12.6% bigger than it was in 1929.

The stark comparison underlines how slow the UK recovery has been in the years following 2008. While in most previous recessions the UK bounced back to previous rates of growth, following the financial crisis, trend growth rates have remained weak.

The statistic is the latest evidence of the unprecedented historical nature of the past decade, and stands alongside others showing the longest period of falling real wages and productivity in two centuries. It comes amid growing consternation about the length of time it has taken for the UK to regain economic momentum.

While some blame austerity and government cuts, others think the collapse of the financial system is partly responsible. There are others, too, who think the explanation is weak productivity, which has contributed to low wages and slow gross domestic product expansion.

Either way, there are many, even among the establishment, who wonder whether the economic system is working as it should. In his party conference speech last week, Chancellor Philip Hammond acknowledged that “too many people have experienced years of slow wage growth… And as they look around them, they feel a growing concern that they are falling behind, and that when they voice those concerns the political system doesn’t seem to hear them.”

Speaking to Sky News, the former head of the CBI and the Financial Services Authority, Lord Adair Turner, said: “The capitalist system is not delivering for ordinary people in the way it seemed to be doing before 2007.

“And that’s the crisis which I think is still unresolved. I think people are legitimately angry about it.

“Something has gone deeply wrong with capitalism.

“From 1948 to 2008 even though there were some ups and downs, some tricky periods back in the 1970s, you would find that in every one of those decades real GDP and real wages increased materially. So almost everybody participated in a growth of the economy.

“That deal has broken down. We have a whole load of people who in 2018 have real wages which are below where they were in 2007.”

Source: Yahoo News UK