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Economic Overview – December 2020
As widely expected, The Bank of England kept Base Rate at 0.1% in November, but also announced a further £150 billion of quantitative easing bringing the total to £900 billion.
Indications are that Base Rate will continue at that level well into 2021 as long as inflation doesn’t spike.
Interest Rates & Inflation
In November, inflation rose to 0.9% from 0.7% in October, and 0.5% in September, still well below the UK target of 2%. Despite rising, the Bank is forecasting subdued levels of inflation over the coming months as the UK economy remains under pressure during the second Covid wave. However, the Bank forecasts price growth will accelerate again towards the end of next year as demand recovers.
The rapid spread of Covid-19 forced consumers away from the shops, resulting in steep discounting during the first lockdown. Interestingly the ONS said prices rose in November at a similar rate to last year despite retailers across the country coming under increasing pressure, with the second wave of the pandemic forcing local lockdowns in England and tougher measures in Scotland and Northern Ireland to contain the virus.
The cost of food increased slightly last month, as restaurants closed due to the renewed restrictions, pushing up demand for goods sold in supermarkets.
The ONS said computer game prices also increased reflecting the release of several new titles ahead of Christmas. Inflation in the price of a second-hand car also soared by more than 10% on a year ago, amid a rush among consumers to buy their own vehicles to reduce their reliance on public transport during the pandemic.
UK GDP expanded 15.5% in the three months to September 2020, partially recovering from a record contraction of 19.8% seen in the previous period and compared with market expectations of a 15.8% growth. This was the strongest pace of expansion in the economy since the series began in 1955, reflecting the continued easing of lockdown 1 restrictions as well as some recovery of activity from the steep contraction in April.
Household consumption increased 18.3% (vs -26.3% in Q2) driven by higher spending on restaurants and hotels and transport, and gross fixed capital formation rose 15.1% (vs -21.6% in Q2) boosted by dwellings investment and business investment. Still, household consumption and business investment remained well below pre-pandemic levels. Public spending advanced 7.8% (vs -14.6% in Q2), while net external demand contributed negatively to the GDP as imports rose more than exports.
UK house prices soared by 7.6% in the year to November, according to the latest figures from Halifax, as buyers sought more space and tried to beat the end of the stamp duty holiday. This is in stark contrast to widely published views in May that prices would fall by 7.5%.
House prices rose 1.2% month on month to hit an average of £253,240 in November, Halifax said. The yearly increase was the strongest growth since June 2016.
There were some signs of the market cooling off, however, with agreed sales and new instructions falling to their lowest level in five months. Yet Halifax said both remain at historically high levels.
Britain’s housing market has boomed during coronavirus, defying gravity during the worst downturn in 300 years.
Estate agents say it has in part been driven by people wanting more space after spending lockdown at home. Many people have also saved large amounts during the pandemic.
Chancellor Rishi Sunak’s stamp duty holiday has also been a major factor, increasing the threshold at which stamp duty is paid to £500,000.
The employment rate for all people decreased by 0.8 percentage points on the year, and decreased by 0.6 percentage points on the quarter, to 75.3%.
July to September 2020 estimates show a large increase in the unemployment rate and a record number of redundancies, while the employment rate continued to fall. Although decreasing over the year, total hours worked had a record increase from the low levels in the previous quarter, with the July to September period covering a time when a number of coronavirus (COVID-19) lockdown measures were eased.
The UK unemployment rate was estimated at 4.8%, 0.9 percentage points higher than a year earlier and 0.7 percentage points higher than the previous quarter.