#ukeconomy – Page 7 – Martin Wheatcroft

ICAEW chart of the week: Economic lockdown

19 June 2020: Economic contraction sees monthly GDP per capita decline from £2,790 in February 2020 to £2,100 in April 2020.

UK GDP per person per month - April 2019: £2,740 +£50 = Feb 2020: £2,790 - Mar £160 - Apr £530 = April 2020: £2,100.

The #icaewchartoftheweek is on the economy this week, illustrating how average GDP per person per month increased from £2,740 in April 2019 to £2,790 in February 2020, before contracting sharply in March and April.

The increase of £50 per person in economic activity between April 2019 and February 2020 was predominately driven by inflation, with per capita economic growth of less than 0.4% over the 10 month period. This reflects just how weak the UK economy was immediately before the pandemic.

The modest increase up to February 2020 is dwarfed by the dramatic changes seen as a consequence of the pandemic, with severe curtailments in many parts of the economy leading to a 5.8% fall in economic activity in March and a further 20.4% in April according to provisional numbers from the Office for National Statistics.

Monthly GDP was estimated to be £183bn in April 2019, £187bn in February 2020 and £141bn in April 2020. The population was projected to be just over 66.7m in April 2019, rising to 67.0m by February 2020, before increasing very slightly in March prior to the lockdown and then falling a little in April.

The dramatic transformation in the UK economy wrought by the lockdown is now extremely visible in the statistics, but it will take some time for the post-lockdown economic position to emerge in order to be able to see how much permanent damage has been done.

This article was originally published by ICAEW.

ICAEW chart of the week: UK electricity usage

24 April 2020: A dramatic decline in electricity usage confirms the scale of the economic downturn and the impact that will have on tax receipts.

Chart showing 7-day moving average electricity usage between 1 Feb and Apr 22 falling below the 5-year average.

The coronavirus pandemic is having a huge impact on all of us, including in our usage of electricity as illustrated by the #icaewchartofthemonth.

For example, the seven-day moving average electricity generated as of 21 April 2020 was 531 GWh, 23% lower than the 690 GWh supplied on average in the previous five years. This is a dramatic fall, reflecting the closure of much of our high streets, most offices and many factories across the country.

Admittedly, some of the decline will be down to weather, with April in particular being much warmer than usual. However, the collapse in demand since the Great Lockdown began is dramatic, demonstrating just how much has changed in just a few weeks.

A silver lining to the current situation is a significant reduction in carbon emissions, with zero electricity generated from coal or oil power plants in recent weeks. Gas-fired power stations are currently providing only around 20% of UK energy supply, with wind, solar and hydropower together providing in the order of 50% each day. Nuclear provides a further fifth, with the balance coming from biomass (around 5% or so) and imports from France, Belgium and Netherlands (a further 5%, much of which is either from nuclear power plants or from renewable sources in any case). This is very positive news for the environment, even if a bit of a headache for the National Grid electricity system operator in managing a very different mix of generation than normal.

Unfortunately, we will have to wait quite a while to see how this translates into economic statistics, with the OBR amongst others suggesting that the economy could contract by as much as 35% in the second quarter of 2020. This will have major implications for tax receipts and government borrowing, which are rapidly moving in opposite directions.

This chart was originally published by ICAEW.

OBR: deficit could reach £273bn or more

15 April 2020: a report from the Office for Budget Responsibility (OBR) indicates that the fiscal deficit could increase to £273bn in 2020-21, but it cautions that this is only one of many plausible scenarios.

The OBR has produced its first analysis of the potential economic and fiscal impact of the coronavirus, based on a three-month lockdown followed by restrictions for a further three months.

At the same time, the International Monetary Fund has warned that the global economic contraction underway is likely to be the worst since the Great Depression, dwarfing the financial crisis twelve years ago.

In its ‘coronavirus reference scenario’, the OBR indicates that the UK economy could fall by 35% in the second quarter of 2020, before bouncing back to leave the economy 13% smaller in 2020 than in 2019.

The consequence would be an increase in the deficit for the fiscal year ending 31 March 2021 to £273bn or 14% of GDP, while public sector net debt could be £384bn higher than budgeted for, reaching £2.2tn or 95% of GDP by the end of the fiscal year.

The OBR says that the economic impact of the coronavirus will derive much less from people falling ill or dying, than from the public health restrictions and social distancing required to limit its spread, severely reducing demand and supply at the same time. That means lower incomes, less spending and weaker asset prices, all of which reduce tax revenues, while job losses will raise public spending.

Once the crisis has passed and policy interventions have unwound, the OBR thinks that annual borrowing could return to roughly the Spring Budget 2020 forecast. However, net debt would continue to be much higher, potentially £260bn (10% of GDP) more than the baseline forecast by 31 March 2025.

The OBR analysis assumes that increased public spending, tax cuts and holidays, loans and guarantees, and actions taken by the Bank of England, designed to support household incomes and to limit business failures and layoffs, will help prevent greater economic and fiscal damage in the long term. However, it warns that the longer the disruption lasts, the more likely it is that the economy’s future potential output will be ‘scarred’ with adverse consequences for future deficits and for fiscal policy.

The International Monetary Fund (IMF) now predicts that the global economy will contract by 3.0% in 2020, much worse than the 0.1% contraction seen during the financial crisis in 2009 and a cut of 6.3% from its previous prediction in January. The IMF prediction is based on a shallower, but longer recession than the OBR’s scenario for the UK. Overall, the IMF believes that the cumulative output loss in 2020 and 2021 from the pandemic could be as much as $9tn.

Alison Ring, Director, Public Sector for ICAEW, commented: “The analysis published by the OBR is not a forecast, but the scenario it presents is pretty startling; making clear that whatever actually happens, the damage to public finances from the coronavirus pandemic will be extremely severe.

“While the OBR suggests that the economy and tax receipts could recover relatively quickly, the additional debt burden will weigh on the public finances for many years for come.”

Fiscal deficit 2020-21: £55bn Spring Budget +£130bn lower receipts +£88bn higher spending = £273bn Reference scenario. Net debt: £1,819bn +£384bn = £2,203bn.

This article was originally published by ICAEW.

ICAEW chart of the week: UK card activity

9 April 2020: Debit and credit cards were used 19.7bn times in 2019, with £722bn spent.

Debit and credit card activity in the UK 2019: 19.7bn transactions for £722bn. Debit cards 15.6bn for £503bn, credit cards 4.1bn for £219bn.

This #icaewchartoftheweek is on the subject of credit and debit usage in the UK, with UK Finance (the trade body for the banking and financial sector) reporting that £722bn was spent on UK and overseas cards in 2019. This comprised 19.7bn transactions at an average of just under £37 per transaction.

Average spending on credit cards at £53 per transaction was higher than the average of £32 spent on each debit card transaction. As a consequence, credit cards were around 30% of the total spend, but 21% of total transactions.

The number and value of contactless transactions both increased by 16% compared with 2018, as more and more people chose to use this form of payment. The average contactless spend was £9.35 on 8.6bn occasions, in contrast with the £81 spent on each of the 2.7bn online transactions in 2019, and the average of £50 incurred in 8.4bn non-contactless transactions.

Overall spending on credit and debit cards in 2019 was only 0.2% higher than in 2018, even though the number of transactions was up by 7.3%. This provides an indication of the weakness in the UK economy before recent events.

Of course, what we all want to know if what is happening right now. With the country in lockdown, the number and value of transactions are likely to fall significantly. We will be poring over that data as soon as it is made available!

IFS: deficit to triple as budget contingency increases

30 March 2020: the Institute for Fiscal Studies (IFS) has suggested that the budgeted fiscal deficit for the financial year starting 1 April 2020 of £55bn could more than triple to £177bn due to the coronavirus pandemic.

In a new publication, the economic research institute also stated that there is a chance the 2020-21 deficit could end up exceeding £200bn.

The Chancellor has already stopped reporting financial estimates for a series of emergency measures, such as the funding of 80% of pay for furloughed workers and support for self-employed workers, incurring tens of billions of public money to keep an economy going whilst in lockdown.

The Contingencies Fund Act 2020 (passed by Parliament on 25 March 2020 alongside the Coronavirus Act 2020), increases the amount available for contingencies from a limit of 2% of spending authorised by Parliament in the preceding financial year to a limit of 50%. In effect, this gives the Chancellor the power to spend an additional £266bn in 2020-21 over and above spending plans already announced, a substantial increase from the £11bn that would have been available otherwise.

The IFS’s estimate assumes that a 5% contraction in the economy would reduce tax revenues by somewhere in the region of £80bn in 2020-21, albeit this would be offset by savings in interest costs following the reduction in the base rate to 0.1% and quantitative easing operations by the Bank of England.

Fiscal measures include the £12bn emergency package announced on the day of the Budget and the £20bn announced on 17 March, together with an estimate by the IFS of £18bn for further measures announced up until 25 March 2020.

The effect on the public finances estimated by the IFS is summarised in the table below.

Estimate of coronavirus revisions to the Spring Budget 2020

Financial year 2020-21	Spring Budget £bn	Economic contraction £bn	Fiscal measures £bn	Revised £bn
Taxes and other income	873	(80)	(22)	771
Total managed expenditure	(928)	8	(28)	(948)
Fiscal deficit	(55)	(72)	(50)	(177)
% of GDP	2.4%	+3.4%	+2.3%	8.1%

^{Source: HM Treasury, Spring Budget 2020; IFS, estimates of economic contraction and fiscal measures to date, 26 March 2020; ICAEW, rough estimate of the split of fiscal measures between waiving tax and additional spending.}

The IFS analysis of fiscal measures includes £10bn for the 80% job retention credit for employed workers (for which the IFS have assumed a 10% take-up), but it was prepared for the announcement of support for the self-employed. This could add another £9bn to the deficit for 2020-21.

The IFS has not included the risk of bad debts on the Government’s £330bn programme of financial guarantees and business loans or on the £30bn of second quarter deferred VAT payments. There is also no cost provision for the exposure to additional bank financing and corporate bond purchases by the Bank of England that is being guaranteed by HM Treasury.

Altogether, this would increase the deficit to £177bn, or 8.1% of GDP based on a 5% smaller economy, before taking account of the support package announced for the self-employed. The prospect of further fiscal measures in the weeks and months to come, combined with the risks from loans and guarantees, means that the prospect of a deficit in excess of £200bn is looking increasingly likely.

For more information

IFS, ‘The economic response to coronavirus will substantially increase government borrowing’.

For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated Coronavirus Hub.

This article was originally published by ICAEW.

ICAEW chart of the week: Public sector employment

Headcount / FTEs - Health and social work: 1,925,000 / 1,657,000; Education 1,500,000 / 1,105,000; Public administration 1,056,000 / 897,000; HM Forces and Police: 402,000 / 391,000; Other 505,000 / 464,000.

The #icaewchartoftheweek is about public sector employment, illustrating how just under 5.4m people work for public bodies in the UK or around 4.5m full-time equivalents (FTEs). This is 16.5% of the total UK workforce of 32.8m as of last September on a seasonally-adjusted basis.

The largest employer in the public sector is the NHS, with a headcount of 1.7m out of the 1.9m who work in the health and social work sector (1.5m FTEs). Included in the million or so people who work in public administration is the 451,000-strong Civil Service (419,000 FTEs) with most of the remaining 605,000 working for local authorities and non-departmental public bodies (FTEs 478,000).

Total public sector headcount has started to increase again in recent years with NHS and non-NHS headcount up 6.8% and 0.6% respectively over a nadir of 5.2m three years ago (up 2.5% overall), compared with an increase of 3.8% and a fall of 12.1% respectively over the previous seven years (down 7.8% overall between September 2009 and December 2016).

With increasing demand on the NHS from more people living longer and the ‘end of austerity’ we should expect to see further increases in public sector employment over the next few years.

ICAEW chart of the week: Inflation

Chart: RPI 4% in Jan 2018, 2.5% in Jan 2019, 2.2% in Dec 2019. CPI: 3%, 1.8%, 1.3%. CPIH: 2.7%, 1.8%, 1.4%.

The #icaewchartoftheweek is on inflation this week, with the Office for National Statistics reporting that consumer price inflation fell to 1.3% in December 2019 – its lowest level for over three years and towards the lower end of the Bank of England’s target range of 1% to 3%.

Accompanied by very low levels of economic growth, this has prompted speculation that the Bank of England may cut interest rates at some point this year to try and stimulate the economy. They may also be hoping that plans to boost infrastructure spending will help kick-start the economy and encourage a tad more inflation at the same time.

The Chancellor is currently consulting on plans to converge the statistically flawed Retail Prices Index with CPIH (CPI including housing) over the coming decade. This will be good news for commuters and some students, given RPI’s use in calculating fare increases and interest payments. However, it will be less good for many pensioners and holders of government debt who currently benefit from higher rates.

ICAEW chart of the week: Q4 retail sales

Chart: 2018 Q4 retail sales £121.3bn + inflation (1.4%) £1.7bn + sales growth (0.9%) £1.1bn = £124.1bn 2019 Q4 retail sales.

Concerned about the state of the UK economy? Then the latest retail sales numbers will not have helped, with fourth quarter sales in the UK mainland just 0.9% higher after inflation over a year earlier, as illustrated by the #icaewchartoftheweek.

With population growth still estimated to be running at around 0.6% a year, this implies that retail sales per capita in Q4 (at around £635 per month) were just 0.3% higher after inflation than the same period in 2018.

Sales in Q4 of £124.1bn comprised £41.3bn on food, drink and tobacco, £21.3bn on clothing and footwear, £19.6bn on household goods, £11.5bn on automotive fuel and £30.4bn on other non-food purchases. On a per capita basis, this is equivalent to approximately £210 per person per month on food, drink and tobacco, £110 on clothing and footwear, £100 on household goods, £60 on automotive fuel and £155 on other non-food purchases.

This low level of growth on a year earlier reflects a slow-down in retail activity in the fourth quarter of 2019, with the Office for National Statistics reporting that Q4 sales were 0.9% lower than the third quarter on a seasonally-adjusted basis.

This will feed into fourth quarter GDP, which will not be good news for the Chancellor as he puts together what is being rumoured to be a radical first Budget in March – a weak economy will reduce his room for manoeuvre to reform the tax system while boosting public spending at the same time.

ICAEW chart of the week: monthly GDP estimates to September 2019

Chart: Monthly GDP estimates. Sep 2018 +0.02%, +0.25%, +0.20%, -0.29%, +0.48%, +0.28%, +0.04%, -0.49%, +0.21%, +0.11%, +0.31%, -0.16%, Sep 2019 -0.07%.

The ONS announced today that the real-terms change in quarterly GDP for Q3 (July to September 2019) was +0.3%, a turnaround from the contraction of -0.2% seen in Q2.

The #icaewchartoftheweek looks instead at the seasonally adjusted monthly changes in GDP over the last year. This is a view that the ONS tends not to highlight because it highlights one of the issues with GDP, which is the inherent difficultly in estimating it accurately. It prefers to remove the rockiness in the monthly numbers by averaging the results over longer periods, such as its headline three-month rolling estimates reported in the media today; a number that is still subject to revision, but to a lesser extent than that for individual months.

The monthly contraction of -0.07% in September may therefore not make the headlines, but it is the principal reason why expectations of 0.4% for quarterly growth were 0.1% too high. Most economists expected the economy to be flat this month, rather than the small contraction in the statistics released this morning.

Revisions may have a significant impact on the October monthly GDP estimates scheduled to be released two days before the general election on 10 December 2019. A flat October with no revisions would see the three-month rolling GDP number fall to 0.0%, while a further contraction could see quarterly growth turn negative, a potentially significant contributor to the public debate in the couple of days before the polling booths open.

Perhaps the main conclusion that can be drawn is not about the specific monthly changes themselves, but rather how the economy is so weak that a very small change either in actual economic activity, or in statistical data collection, can easily move the numbers from positive to negative or vice-versa.

A rather dismal perspective to hold onto as the debate rages and claim and counterclaim are made.

ICAEW chart of the week: Balance of payments

Chart: Balance of payments 2018. Current account -£93bn (trade -£38bn, primary income -£29bn, secondary income -£26bn), capital account -£3bn, financial account +£96bn (investment +£77bn, errors and omissions +£19bn).

Although most of the focus on the balance of payments is on trade, i.e. imports and exports of goods and services, it is not the only element in the balance of payments equation, as the #icaewchartoftheweek illustrates.

Based on the 2019 Pink Book published by the Office for National Statistics last week, the balance of payments between the UK and the rest of the world in 2018 comprised a current account deficit of £93bn and a capital account deficit of £3bn, balanced by net inward investment of £77bn and errors and omissions of £19bn.

The current account deficit remains high by historical standards and was equivalent to 4.3% of GDP in 2018, up from 3.5% of GDP in 2017.

The current account deficit incorporates a trade deficit of £38bn, with imports of £680bn exceeding exports of £642bn. This reflects a surplus in services of £104bn that was more than outweighed by a deficit in goods of £142bn.

The primary income deficit of £29bn reflected £242bn in outflows – mainly investment income paid to foreign investors – less £213bn coming into the UK, while the secondary income deficit of £26bn reflects contributions to international institutions (including the EU), international development assistance, remittances and other net transfers.

Capital flows of £3bn reflect both sales of non-financial assets, and capital grants to other countries.

Inward investment of £178bn comprised direct investment in UK businesses of £28bn and £151bn of equity and debt investments, less a net £1bn movement in other forms of investment. Outward investments amounted to £101bn, with direct investments in foreign businesses of £29bn and £204bn in other movements (including currency changes), less net sales of £132bn of equity and debt investments.

Unfortunately, getting the balance of payments to actually balance is quite difficult and so the ONS has plugged the difference between the current, capital and financial accounts with £19bn in ‘errors and omissions’. The ONS will continue to revise the statistics over time, with the aim of improving the accuracy of the components reported.

Although the precise numbers will continue to be refined, the overall picture presented by the ONS is unlikely to change. The UK continues to buy more than it sells, pays out more to foreign investors than is earned from foreign investments, and transfers money to the rest of the world; with finance provided by foreign investors.

For more information about the Balance of Payments, visit UK Balance of Payments, The Pink Book: 2019.