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Economic Overview – March 2021
At its meeting in February, the Bank of England (BoE) maintained the bank rate at a record low of 0.10%, where it has remained since March 2020.
Moreover, the Bank agreed to keep the total stock of investment-grade corporate bonds and UK government bonds at £895 billion.
Interest Rates & Inflation
In addition, the Bank announced it would engage with financial firms to ensure they are ready to implement a negative bank rate after six months. As such, the BoE will incorporate the option of negative interest rates into its policy toolkit but is not likely to cut rates into negative territory over the next six months.
The Bank adopted a wait-and-see approach in the face of an uncertain economic outlook. On one hand, the brisk domestic vaccine rollout bodes well for economic activity later this year, while the Bank sees inflation—although currently below its 2% target—approaching the target “quite sharply” in the spring. As such, further easing was not warranted. On the other hand, given the economy is still in lockdown, the BoE judged it premature to reduce stimulus.
The first possible time that the Bank could now set interest rates below zero, if it is to hold true to this timeframe, would be at its August meeting. At that point, however, the Bank thinks that GDP will be rising strongly, and inflation having risen from its current 0.6% to around 1.5%. If the Bank is right, then this is not the sort of backdrop against which we would be expecting the MPC to loosen policy further – whether that be rate cuts below zero or additional/faster asset purchases.
Britain’s economic growth will accelerate next year at the fastest rate since official records began as the economy rebounds by 7.3%, according to the Office for Budget Responsibility (OBR). With Covid restrictions set to remain until the summer, delaying the start of the recovery, the OBR said the economy would surge ahead in 2022 at the fastest pace since 1948.
But the OBR warned that debts from the pandemic will cost the equivalent of £14,000 for every household as Government borrowing hits a post-war high, according to figures that lay bare the impact of Covid-19 on the public finances. It said borrowing of £355bn in this financial year would push the annual spending deficit to 16.9% of GDP, its highest level since 1944-45.
A further £243bn of borrowing next year will take the total to almost £600bn over two years. Outlining the full impact of the pandemic on the public finances, the OBR said the increase in borrowing would also send the UK’s total debt as a share of the economy to more than 100% and keep it there for the rest of the Parliament.
Not since 1958 has Britain’s debt-to-GDP level been at such a high level, though the cost of financing Government borrowing was at a “historic low”, it added. The increase in debt was lower than the 19% the OBR was forecasting in November after tax receipts were higher than expected and Government spending slightly lower.
But the costs of the pandemic, which were expected to ease in the 2021-22 financial year, will continue to put pressure on the Treasury’s finances after third lockdown and restrictions until at least June forced the chancellor to maintain extra support for businesses and households until the autumn.
A £59bn fiscal stimulus for 2021-22, equal to nearly 3% of last year’s GDP, and the Chancellor’s determination to maintain the highest level of public infrastructure spending in a generation, also raised borrowing levels.
The stimulus package, mainly comprising support for businesses, allied to a return of consumer spending, gave rise to a forecast increase next year in GDP growth of 7.3%, which would be the highest for 74 years. This dramatic rebound would follow a 4% increase in GDP during 2021, downgraded from last November’s forecast of 5.4%. Growth is expected to moderate to 1.7% in 2023, 1.6% in 2024 and 1.7% in 2025.
House price growth rebounded last month with the average value hitting a record high of £231,068, according to the Nationwide. Prices were up 6.9% from a year before, compared with 6.4% in January, it said.
The extension and subsequent further tapering of the Stamp Duty Land Tax suspension should see further buoyancy of house prices, while it remains to be seen how the Government guarantee enabling first time buyers to borrow to to 95%, will also affect prices.
The UK economy is in its third lockdown, with many shops, restaurants and bars forced to close their doors yet again.
So far, this hasn’t resulted in a rapid rise in unemployment, as the furlough scheme has helped to protect jobs and has now been further extended to September.
We expect the unemployment rate to continue rising in 2021 – the OBR expects 2.2 million people to be unemployed at the end of the year, or 6.5% of all workers, while the number of unemployed is expected to fall next year as the economy recovers from the crisis.
Without the billions spent on schemes to protect jobs, and the rapid roll-out of vaccines, the level would have been much higher. Last year it was feared that up to 4 million people would be unemployed.
The most recent unemployment rate – for October to December – was 5.1%, according to the Office for National Statistics (ONS). This is the highest figure for five years and means that 1.74 million people were unemployed.
The ONS also gathers weekly figures, which showed unemployment staying largely the same from October to December.
Workers in the hospitality industry, retail and entertainment have been badly hit. These are the sectors which have seen the biggest impact from Covid restrictions.
They also employ large numbers of young people, who have borne the brunt of job losses. Figures for the number of people employed on payrolls show the impact clearly. During the pandemic more than half the drop in the number of employees has been among the under-25s.