Surfs Up ... Drop In ... Pull In ... Kick Out
The UK Economy is bouncing back from the coronavirus. Businesses are ready to shoot the curl! Surf's Up! It's time to Drop In, Pull In, Kick Out and enjoy the ride.
We expect the economy to grow by 6% this year and by 11% over the two year period. In nominal terms the economy will grow by over 20% over the next three years, providing strong support for businesses and jobs in the process.
Interest rates will remain on hold. Monetary policy will continue to be expansive. Fiscal policy will remain neutral. Even the so-called zombie companies will benefit from high levels of forbearance and debt erosion.
The latest flash PMI*data for April released this week demonstrated a strong revival in output growth in manufacturing and services. The composite output index increased to 60.0 from 56.4 in March. Both sectors are reporting stronger order books both at home and abroad. Manufacturers are reporting a growing willingness to spend, even among EU clients.
Business activity is expected to grow strongly in May and June, setting the scene for a bumper second quarter. There is good news for the job market. Businesses are recruiting and taking on staff at a rate not seen for over three and a half years. The latest jobs data for March reported a drop in the unemployment rate to 4.9%. We expect furlough numbers to drop significantly by the end of the second quarter.
There may be time to worry about inflation but not just yet. CPI inflation increased to just 0.7% in the month from 0.4% in February. Manufacturing prices ticked up in March. Input costs increased by 6%. Hardly surprising when the oil price Brent Crude averaged $63 dollars in the month, compared to $32 dollars last year. [Prices fell below $20 dollars in April 2020].
Retail sales bounced back. Year on year, sales increased by over 7%. DIY sales increased by 45%. Garden center sales increased by 34%. Online sales increased by 62% accounting for 35% of all transactions. Clothing sales on line increased by 80% accounting for 56% of all sales. Online sales at Zara increased by 95% in April. Primark reported record sales as stores reopened. Some stores closed early as capacity limits were stretched to the limit.
Even the borrowing figures turned out better than expected. Total borrowing hit £303 billion in the financial year, well below the OBR forecast of £355 billion in March and significantly below the near £400 billion spend expected in October last year. [The OBR forecasts included a £27 billion provision for loans under the government loan guarantee schemes. No provision is made in the latest ONS data.]
Tax receipts fell by 5% or £35 billion in the financial year. Special pandemic measures, including support for individuals and businesses, increased total spending by £203 billion. Total debt increased to £2.1 trillion, almost one third of which sits in the Bank of England coffers and of course is interest free. In the current financial year, the OBR are forecasting borrowing of £230 billion. Stronger growth and the end of lock down could push this much lower to around £150 billion.
With rates on hold, gilt yields suppressed, the Bank's "money for nothing gilts for free" policy ensures debt service is not a problem for the Treasury in the medium term. So get ready to shoot the curl, surfs up, enjoy the ride ...
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