 The latest monthly GDP estimate was released this week. Activity fell by 9% in November compared to prior year. Construction activity was down by 1.4%. Manufacturing down 4%. The service sector fell by 20%. The arts and entertainment sector was down by almost 40%. Accommodation and food were down by 65%.
For the year as a whole, we expect output in the economy to have fallen by around 10% in 2020. In the current year, despite the lock down in the first quarter, growth of 4.5% seems possible for the year as a whole. This is based on the assumption there is some easing of restrictions prior to Easter and the vaccination program continues at pace. Our detailed sector forecasts outline the fortunes of some twenty sub sectors in the UK economy. Later this month we will release our "planogram" of sector winners and losers with a "Stocks Behind The Box" list of shares to pick, stick or flick. Our "Tale of two economies" continued this week. Tesco reported a record Christmas. Shoppers were "treating themselves", as favourite pubs bars and restaurants were locked down. Food outlets benefited from the two nation state. Pink Prosecco and festive treats boosted sales at Lidl. Total sales were up by 18% compared to prior year. ASOS raised profits guidance, reporting a sales increase of 36% compared to prior year. Online fashion retailer Boohoo released news of a 40% increase in sales in the four months to December. At Primark, sales fell by 30% in the 16 weeks to the end of the year. The company warned of a potential £1 billion loss of sales, if the lock down continues to the end of February. Primark continues to resist the move to online shopping. The fortunes of Very, Joules and Next continue to reflect the benefits of multi channel marketing. Moonpig is heading for a £1 billion IPO, as Paperchase and The Card Factor struggle with restructuring and administration. Halfords reported sales up by 10% in a "best ever Christmas" boosted by a strong performance in online cycling sales. Digital sales boosted the performance at Dunelm. Online sales were up by 20%, with overall sales up by 20% in the quarter. It isn't all great news. Lock down restrictions and a slump in travel have led to sales a drop in sales of 50% at Whitbread. Britain's largest hotel chain, the owner of Premier Inn and Beefeater, announced job 1,500 job losses. Occupancy rates are down by over 50% The Chancellor of the Exchequer has warned it will get worse before it gets better. Job losses and business failures are set to increase. The Governor of the Bank of England has suggested we are approaching the "darkest' hour. Grab yourself a fat cigar and a brandy. Echoes of Churchill are in the Bank. Andrew Bailey was referring to the "Darkest Hour before the Dawn". The dawn is coming but many in our "tale of two economies" have always seen the light ...
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 The Secret Service is launching a massive security operation to protect the inauguration of Joe Biden next week.
More than 15,000 National Guard, thousands of police and tactical guards will be deployed. Eight foot fencing will be in place to protect the Capitol building. The FBI, The National Guard, U.S. Marshals and a host of other Federal Agencies will fall under the control of the Secret Service. Joe Biden's close protection team has been hand picked to protect the Democrat President. The FBI is warning of armed demonstrations across the country next week. A repeat of the chaos in Washington last week is not possible. Trump will not be attending the inauguration ceremony. It seems unlikely, he will take the time to pen words of guidance to the incoming President. The President will clear the swamp, on the morning of the 20th and head for Florida. Trump became the first President in US history to be impeached twice this week. The President was reported to be angry at aides for failing to defend him. Rudy Giuliani's fees are at risk. Advisors have been told not to pay the $20,000 dollars a day clock rate. A high price for failure, too much for Trump. The President's problems increased this week. Deutsche bank is reportedly seeking to withdraw support for the Trump Organization. The bank has some $350 million of loans outstanding. The Trump National Golf Club in Bedminster has been removed as the host of the PGA Championship in 2022. A serious blow to Presidential prestige. Trump was banned from Twitter, Facebook and other social media platforms this week. Worse still he could be banned from ever taking public office again, if the Republican back lash continues in the Senate. Mitch McConnell, senior senator of the GOP, thinks the President could be guilty. The trial is looming in the Senate, Republican colleagues have been told by McConnel, to "vote with their conscience" ... If McConnell takes the lead, a conviction seems probable... That's all for this week, stay safe, hands, face and space ... it's tough out there, say in touch ...  It was the best of times, it was the worst of times ... and that was just week one! The tale of two economies continues. The third lock down is imposed into the first quarter of 2021.
This week, the SMMT reported car sales down by 30% in the past year. Showroom sales were hindered behind lock doors. Marstons, the brewer of Pedigree and Hobgoblin, called for more help for the pubs and restaurant sector. Mitchell and Butlers, owner of All Bar One and Harvester, is to tap shareholders for funds, to offset the slump in revenue. Chief Executive, Phil Urban called on the government for new support measures, to help hospitality businesses. Ryanair announced cuts in flights and services, as traffic levels are expected to fall by 80% once again. Restructuring is expected at Paperchase, as PwC are appointed as administrators. The retail chain may claim the title, of the first, but not the last, high street victim of 2021. Marks & Spencer boss, Steve Rowe, talked of "near impossible" conditions, resulting in clothing sales down 25% in the final quarter of the year. M&S non food retail stores sales were down by almost 50%, offset by 50% growth in online sales. Revenues from food, online and Ocado were able to offset some of the high street damage. Therein lies the reality of the "Tale of Two Economies". Sector losers during the pandemic have been clothing and retail, travel and tourism, food and accommodation, leisure and entertainment. Sector winners have been, food, online retail and logistics. Online food sales have doubled. The share of online sales overall has increased to over 30%. Digital acceleration online and into cloud, has become the "modus operandi" for all This week ASOS announced a £90 million investment in a new 450,000 distribution warehouse. Joules and Next reported record sales online. Moonpig is planning a £1 billion flotation within the month. DIY sales, gardening and pets have been additional beneficiaries. Pets at Home, reported a surge in profits as home owners added pets to ease the pain and isolation of lock down. Streaming has provided exceptional online growth for music and movies. Streaming accounted for 80% of music consumption over the past year. Netflix and Disney have enjoyed a surge in share price as a result of the home entertainment boom. The top seven digital stocks have surged in value by $3.5 trillion over the past year. Barratt Developments reported record home sales in the second half of the year. New mortgages hit a record high in December. House prices ended the year up over 7% higher. Businesses like Rentokil were able to clean up, as hygiene demands increased. Then of course there is Brexit. Finally after four years of confusion, the oven ready deal emerges slightly overcooked from the heated negotiations. A free trade deal, outside of the customs union, with a border down the Irish Sea and a bigger catch for UK trawlers, is the result. More catches to come for UK exporters in the future, no doubt. Next week we will take a closer look at growth forecasts for the year in prospect ... an act of foolishness in the epoch of incredulity ... perhaps, don't miss that!  Trump and Tariffs, Boris and Brexit, have been the focus of concern over the past four years. Brexit deal done. Trump is out. Now we are able to focus on the impact of virus and vaccines as the world recovers from the pandemic.
Trump has finally come to realize he will not be the one inaugurated on the 20th of January. The shocking scenes in Washington forced the 45th President of the United States to accept Joe Biden will take office later this month. The President will now work towards an orderly transition. He will not be attending the inauguration, to assist the process. We can but hope his right wing supporters do the same. Or at least a ring of steel will be in place in Washington to defend proceedings. Far better than the ring of silk in place around the Capitol last week. Too many lives lost so needlessly. It could easily have been far worse. Trump is facing pressure to resign or face impeachment for a second time. "Incitement to insurrection", never a great feature on a presidential CV. The President insisted he only wanted to encourage a large peaceful protest. Not the storming of the Senate and the desecration of Nancy Pelosi's office that resulted. Trump faced the ultimate indignity. Impeachment he can cope with but the imposition of a Twitter ban was the step too far. The President was furious, insane with anger, beyond the pale and mentally unreachable, the reports from the White House. He had been forced to make a conciliatory broadcast, to denounce the violence. "The recording had the slight air of a hostage video, in which a captive is made to read words written for him." according to Gerard Baker in the Times today. Trump's days as a hostage in the White House are numbered. Nancy Pelosi is taking no risks. The keys to the nuclear launch codes are out or reach. In Washington last week, it was the worst of times, the best is yet to come, hopefully within days ...  This will be our last update of 2020. Mary and I wanted to take this opportunity to wish you a Merry Christmas and Happy New Year. We will be taking a break for a few weeks. We plan to be back from the 9th of January.
So difficult not to have seen so many friends through the year. It really has been a quite extraordinary period. Let's hope things may return to some semblance of normality in 2021. I wish all of you and your loved ones, every best wish for the year ahead. This is our tenth year publishing The Saturday Economist. It has been a year of progress and expansion. We have extended our social media coverage, with weekly updates on Facebook and LinkedIn. Since launch we have had over 600,000 views on LinkedIn. Our daily "What The Papers Say" Review on Twitter, covers titles in Europe, the USA and South East Asia. We launched our The Saturday Economist Live, Podcast at the end of September, now available on eight platforms. We plan to expand the coverage through next year. This month we are releasing the Beta version of our GR "Chat Room". If you have any questions, queries or comments just click on the link and we will get back to you. Check it out. This is the year of the Webinar. We have expanded our studio facilities using Zoom and Ecamm Live to improve our on line client presentations. We will be boosting content to our movie channel, relaunching our Guild Group in January. Plus we intend to increase our coverage of financial markets. Lots of great things planned for 2021. It is always great to keep in touch and we welcome feedback and comment ...  Forecasts are for UK GDP to have fallen by around 10% this year. The unemployment rate is expected to end the year at around 5%. Government borrowing will have increased to £400 billion during the financial year. The Bank of England has stepped up as the buyer of last resort. The process of monetary financing of the fiscal deficit is in play.
Central bankers in Europe, the USA, Japan and the UK, are in on the process. The Fed balance sheet has expanded to over $7 trillion dollars from less than $4 billion prior to the crisis. This week the Bank of England MPC voted to maintain the target of gilt purchases at just under £1 trillion for the moment. Most analysts expect UK growth in 2021 to be 5.5% with a peak in unemployment in the second quarter at around 6.5%. Government borrowing in the next financial year is likely to be around £200 billion. The Chancellor suggest the borrowing cannot be sustained at present levels, then announced an extension of the furlough scheme to the end of April next year ... Boris Johnson admitted yesterday, things are looking difficult in discussions with the EU. The "door is open and we will keep talking" said the Prime Minister. French fishermen are in fighting mood. UK lorry drivers will be unable to take a ham sandwich across the channel. The Pound closed up at $1.35. Ten year gilts closed up to 25 basis points. In the US, the Dow, S&P and Nasdaq closed up. The S&P PE tracked 37.1 compared to a long run average of 19.5. Bitcoin closed at $22,973, Ripple and Ethereum missed out on the crypto rally. Is anyone beginning to thing Tesla is overvalued? Jumping to $695. The stock trades on a PE of 1400 with a market cap of over $600 billion. Ford and GM have market cap of $35 billion and $58 billion respectively. Add in Boeing and the trio add up to a combined cap of $200 billion. So what of market prospects in the year ahead? Markets are in bullish mode, looking through the pandemic to a recovery, supported by large scale vaccine distribution. Asset prices are pushed higher by central bank largesse and the search for yield. Traders have their favourites. For gold the test of $2,000 was too much. Some suggest $400,000 is the bitcoin bounce. More than ever it is important to remember analysis, analysis, analysis is key. Capital, liquidity, profitability and diversification the platform. Hence our plans for more focus in markets in the year ahead ...don't miss that! That's all for this week Have a great safe holiday and New Year ...  A no-deal Brexit would be "wonderful for Britain", explained the Prime Minister, yesterday. We are leaving with a no-deal on WTO terms, unless a breakthrough is achieved, within days.
Aussie rules no longer OK. Boris Johnson made no reference to an "Australian" deal. Former Prime Minister Malcolm Turnbull had warned the PM to be careful "what you wish for". "It will be pretty disappointing, I think you will find out. Australia's relationship with the EU, is not one that Britain would want." It is not one that Australia wants either but it may well be the one we end up with. The navy has been put on standby to board foreign fishing boats and make arrests, if French transgressions arise in the New Year. Four patrol ships are to be deployed, with Royal Marine helicopters, ready to offer, abseil assist. France has over 80% of the cod quota in the channel. Twenty-two frigates were deployed in the last cod war with Iceland. Now we can better understand, perhaps, why the Prime Minister is planning to build the largest navy in Europe. "President Macron explained, "I am not asking to have my cake and eat it. All I want is a cake, that's worth its weight (in cake), because I won't give up my share (of the cake)". Prime Minister Johnson explained, the EU want us to behave like twins. "They get a haircut, we have to get a haircut. They buy an expensive handbag, we have to buy an expensive handbag." Working in international trade we are always conditioned to avoid idioms and similes. It just leads to puzzled looks and confused stares. No wonder the negotiations have been dragging on and on. Meet the French demands, let them eat cake and salted cod from the Baltics. Boris Johnson should have the confidence to understand he does not have to get a haircut, just rearrange the bits he has got. If he doesn't want to buy a handbag, he will have to use some other object to swing at Johnny Foreigner. Camiilla Cavendish writing in the Times today suggests "the Tories have fallen prey to magical thinking. Hard trade-offs, are wished away, without a clear vision for prosperity if there is no deal". Matthew Parris in the Times claims the cabinet "don't actually believe in a painless Brexit or the sunlit future they have promised to deliver." The evidence is mounting of the problems ahead. Bank shares have taken a battering. Supermarkets face a £3 billion shock to prices. Bottlenecks at the ports. Honda called a halt to production this week, as just in time deliveries didn't make it on time. The car industry will produce less than one million cars this year. 1.7 million were manufactured in 2016, the year of the vote to leave the EU. Toyota has warned there will be no build of electric vehicles in the UK until 2034. Any decision dependent on the outcome of trade talks (and the success of direct shipments from Japan). Liz Truss this week announced the decision to slash tariffs on the US products. EU tariffs had been imposed on ketchup and orange juice. The move designed to ease the way for a reduction in the US tariffs on Scotch Whisky. The move is guaranteed to alienate the Airbus lobby group in Europe. The measures had been imposed in response to unfair subsidies to Boeing in the USA. Great timing. One day those Airbus wings will just fly away. Motor and aerospace, farming and pharma, just some of the industries facing severe challenge and setback in the event of a "wonderful" no deal. The Prime Minister may believe we will be free "to do whatever we want, any old time" but in reality the options will be severely limited ... "You can't always get what you want ...  "Going Negative Could Be Positive" writes Philip Aldrick in the Times today. The economics editor has been talking with Michael Saunders, an external member of the Monetary Policy Committee at the Bank of England.
Rates could be cut a little below zero, the former Citigroup economist explained, as long as "appropriate mitigations" are in place. The Bank has asked commercial lenders to ensure they are systems ready for a move below the line. Bankers have warned, negative rates could hit profits and create operational problems. Not so argues Saunders, "studies have shown, the net effect of negative rates on bank profitability is small and may be slightly positive." Negative rates rates could increase economic growth and reduce the impact of bad debts as the economy expands, it is said. "Studies which allow for these indirect effects suggest the net effect on bank profitability is small and may even be slightly positive." Well of course it is. The model used is a tautology. Model in sufficient growth with a fall in defaults and bank profitability will rise. No wonder Andrew Bailey Governor of the Bank if England is slow to make the move. Stuck on Planet ZIRP, we should avoid the drift towards the NIRP crevasse. The Governor has already abandoned the pretense of QE. The minutes of the MPC committee in June, reveal the committee voted to increase the stock of UK government bonds "financed by the creation of central bank reserves. Last month Andy Haldane Chief Economist at the Bank of England, delivered a speech entitled “What Has Central Bank Independence Ever Done For Us? An appropriate attribution to Monty Python, with a hint of satire, he explained, the Bank of England creates a high level of central bank reserves to acquire government gilts. “This is process is not a monetary financing of government deficits. It is a reflection of both policies [monetary and fiscal] responding counter-cyclically, as they should, in the face of a very large cyclical shock to aggregate activity.” Ah ... Central Bank Reserves have now increased to almost 50% of GDP. This is not officially “Monetary Financing of Fiscal Deficits” or “Fiscal Dominance”. It sure looks like it. We call it Dire Straits Economics, that’s “Money For Nothing, Gilts For Free”. No need to compound the challenge and take the risk of a move to negative rates ... Note Fiscal dominance is an economic condition that occurs when a country has a large government debt and deficit such that monetary policy targets keeping the government from bankruptcy rather than macro-economic targets such as inflation, growth and jobs.  Less than four weeks to go to the new deal deadline and we are still talking about fish. "France derails Brexit talks", the headline in the Times today.
Macron has thrown a mackerel into the net demanding access to UK waters for up to a decade after the transition period. He may have well sent a gunboat up the Thames, the impact. Discussions were suspended, Bernier went back to Paris. Boris Johnson will hold emergency talks with Ursula Van Der Leyen, President of the European Commission. A spokesman said "Time is in very short supply" We even have a video which explains the clock is ticking, that's "Les heures tournent et pas doucement" in French. "We are at a difficult point in the talks. We will not be able to agree a deal which does not respect the fundamental principles on sovereignty, fishing and control". Yes taking back control always included the fish. Matthew Flynn writing in the Telegraph today, suggests there is something fishy about the French threat to veto the trade bill. President Macron may well have calculated that a no deal may be bad for the EU but could be a very good outcome for France. The trade surplus with the UK is quite small at around £ 5 billion a year. Paris would be the main beneficiary of disruption to London as the financial services capital of Europe. The UK and France are close competitors in the race for inward investment. Sitting in the Elysee Palace Macron may well think France would be a winner from a no deal. But then again he would lose the fish and would have a tremendous problem with cheese. Let's hope the Prime Minister can smile and work his charm on the President of the Commission. All sides need an agreement, time for a common language, time is running out, the hours are turning ... That's all for this week! Have a great, safe, week-end ... Hands, Face and Space ...  Spending Review this week, the Chancellor laid out the plans for government expenditure in the years ahead. The Office For Budget Responsibility released the latest forecast for the economy and government finances.
Government borrowing will hit £400 billion in the current financial year. Add in the funding for Gilt redemptions, the Debt Management Office will issue over £500 billion of new gilts this year. That's almost 25% of GDP. Thank the Bank, for the £1 trillion pound bank note. No need to task the markets too heavily to fund the deficits, "with inky blots and rotten bonds sustained". The emergency spending on Covid measures now totals £280 billion. In the next financial year, it is hoped that spending on similar measures, will fall to around £55 billion. Total borrowing will fall to around £165 billion, then to £100 billion in 2022/23 as the damage from the pandemic abates. No need for tax rises as yet. The Bank of England supports the spending plans, to sustain the economy during the crisis. Fears for tiers now extend to spring next year. Economic output is expected to have fallen by 11% in 2020. The good news, a strong recovery is expected next. The OBR is forecasting growth of 5.5% in 2021 and 6.6% in 2022. The extension of the furlough scheme to the end of March, suggests the anticipated peak in unemployment will occur in the second quarter of 2021 at around 2.6 million, a rate of 7.5%. The spending review offers a commitment to create jobs, grow the economy and protect people's lives and livelihoods. The unemployment rate is expected to fall back to pre covid levels over the next two years. More money for the NHS, education and defence. More schools, hospitals, safer streets and a big commitment to infrastructure. The creation of a national infrastructure bank, a positive step. The government is committed to the leveling up agenda, across the U.K. More money for the low paid. The government is accepting in full the recommendations of the Low Pay Commission to increase the National Living Wage by 2.2% to £8.91 an hour and to extend the rate to those aged 23 and over. An increase in the National Minimum Wage rates follows. How long before the development of Universal Credit morphs into a Universal Basic Income? It was all going so well for the Chancellor. Why then the suggestion of a public sector pay freeze and the threat to overseas aid. The move is political and piecemeal, with a modest yield in savings compared to the borrowing levels this year. NHS workers will avoid the pay freeze, those on lower incomes will receive a pay rise. What then also of the the cut in overseas aid? The UK will spend the equivalent of 0.5% of GDP or £10 billion in 2021. "At a time of emergency, sticking to the 0.7% rule is not an appropriate prioritization of resources." according to the detailed spending review. It's also a good way of mitigating external capital flows ... always a good idea as the threat of gilt strike hovers ... References: Deficits with inky blots and rotten bonds sustained : The Saturday Economist 22 June 2014 Rishi Sunak and the Trillion Pound Bank Note : The Saturday Economist 7th November 2020 |
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.
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