Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

Tel: 020 8346 3482
Mobile: 07800 608 674
Email: ruthlea@arbuthnot.co.uk

 

From the desk of Ruth Lea

Economic insight and financial comment related to the ever-changing financial landscape and the economic world at large.

Economic Perspectives

30th March 2020

Economic Insight - 30 March 2020

The coronavirus crisis: recession looks all but inevitable
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the coronavirus pandemic and its economic implications:
Press Release

The coronavirus crisis: recession looks all but inevitable

Date: 30th March 2020

The coronavirus crisis: recession looks all but inevitable
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the coronavirus pandemic and its economic implications:
    • The Government’s response to the increasingly severe coronavirus pandemic has been to introduce increasingly strict curbs on activity in order to contain the spread of the disease. These restrictions have already had, and will continue to have, profound implications for business and the economy.
    • It is currently impossible to say how long the current intensity of the restrictions will continue or, indeed, when the worst of the pandemic in the UK will be past. However, Sir Patrick Vallance (Government Chief Scientific Adviser (GCSA)) commented on 12 March that the peak could be “10-14 weeks ahead”, accompanied by a graph suggesting the worst of the outbreak would be over by Autumn 2020.
    • It will be some weeks before the ONS releases any indicators relating to March. But, in the meantime, Markit recently released its flash UK composite output index for March which showed a very sharp decline in activity – to a record low (the series began in 1998). The index implied contraction in 2020Q1. Moreover, Markit expect the decline to accelerate in 2020Q2.
    • Markit’s findings were broadly supported by the latest Bank of England Agents’ summary (for example), which concluded “…the Covid-19 (Coronavirus) pandemic has caused a sudden, rapid decline in economic activity in recent weeks”.
    • Given this information it now seems all but inevitable that the UK will experience a recession in the first half of 2020.
    • Given the enormous unknowns, a scenario-building approach to projecting GDP is probably the most constructive way forward. Assuming that the worst of the outbreak is over by the Autumn and that measures of the Government and the Bank of England are effective in mitigating the worst of the down-turn, it is reasonable to expect the beginnings of recovery in the second half of 2020 after a very sharp contraction in the first half of 2020. We also assume that there will be some significant relaxation of the severe restrictions introduced on 23 March 2020 in April-May. Overall GDP could fall 2?-3% in 2020.
    • This scenario is broadly in line with the MPC’s assessment that there will be a large and sharp reduction in activity, but it should prove temporary.
    Support measures by the Treasury and the Bank of England:
    • The Chancellor has announced four significant packages of measures: in the Budget (11 March, including the Coronavirus Business Interruption Loan Scheme), 17 March (including the Covid Corporate Financing Facility), 20 March (including the Coronavirus Job Retention Scheme) and 26 March (for the self-employed).
    • The Bank of England’s measures include: cuts in the Bank Rate (to 0.25% on 11 March and to 0.1% on 19 March), the introduction of the Term Funding scheme for SMEs and an increase in Bank’s holdings of UK government and corporate bonds by £200bn (to £645bn).
    Internationally:
    • In the US, the Fed cut the target range for Fed Funds again on 15 March (to 0-0.25%) and the Senate and the White House agreed a $2 trillion stimulus package on 25 March.
    • The ECB announced a new Pandemic Emergency Purchase Programme (PEPP), with overall envelope of €750bn, on 18 March.
    The pandemic has had major impact on the markets, including:
    • The equity markets, with the FTSE100 dropping from around 7,500 in the first half of February to a recent low of under 5,000 on 23 March, ending last week at around 5,500.
    • Sterling has weakened since the beginning of the year, reflecting the flight to relative safe havens (including the dollar) as well as the perceived, specific vulnerability of sterling, reflecting the UK’s need to finance its current account deficit.
    • Oil prices have collapsed from $65pb (Brent crude) at the start of the year to $25pb by 27 March, on falling demand, exacerbated by disagreements between Saudi Arabia and Russia.
    Other news:
    • The ONS’s recent releases have related to January and February and are, therefore, not good indicators of where the economy can be expected to go over the next few weeks and months. The labour market data were robust, whilst inflation looks well-contained.
    • The UK-EU Brexit talks are expected to continue in the forthcoming week, by video link.
    Ruth Lea said, “We are in unknown territory. The indicators we have, however, point to a fall in GDP in 2020Q1 and a very sharp contraction in 2020Q2. Recession, therefore, looks all but inevitable. If, however, the worst of the outbreak is indeed over by Autumn and the measures announced by the Treasury and the Bank of England mitigate the worst of the down-turn, the economy should start to recover in the second half of 2020. Under these circumstances, there would be a sharp V-shaped recession. Comparisons are being made with the Great Recession of 2008-2009 and it could well be, indeed it is likely, that the initial contraction in the economy is sharper that in 2008. But the Great Recession was characterised by a highly damaging, protracted U-shaped recession, which we do not expect this time”.

For full story: http://www.dannyshi.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
ruthlea@arbuthnot.co.uk
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
arbuthnot@maitland.co.uk
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:
    • There were two parts to the Budget. Firstly, a package of measures, costed at £12bn, to support public services (including the NHS), individuals and businesses affected by the coronavirus outbreak. Secondly, the new Government’s overall fiscal strategy, including the spending envelope for the forthcoming Comprehensive Spending Review 2020 (CSR).
    • The OBR’s revised economic forecasts were little changed. GDP growth was revised to 1.1% for 2020 (from 1.4% in March 2019, last year’s Spring Statement), 1.8% for 2021 (1.6%), 1.5% for 2022 (1.6%), 1.3% for 2023 (1.7%) and 1.4% for 2024 (new forecast). Significantly, these forecasts did not allow for the economic impact of the coronavirus outbreak.
    • The OBR revised their public finances forecasts. Public sector net borrowing (PSNB) and public sector net debt (PSND) were revised significantly higher, reflecting the substantial increase in public spending. Cumulative extra borrowing for the years FY2020-FY2023 (inclusive) was £95-100bn, whilst debt was projected to be £99bn higher in FY2023, and some 2.9% higher as a % of GDP, than in March 2019. These forecasts did not allow for the Treasury’s package of coronavirus-related measures.
    • The Budget was very expansionary. The estimated net effect of the spending and tax decisions totalled £17.9bn (FY2020), £36.4bn (FY2021), £38.5bn (FY2022), £41.15bn (FY2023) and £41.9bn (FY2024), entirely driven by higher spending (with current spending increases greater than capital spending increases). The net tax measures were contractionary.
    • Spending announcements included extra cash spending for the NHS, security and schools; around £640bn of gross capital investment for roads, railways, communications, schools, hospitals and power networks across the UK by FY2024; and plans to increase public R&D investment to £22bn a year by FY2024.
    • Tax announcements included confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%; freezing fuel and alcohol duties for FY2020; and increasing the NICs threshold to £9,500 in April 2020.
    Other UK news:
    • The Bank of England announced an emergency cut in Bank Rate to 0.25% on 11 March, alongside a new Term Funding scheme for SMEs and a relaxation of capital buffers.
    • GDP was flat (MOM) in January and flat (QOQ) in the three months to January.
    • The underlying total trade (goods and services, excluding precious metals) balance showed a deficit of just £0.5bn in the three months to January.
    The US Fed cut the target range for the Fed Funds rate to 0%-0.25% on 15 March, along with a major stimulus programme.

    EU update:
    • The ECB agreed a package of monetary policy measures to alleviate the impact of the coronavirus outbreak on 12 March, but no cuts in interest rates.
    • The Commission sent a draft legal text, titled the “New Partnership between the European Union and the United Kingdom”, to the 27 EU states on 12 March.
    Ruth Lea said, “The coronavirus measures are to be welcomed. Concerning the rest of the Budget, it was more expansionary than expected, with large projected increases in current as well as capital spending. The OBR forecast significant rises in public sector borrowing and debt compared with March 2019. But, given the huge uncertainties ahead, there are serious risks that these forecasts could be significantly overshot. There is already speculation that the Autumn Statement may need to contain tax rises, though, at this point, it is too early to comment on this issue with any confidence.”

For full story: http://www.dannyshi.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
ruthlea@arbuthnot.co.uk
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
arbuthnot@maitland.co.uk
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:
    • There were two parts to the Budget. Firstly, a package of measures, costed at £12bn, to support public services (including the NHS), individuals and businesses affected by the coronavirus outbreak. Secondly, the new Government’s overall fiscal strategy, including the spending envelope for the forthcoming Comprehensive Spending Review 2020 (CSR).
    • The OBR’s revised economic forecasts were little changed. GDP growth was revised to 1.1% for 2020 (from 1.4% in March 2019, last year’s Spring Statement), 1.8% for 2021 (1.6%), 1.5% for 2022 (1.6%), 1.3% for 2023 (1.7%) and 1.4% for 2024 (new forecast). Significantly, these forecasts did not allow for the economic impact of the coronavirus outbreak.
    • The OBR revised their public finances forecasts. Public sector net borrowing (PSNB) and public sector net debt (PSND) were revised significantly higher, reflecting the substantial increase in public spending. Cumulative extra borrowing for the years FY2020-FY2023 (inclusive) was £95-100bn, whilst debt was projected to be £99bn higher in FY2023, and some 2.9% higher as a % of GDP, than in March 2019. These forecasts did not allow for the Treasury’s package of coronavirus-related measures.
    • The Budget was very expansionary. The estimated net effect of the spending and tax decisions totalled £17.9bn (FY2020), £36.4bn (FY2021), £38.5bn (FY2022), £41.15bn (FY2023) and £41.9bn (FY2024), entirely driven by higher spending (with current spending increases greater than capital spending increases). The net tax measures were contractionary.
    • Spending announcements included extra cash spending for the NHS, security and schools; around £640bn of gross capital investment for roads, railways, communications, schools, hospitals and power networks across the UK by FY2024; and plans to increase public R&D investment to £22bn a year by FY2024.
    • Tax announcements included confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%; freezing fuel and alcohol duties for FY2020; and increasing the NICs threshold to £9,500 in April 2020.
    Other UK news:
    • The Bank of England announced an emergency cut in Bank Rate to 0.25% on 11 March, alongside a new Term Funding scheme for SMEs and a relaxation of capital buffers.
    • GDP was flat (MOM) in January and flat (QOQ) in the three months to January.
    • The underlying total trade (goods and services, excluding precious metals) balance showed a deficit of just £0.5bn in the three months to January.
    The US Fed cut the target range for the Fed Funds rate to 0%-0.25% on 15 March, along with a major stimulus programme.

    EU update:
    • The ECB agreed a package of monetary policy measures to alleviate the impact of the coronavirus outbreak on 12 March, but no cuts in interest rates.
    • The Commission sent a draft legal text, titled the “New Partnership between the European Union and the United Kingdom”, to the 27 EU states on 12 March.
    Ruth Lea said, “The coronavirus measures are to be welcomed. Concerning the rest of the Budget, it was more expansionary than expected, with large projected increases in current as well as capital spending. The OBR forecast significant rises in public sector borrowing and debt compared with March 2019. But, given the huge uncertainties ahead, there are serious risks that these forecasts could be significantly overshot. There is already speculation that the Autumn Statement may need to contain tax rises, though, at this point, it is too early to comment on this issue with any confidence.”

For full story: http://www.dannyshi.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
ruthlea@arbuthnot.co.uk
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
arbuthnot@maitland.co.uk
Download full article

16th March 2020

Economic Insight - 16 March 2020

The March Budget: coronavirus-related support and major increases in public spending
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:
Press Release

The March Budget: coronavirus-related support and major increases in public spending

Date: 16th March 2020

The March Budget: coronavirus-related support and major increases in public spending
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:
    • There were two parts to the Budget. Firstly, a package of measures, costed at £12bn, to support public services (including the NHS), individuals and businesses affected by the coronavirus outbreak. Secondly, the new Government’s overall fiscal strategy, including the spending envelope for the forthcoming Comprehensive Spending Review 2020 (CSR).
    • The OBR’s revised economic forecasts were little changed. GDP growth was revised to 1.1% for 2020 (from 1.4% in March 2019, last year’s Spring Statement), 1.8% for 2021 (1.6%), 1.5% for 2022 (1.6%), 1.3% for 2023 (1.7%) and 1.4% for 2024 (new forecast). Significantly, these forecasts did not allow for the economic impact of the coronavirus outbreak.
    • The OBR revised their public finances forecasts. Public sector net borrowing (PSNB) and public sector net debt (PSND) were revised significantly higher, reflecting the substantial increase in public spending. Cumulative extra borrowing for the years FY2020-FY2023 (inclusive) was £95-100bn, whilst debt was projected to be £99bn higher in FY2023, and some 2.9% higher as a % of GDP, than in March 2019. These forecasts did not allow for the Treasury’s package of coronavirus-related measures.
    • The Budget was very expansionary. The estimated net effect of the spending and tax decisions totalled £17.9bn (FY2020), £36.4bn (FY2021), £38.5bn (FY2022), £41.15bn (FY2023) and £41.9bn (FY2024), entirely driven by higher spending (with current spending increases greater than capital spending increases). The net tax measures were contractionary.
    • Spending announcements included extra cash spending for the NHS, security and schools; around £640bn of gross capital investment for roads, railways, communications, schools, hospitals and power networks across the UK by FY2024; and plans to increase public R&D investment to £22bn a year by FY2024.
    • Tax announcements included confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%; freezing fuel and alcohol duties for FY2020; and increasing the NICs threshold to £9,500 in April 2020.
    Other UK news:
    • The Bank of England announced an emergency cut in Bank Rate to 0.25% on 11 March, alongside a new Term Funding scheme for SMEs and a relaxation of capital buffers.
    • GDP was flat (MOM) in January and flat (QOQ) in the three months to January.
    • The underlying total trade (goods and services, excluding precious metals) balance showed a deficit of just £0.5bn in the three months to January.
    The US Fed cut the target range for the Fed Funds rate to 0%-0.25% on 15 March, along with a major stimulus programme.

    EU update:
    • The ECB agreed a package of monetary policy measures to alleviate the impact of the coronavirus outbreak on 12 March, but no cuts in interest rates.
    • The Commission sent a draft legal text, titled the “New Partnership between the European Union and the United Kingdom”, to the 27 EU states on 12 March.
    Ruth Lea said, “The coronavirus measures are to be welcomed. Concerning the rest of the Budget, it was more expansionary than expected, with large projected increases in current as well as capital spending. The OBR forecast significant rises in public sector borrowing and debt compared with March 2019. But, given the huge uncertainties ahead, there are serious risks that these forecasts could be significantly overshot. There is already speculation that the Autumn Statement may need to contain tax rises, though, at this point, it is too early to comment on this issue with any confidence.”

For full story: http://www.dannyshi.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
ruthlea@arbuthnot.co.uk
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
arbuthnot@maitland.co.uk
Download full article

1234 (2019)(2018)

Comment, at a glance

Markit construction survey shows large fall in activity in March
6 April 2020
The Markit/CIPS construction Total Activity Index dropped to 39.3 in March from 52.6 in February, to signal the steepest fall in construction output since April 2009. Survey respondents overwhelmingly attributed reduced activity to the impact of the COVID-19 pandemic. Emergency public health measures to halt the spread of COVID-19 had led to stoppages of work on site and a slump in new orders.

All three broad categories of construction work recorded a fall in output during March. Civil engineering activity (index at 34.4) saw the steepest rate of decline, followed closely by commercial building work (index at 35.7). Residential activity dropped at a comparatively modest pace in March, with the equivalent index posting 46.6. However, construction companies often commented on an expected slump in house building from stoppages on site amid increasing measures to slow the spread of COVID-19.

Read more
Markit survey shows record fall in services in March
3 April 2020

The Markit/CIPS final UK Services PMI Business Activity Index posted 34.5 in March, below the earlier ‘flash’ reading of 35.7 and down sharply from 53.2 in February. This reading exceeded the previous record low seen at the height of the global financial crisis and signalled by far the fastest downturn in service sector output since the survey began in July 1996. The slump in activity was almost exclusively linked by survey respondents to business shutdowns and cancelled orders in response to the COVID-19 pandemic. The latest survey data were collected 12-27 March.

Markit’s Composite Output Index, a weighted average of the Manufacturing Output Index and the Services Business Activity Index, was 36.0 in March, down sharply from 53.0 in February and the lowest level since this series began in January 1998. The latest reading was below the earlier ‘flash’ reading of 37.1 in March and pointed to a slightly faster reduction in private sector output than that seen at the height of the global financial crisis (index at 38.1 in November 2008).The downturn in overall business activity was driven by a rapid fall in service sector activity (see above), alongside the fastest decline in manufacturing production since July 2012.

Markit noted that the UK economy was “…now almost certain to experience a deep contraction in 2020Q2”.

Read more
New ONS publication on indicators relating to coronavirus
2 April 2020

The ONS has started to compile a release on indicators on the UK economy and society, including information related to the coronavirus (COVID-19). The ONS said the indicators were constructed from rapid response surveys, novel data sources and experimental methods. The publication contained two new indicators: one on business impacts and one on online price changes for high-demand products.

Firstly, the initial results from the new fortnightly Business impact of coronavirus (COVID-19) survey (BICS), for the period 9 March to 22 March 2020, covered business turnover, workforce, producer prices and trade. The main findings were:
·       Of those 3,642 businesses who responded to the BICS, 45% reported turnover that was “lower than expected”.
·       Over a quarter (27%) of responding businesses said they were reducing staff levels in the short term, while 5% reported recruiting staff in the short term.
·       Almost half (46%) of businesses who responded said that they had encouraged their staff had to work from home.
·       The majority of responding businesses reported that the prices they buy and sell at were stable, with 68% of businesses who responded reporting no change to their selling prices and 63% reporting that the costs of buying goods and services generally stayed the same.
·       For those businesses that responded where importing and exporting were applicable, 57% of importers and 59% of exporters reported that trade had been affected by COVID-19.

Secondly, experimental weekly online price indices were presented for several high-demand products (HDPs), for the period 16 March to 29 March 2020, covering items such as long-life food, health and household and hygiene products. The main findings were:
·       Overall, online prices of items in the high-demand products (HDPs) basket have increased by 1.1% over the period week 1 (16 to 22 March) to week 2 (23 to 29 March).
·       Over the same period, most items in the basket saw modest price changes, with 13 out of the 22 items showing price changes between negative 1.0% and positive 1.0%. 

In addition, the publication included the shipping indicators based on counts of all vessels, cargo ships and tankers to the week commencing 16 March 2020 for weekly data and to the 28 March 2020 for the ONS’s daily ships visits data. The ONS concluded that in the week commencing 16 March 2020, both unique shipping visits and total shipping visits increased on a UK level, but some large UK ports saw decreases in unique visits in this period.

Source: ONS, “Coronavirus, the UK economy and society, faster indicators: data as at 2 April 2020”, 2 April 2020.

Read more
Markit survey for UK manufacturing, significant fall in March
1 April 2020

Markit reported today that the outbreak of coronavirus disease 2019 (COVID-19) and subsequent mitigation efforts across the world had led to a substantial contraction of UK manufacturing production during March. The seasonally adjusted IHS Markit/CIPS PMI fell to a three-month low of 47.8 in March, down from 51.7 in February.

Specifically, Markit commented:
·       Output fell at the greatest extent since July 2012 following a similarly severe reduction in intakes of new business. The downturns in output and new orders were widespread, with contractions seen across the consumer, intermediate and investment goods sub-industries.
·       Employment fell for the eleventh time in the past 12 months, and at the fastest rate since July 2009.
·       Restrictions in place around the world in response to the COVID-19 pandemic had a noticeable impact on supply chains during March. Vendor delivery times lengthened to the greatest extent in the 28-year survey history amid reports of input shortages, transport disruption and delays in receiving goods from overseas. International shipping and border delays were also mentioned.

Read more
Current account deficit narrowed in 2019Q4, little changed in 2019
31 March 2020

The current account deficit narrowed significantly to £5.6bn (1.0% of GDP) in 2019Q4, compared with £19.9bn (3.6%% of GDP) in 2019Q3, an improvement of £14.3bn. The deficit in 2019Q4 was the lowest since 2011Q2 when it was £2.3bn (0.6% of GDP). The narrowing in the current account deficit was primarily because of a substantial narrowing in the goods deficit, which was distorted by movements in precious metals (including non-monetary gold (NMG)). The ONS noted that the total trade balance had been more volatile over the course of 2019 than usual. In 2019Q1, the UK recorded substantial imports of non-monetary gold leading to a sharp deterioration in the balance. However, in 2019$, the UK recorded the unwinding of these imports leading to a positive impact on the trade and current account balances.

More specifically in 2019Q4:
·       The goods deficit narrowed to £15.6bn (from £29.9bn in 2019Q3), as exports rose by 9.2% (QOQ), whilst imports rose just 0.6% (QOQ). The narrowing mainly reflected higher exports of precious metals (including non-monetary gold (NMG)).
·       The services surplus slipped to £23.5bn (from £26.7bn in 2019Q3). The surplus on “other business services” fell by £4.5bn to £4.2bn.
·       Taking goods and services together, there was a total trade surplus of £8.0bn, compared with a deficit of £3.2bn in 2019Q3.
·       The primary income (mainly investment income) deficit improved to £7.1bn in 2019Q4 (compared with £9.7bn in 2019Q3). The ONS said the main factor in the narrowing of the primary income deficit was a widening to the surplus on foreign direct investment (FDI). This was mainly because of the value of FDI credits, which increased by £2.5bn to £25.2bn in 2019Q4. Meanwhile, FDI debits only increased £0.2bn to £17.6bn.
·       The secondary account (current transfers) deficit was little changed at £6.4bn (£7.0bn in 2019Q3).

The current account deficit with the EU was little changed at £27.6bn in 2019Q4 (£27.0bn in 2019Q3), whilst the non-EU surplus rose to £22.1bn (£7.1bn in 2019Q3). The overall improvement in the current account, therefore, mainly reflected trade with non-EU countries.


Turning to the annual data, the current account deficit was little changed, recording a deficit of £83.8bn (3.8% of GDP) in 2019, compared with a deficit of £82.9bn (3.9% of GDP) in 2018. On an annual basis, the intra-2019 volatility in the trade of non-monetary gold and other precious metals was not evident, according to the OBS.

More specifically in 2019:
·       The goods deficit narrowed to £129.7bn (from £139.4bn in 2018).
·       The services surplus slipped to £103.8bn (from £109.6bn in 2018).
·       Taking goods and services together, there was a total trade deficit of £25.9bn, compared with a deficit of £29.8bn in 2018, a modest improvement.
·       The primary income (mainly investment income) deficit rose to £30.3bn in 2019 (compared with £27.5bn in 2018). An increase in the surplus on FDI was largely offset by a deterioration in the balance (deficit) on portfolio investment.
·       The secondary account (current transfers) deficit was little changed at £27.5bn (£25.6bn in 2018).

The current account deficit with the EU was little changed at £109.9bn in 2019 (£109.6bn in 2020), whilst the non-EU surplus was also little changed at £26.1bn (£26.8bn in 2018).

Read more
GDP was flat (unrevised) in 2019Q4, grew 1.4% (unrevised) in 2019
31 March 2020

GDP was flat (QOQ) in 2019Q4, to be just 1.1% higher (YOY). The ONS said “…the path of UK GDP growth has been particularly volatile throughout 2019, in part reflecting changes in the timing of activity related to the UK’s original planned exit dates from the EU.” GDP in 2019Q1 is now estimated to have grown by 0.7% (QOQ), compared with 0.6% in the previous estimate, whilst GDP in 2019Q2 is estimated to have fallen by 0.2% compared with a 0.1% fall in the previous estimate.

Within the total, the service sector provided a positive contribution to GDP growth, while output in the production sector fell:
·       Services output was subdued in 2019Q4, when it rose 0.2% (QOQ, revised up). The slowdown in services sector growth was broad-based.
·       Total production output decreased by 0.7% (QOQ) in 2019Q4, the third consecutive quarter of decline. Similarly, manufacturing output fell by 1.1%, also the third consecutive quarter of decline. The ONS commented that this weakness in manufacturing “may partially reflect relatively weaker global GDP growth, as global trade tensions have weighed on economic activity”.
·       Construction output fell 0.1% (QOQ) (revised down).  

Turning to the expenditure components, government consumption and net trade contributed positively to growth, while gross capital formation subtracted from growth and private consumption was flat:
·       Household consumption was flat (QOQ) in 2019Q4 (revised down); this was the first quarter that household consumption has not increased since 2015Q4.
·       Government consumption increased by 1.5% (QOQ), driven by education and health.
·       Gross capital formation (GCF) comprises gross fixed capital formation (GFCF), changes in inventories and net acquisition of valuables.
·       Within GCF, GFCF fell by 1.2% (QOQ, revised upwards), driven by declines in investment in information and communication technology (ICT) equipment, dwellings and transport, though these were partially offset by an increase in investment in other buildings and structures. Business investment fell by 0.5% (QOQ), continuing its recent subdued performance. 
·       Also within GCF, there was some evidence that stock-building (inventories) was taking place in 2019Q4, as there was an increase of £2.4bn in stocks (volume terms) being held by UK companies (this figure excludes alignment and balancing adjustments). The net acquisition of valuables, however, fell sharply.
·       There was an improvement in the recorded trade balance, exports (volume terms) rose 5.0% (QOQ), whilst imports rose just 0.4% (QOQ). The trade data were, however, distorted (“improved”) by large movements (net exports) in precious metals (including non-monetary gold (NMG)). These movements in NMG in trade were, however, offset in the national accounts by equivalent offsetting movements (falls) in the “net acquisitions of valuables” included in GCF. These movements do not affect headline GDP, as they are recorded as equivalent offsetting impacts in the UK National Accounts, but they are reflected in the composition of GDP growth.

 

GDP was estimated to have increased by 1.4% (YOY, unrevised) in 2019, slightly above the 1.3% YOY growth seen in 2018. Growth was 1.9% in both 2016 and 2017.

Within the total, the service and construction sectors provided positive contributions to GDP growth, while output in the production sector fell:
·       Services output growth slowed to 1.8% (YOY), compared with 2.0% in 2018.
·       Total production output decreased by 1.4% (it rose 0.8% in 2018), led by manufacturing output, which fell by 1.7% (after rising 0.9% in 2018).
·       Construction output increased by 2.3% in 2019, after a flat performance in 2018.

Turning to the expenditure components, private consumption and government consumption contributed positively to growth, whilst the trade balance was little changed in 2019:
·       Household consumption increased by 1.1% (YOY) in 2019, down on 2018’s 1.6%. The 2019 figure was the weakest annual figure since 2011. The easing was most notable in household goods and services, and housing, but could also be seen in miscellaneous, recreation and culture, health, and food and drink.
·       Government consumption picked up by 3.5% (YOY), after a 0.4% increase in 2018, driven by central government spending in a number of areas including health, education and defence.
·       Gross fixed capital formation (GFCF) showed a weak 0.6% increase (0.2% fall in 2018), within which business investment also rose 0.6% (1.5% fall in 2018). 
·       There was modest de-stocking (including adjustments) in 2019, though at a slower rate than in 2018. This would boost GDP.
·       The trade balance was little changed, as exports (volume terms) rose 4.8% (1.2% in 2018), whilst imports rose 4.6% (2.0% in 2018). 

 

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Consumer credit annual growth slipped to 5.7% in February, but mortgage approvals picked up
30 March 2020

These data relate to February and therefore will be largely unaffected by the impact of COVID-19.

Concerning lending to individuals the Bank of England announced: 
·       The increase in consumer credit was £0.9bn in February, compared with £1.1bn in January, whilst the growth rate slipped to 5.7% (YOY), compared with January’s 6.0%. The Bank noted “...within this (total), net borrowing on credit cards was zero, weaker than in recen months.” (Money & Credit statistical release, table B).
·       Net mortgage borrowing by households was £4.0bn in February, the same as in January. The annual growth rate for mortgage borrowing ticked up to 3.5% (3.4% in January) (table D).
·       Mortgage approvals for house purchase (an indicator for future lending) continued to rise to 73,500 (rounded) in February, compared with 71,340 in January and the average of the past six months (67,150) (table E). The Bank commented that “…this took the series to its highest since January 2014, significantly stronger than in recent years”. The latest data were, however, a little down the recent peak of nearly 75,000 (January 2014) and well down on the monthly data recorded in the years prior to the Great Recession, when mortgage approvals averaged 104,000 (2007), 119,000 (2006) and 100,000 (2005).

Businesses can raise money by borrowing from UK banks (in the form of loans) or financial markets (in the form of bonds, equity and commercial paper). In February, UK businesses borrowed £1.3bn of finance from these sources, which although below the average of the past two years, was stronger than the previous four months.

Net bank lending to non-financial businesses (which includes lending to businesses in the public sector) was £1.6bn in February, after minus £5.9bn in January. The growth was unchanged at, a weak, 0.8% (YOY) (table G). Loans to SMEs were flat, whilst loans to large businesses rose £1.6bn. The growth rate of lending to SMEs was 0.7% (YOY, 0.5% in January), whilst the growth rate of lending to large businesses was unchanged at 0.9% (YOY).

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Monetary Policy Committee
unchanged policy
26 March 2020

At the meeting ending on 25 March 2020, MPC members voted unanimously to:
·       Maintain the Bank Rate at 0.1% (it had been cut to 0.1% at a special meeting on 19 March).
·       The Bank of England should continue with the programme of £200bn of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to take the total stock of these purchases to £645bn (as also announced on 19 March).

On the economy, the minutes of the MPC meeting noted:
·       The economic consequences of these developments are becoming more apparent and a very sharp reduction in activity is likely. Given the severity of that disruption, there is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment.
·       The scale and duration of the shock to economic activity, while highly uncertain, would be large and sharp but should ultimately prove temporary, particularly if job losses and business failures could be minimised. In the current circumstances, and consistent with the MPC’s remit, monetary policy was aimed at guarding against an unwarranted tightening in financial conditions and, more broadly, supporting businesses and households through the crisis and limiting any lasting damage to the economy.
·       There was little evidence, as yet, to assess the magnitude of the economic shock from Covid-19. The MPC nevertheless judged that activity had fallen materially in both the global and domestic economy over recent weeks and would remain at or below that weakened level in the immediate period ahead.

The Bank of England also released the latest Agents’ summary and the results of the latest Decision Maker Panel (DMP) on 26 March 2020. Given the lack of knowledge about the way in which the economy is responding to the coronavirus pandemic, it is worth noting the conclusions of these two documents in some detail.  

The Bank’s Agents reported that the fall in output had become much more widespread since the MPC’s special meeting ending on 10 March. Activity was falling rapidly in many sectors due to a combination of economic uncertainty, supply-chain disruption, travel restrictions and social distancing. Many contacts had suffered cash-flow problems as revenues had fallen and had responded by reducing operations and working hours to save costs. There was some evidence of redundancies, although early reports suggested that the Government’s Coronavirus Job Retention Scheme would help to prevent some job losses that might otherwise have occurred. Demand for short-term credit had increased, although some companies reported that credit availability had tightened. Housing market activity had declined sharply as uncertainty and social distancing measures had deterred buyers and sellers.

The Bank’s latest Decision Maker Panel (DMP), conducted over the period from 6 to 20 March, indicated that many businesses expected Covid-19 to have a large negative impact on sales over the next year. Businesses in the leisure and tourism, accommodation and food, and transport and storage sectors were expected to be the most severely affected. Covid-19 had created significant uncertainty for businesses, with around half of respondents saying that it was the most important source of uncertainty they faced.

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Retail sales slipped 0.3% in February
26 March 2020

Retail sales slipped 0.3% (MOM) in February, to be flat (YOY), after the 1.0% (MOM) increase in January. The flat YOY figure was the lowest YOY growth rate since March 2013. The ONS said that a range of retailers provided “feedback on the adverse effect of the extreme rainfall on sales” in February. The ONS also commented that the data collection for the period was completed by 29 February and was largely unaffected by recent developments with the coronavirus. However, a small number of retailers suggested that online orders shipped from China were reduced because of the impact of COVID-19.

Retail sales fell 0.6% (QOQ) in the three months to February, to be just 0.6% higher (YOY) (table 1). The ONS commented that this was across all stores except non-store retailing.

Online retailing was 19.6% of total retailing in February 2020, compared with 19.1% reported in January.  

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House prices rise 1.3% (annual) in January
25 March 2020

According to official data, UK average house prices in January rose 1.3% (YOY), down from 1.7% (revised) in December (Figure 1). The ONS commented “…over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.” Yorkshire & Humberside and the West Midlands saw annual house price growth of 3.1% and 2.6% respectively, but this growth was partially offset by the negative growth in the East of England (negative 0.6%) and the South East (negative 0.5%) in January.

Prices fell 1.1% (MOM) on a non-seasonally adjusted basis in January, and fell 0.4% (MOM) on a seasonally adjusted basis.

The inflation rates for the UK’s four countries in January were: England (1.1% YOY, down from December’s 1.6%), Wales (2.0% YOY, down from December’s 2.7%), Scotland (1.6% YOY, down from December’s 2.0%) and Northern Ireland (2.5% (2019Q4, YOY)).

In England, there was, as always, a significant range across the regions (figure 4). The complete list of annual price changes is: Yorkshire & Humberside (3.1%), West Midlands (2.6%), East Midlands (2.3%), North West (2.1%), London (1.4%), North East (0.9%), South West (-0.1%), South East (-0.5%) and East (-0.6%).

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