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Economic Overview – September 2020
The Bank of England (BOE) made emergency interest rate cuts on the 11th and 19th March 2020, to try and reduce the economic impact of the coronavirus outbreak. The BOE slashed interest rates from 0.75% to 0.25 and then from 0.25% to just 0.1%, the lowest level on record.
So what can we expect now? Here are the indicators to watch:
Interest Rates & Inflation
UK inflation has fallen sharply in recent months and now sits at 1.1% (July 2020). This is well below the official 2% target rate but means that the cost of living is still higher than this time last year. The BOE predicts that inflation could fall negative before the end of the year, but, if inflation remains below the official target the BOE may be inclined to cut interest rates (if it can), to spur economic growth and inflation.
The coronavirus outbreak has sent the UK economy into its first recession since 2009. Between April and June 2020 the UK economy shrank by a staggering 20.4%, the worst slump on record. Weak economic growth reduces the chance of an interest rate rise, so until economic growth improves an interest rate rise seems unlikely.
The number of people out of work continues to rise and in the three months to the end of July the number rose to over 2.5 million unemployed in the UK, putting the UK unemployment rate at 4.1%, up from 3.9%. However, when the Government’s furlough scheme ends the number of unemployed is expected to spiral. Weak employment numbers reduce the chances of an interest rate rise. Therefore the economic impact of the coronavirus (increased unemployment) will likely mean that interest rates could stay lower for longer.
The Bank of England has warned that the UK will take time to recover from a recession. It is predicting that by the end of 2020 the UK economy will still be 5% smaller than it was prior to the coronavirus outbreak and it won’t regain its pre-coronavirus size until the end of 2021. Weak economic growth prospects reduce the chances of an interest rate rise.
As mentioned above, the Consumer Prices Index (CPI) 12-month inflation rate was 1.1% in July 2020, up from 0.8% in June 2020. It was widely expected to fall further, however the largest contribution to CPI came from recreation and culture (0.33%). Clothing, rising prices at the petrol pump, and furniture and household goods also made large upward contributions.
Growth
The economy began to recover in June with shops reopening, factories beginning to ramp up production and housebuilding continuing. Despite this, GDP in June still remained a sixth below its level in February, before the virus struck.
Overall, productivity saw its largest ever fall in the second quarter. Hospitality was worst hit, with productivity in that industry falling by three quarters in recent months. It is clear that the UK is in the largest recession on record. Latest estimates show that the UK economy is now 17.2% smaller than it was in February, the effects of which have been most pronounced in those industries that are most exposed to public health restrictions and the effects of social distancing.
Monthly GDP grew by 8.7% in June 2020 as lockdown measures eased, following upwardly revised growth of 2.4% in May and a record fall of 20.0% in April 2020.
In the two months since its April 2020 low, the UK economy has grown by a total of 11.3%. However, it still remains 17.2% below levels seen in February 2020, before the full impact of the coronavirus.
House Prices
The UK property market saw activity continue to increase in August with the stamp duty holiday and pent-up demand, after the market came to a total standstill, being hailed as the drivers for this boost. House prices in England and Wales accelerated sharply in August.
Every part of Britain is now experiencing house price growth, except London, according to an estate agents report. Some property experts hailed August as a record month. Rightmove claimed it was “the busiest month for 10 years” while Zoopla said it is at its strongest level for five years.
However, some property experts do not believe this rate of growth can continue and believe once Government support packages, including stamp duty, come to an end, house price growth could begin to decline. Halifax claims the property sector will feel the effects of the recession, with “greater downward pressure on house prices in the medium-term”. Nationwide predicts there will be a downward trend following the conclusion of the Government support schemes which will “dampen housing activity”.
The government showed it was prepared to act with the introduction of the stamp duty holiday, so with a combination of the furlough scheme ending, and a potential second wave of Covid, Whitehall will not want to see serious house price falls.
Employment
As mentioned above, the UK unemployment rate has risen to its highest level for two years, with the unemployment rate growing to 4.1% in the three months to July, compared with 3.9% previously. Young people were particularly hard hit, with those aged 16 to 24 suffering the biggest drop in employment compared with other age groups.
Firms continue to remove staff from payrolls as they prepare for the end of the government’s furlough scheme – there were 156,000 fewer young people in employment in the three months to July compared to the previous quarter, according to the ONS. Some 695,000 UK workers have disappeared from the payrolls of British companies since March, when the coronavirus lockdown began.