Tourism and hospitality boost UK economy in May

Businesses that were among the worst hit by lockdown helped the UK’s economic recovery to accelerate last month, according to the latest Lloyds Bank UK Recovery Tracker.

The report showed that 11 out of 14 sectors reported faster growth in output month-on-month in May, up from nine in April, as the UK moved further out of lockdown.

The strongest growth was seen in the tourism and recreation sector, with pubs, hotels, restaurants and travel agents benefiting from a release of pent-up consumer demand.

Transport — including bus and rail operators, and providers of logistics services — also bounced back during May.

Lloyds also revealed that all 14 sectors monitored by the monthly tracker reported job creation during May, up from 12 sectors in April and the highest number since April 2015.

Employment increased in tourism and recreation for the first time since January 2020 as businesses benefited from the relaxation of lockdown restrictions.

The strongest rate of job creation was seen in manufacturing as firms increased their workforces to meet rising international demand for goods.

“When we look at the pace of growth, sectors that have been acutely affected by Covid-19 restrictions are now outpacing sectors that have been able to operate more freely during lockdown,” commented Jeavon Lolay, head of Economics and Market Insight at Lloyds Bank Commercial Banking.

“Whether the four-week delay to further easing of restrictions will impact this trend is unclear. But while the delay is understandably disappointing for many businesses, there’s no denying that the economy is now on a much sounder footing.”

UK economy picked up in March

The UK economy contracted by 1.5% in the first three months of 2021 but showed strong growth in March, according to new figures from the Office for National Statistics (ONS).

Across the first quarter, GDP shrank by 2.5% in January and then grew by 0.7% in February and 2.1% in March – the fastest monthly growth since August 2020.

“The strong recovery seen in March, led by retail and the return of schools, was not enough to prevent the UK economy contracting over the first quarter as a whole, with the lockdown affecting much of the services sector,” explained Darren Morgan, ONS director of economic statistics.

“However, construction grew strongly over the quarter and, in March, was above its pre-pandemic level.

“Manufacturing also recovered from an initial fall, increasing strongly in February and March, as businesses continued to adapt and make themselves Covid-19 secure.”

March’s GDP is still 5.9% smaller than in February 2020, before the first lockdown, and 1.1% below the initial recovery peak in October 2020.

But economists are optimistic that growth will continue over the course of the year.

“The first quarter should mark the low point for the economy in 2021,” said Tej Parikh, chief economist at the Institute of Directors.

“The lockdown, and added costs of navigating new trading terms with the EU, limited many businesses’ trading activities at the start of the year. Meanwhile, the vaccine rollout, extension of support measures at the Budget, and the roadmap to reopen the economy has helped build directors’ confidence for the months ahead.”

UK economy expected to bounce back by end-2022

The UK economy will return to its pre-pandemic level by the end of 2022, according to a new analysis by the National Institute of Economic and Social Research (NIESR).

In its spring 2021 economic outlook, the think tank said it expected the economy to grow by 5.7% this year – an upgrade from its previous estimate for growth of 3.4% – and recover to its pre-pandemic peak in the last quarter of 2022.

The revised forecast comes after a smaller than expected fall in first-quarter GDP and the projected re-opening of the remaining affected sectors, thanks to the successful vaccination programme. The main downside risk remains a resurgence of the Covid-19 virus, due to the rise of new variants or the failure of vaccines, and the UK will not be physically or economically protected from a failure to control the virus globally, the authors noted.

NIESR now anticipates that unemployment will peak at 6.5% in the final quarter of this year, based on an assumption that around 450,000 of those remaining on furlough in September will not be taken back after the scheme ends.

CPI inflation is forecast to rise over the coming months, reaching 1.8% in the fourth quarter of 2021, before falling to 1.5% at the end of 2022 and settling just below the 2% target between 2023 and 2025.

NIESR also took the opportunity to call for a “serious rethink” of fiscal policy.

“Prior underinvestment in health and social care capacity had devastating consequences in 2020 and also contributed to the UK’s relative economic underperformance during the pandemic,” the report argued.

“The long-term challenges of low wage growth, slow productivity and inequalities across regions and between groups of people have not been resolved by Covid-19; indeed, the risk is that they have been exacerbated.”

UK business activity bounces back in March

Business activity in the UK private sector returned to growth in March, thanks to a rebound in the services sector.

The growth was driven by the fastest increase in service activity since August 2020, according to the latest report from IHS Markit and the Chartered Institute of Procurement & Supply (CIPS).

The headline seasonally adjusted IHS Markit/CIPS Flash UK Composite Output Index stood at 56.6 in March, up from 49.6 in February and above the crucial 50.0 mark, which indicates growth, for the first time in three months.

It was also the first time that service sector activity (56.8) outpaced manufacturing production growth (55.6) since the start of the pandemic.

“The surge in business activity is far stronger than any economists expected, according to Reuters polls, and hints at only a modest contraction of GDP during the first quarter, adding to evidence that the economy has shown far greater resilience in the third lockdown compared to the first,” commented Chris Williamson, chief business economist at IHS Markit.

“The encouraging readings on future expectations, job creation and new order inflows meanwhile all point to robust economic growth in the second quarter, especially if virus restrictions are lifted further.”

Williamson added, however, that there are still concerns over supply chain delays, a continued fall in exports and sharply rising prices, all of which are making life difficult for many companies.

And Covid-19 restrictions are likely to curb the overall pace of economic growth for some time to come, especially if there is a third wave of infections, he concluded.

Now is ‘not the time’ for tax rises, MPs say

Tax increases in the upcoming Budget could undermine the UK’s economic recovery from Covid-19, the Treasury Committee has warned.

In a cross-party report published as part of its Tax After Coronavirus inquiry, the committee said that “now is not the time for tax rises or fiscal consolidation”.

It added, however, that “significant fiscal measures, including revenue raising, will probably be needed in future”.

The Government’s ‘tax lock’ manifesto commitment on income tax, national insurance and VAT is expected to come under pressure, and a “moderate” increase in corporation tax could raise revenue without damaging growth, the committee argued.

The report also called for reform of stamp duty land tax (SDLT) and said that the Government should support businesses by introducing a temporary three-year loss carry-back for trading losses.

Mel Stride MP, chair of the Treasury Committee, told the BBC it was “almost inevitable” that some taxes would be increased.

Speaking to BBC Radio 4’s Today programme, he said: “Putting up taxes is in general not a great thing to do but we are where we are and I think the committee view is that looking at income tax and looking at corporation tax is… the right way to go.”

Stride added: “Each 1% increase in corporation tax raises about £3bn so I think… [it] is almost inevitable that some level of rise in going to occur.”

Chancellor Rishi Sunak will unveil the Budget on Wednesday.

UK economy ‘to get worse before it gets better’

The UK economy will get worse before it gets better, Chancellor Rishi Sunak has warned.

In a speech to MPs, Sunak said that new national restrictions to control the spread of coronavirus are necessary but will have a “further significant economic impact”.

Fiscal stimulus measures provided so far amount to more than £280bn.

Alongside the introduction of new restrictions, the Government is providing another £4.6bn to protect UK jobs and businesses, the chancellor said.

For example, businesses in England that are legally required to close — such as those in retail, hospitality and leisure — can claim one-off grants of up to £9,000 for each of their premises, benefitting over 600,000 businesses.

Additionally, local authorities will be distributing discretionary funds of half a billion pounds to support local businesses in their areas. The furlough scheme has also been extended until the end of April 2021.

“Sadly, we have not, and will not, be able to save every job and every business,” Sunak said.

“But I am confident that our economic plan is supporting the finances of millions of people and businesses.”

UK could be heading for double-dip recession

Activity in the UK’s private sector contracted in November as the national lockdown in England ended four months of expansion, according to early data.

The IHS Markit/CIPS Flash UK Composite PMI is down to 47.4 so far in November — the first time the index has gone below 50 since June. Any score under 50 represents a decline in activity.

This early “flash” reading of the index compares to a level of 52.1 in October.

The downturn was driven by the fastest reduction in service sector output since May as pubs, restaurants and other leisure and hospitality businesses closed under new Covid-19 lockdown measures.

Manufacturing was largely unaffected by the lockdown and this is reflected in the manufacturing PMI, which rose to 55.2, up from 53.7 in October and the highest since August.

Stockpiling the before end of the Brexit transition period on 31 December 2020 contributed to the boost in manufacturing.

Chris Williamson, chief business economist at IHS Markit, warned that the November survey data points to a double-dip recession, with the latest lockdown measures causing business activity to collapse across much of the economy.

He added: “Some comfort comes from the data suggesting that the impact of the lockdown has not been as severe as in the spring, and manufacturing has also received a significant boost from inventory building and a surge in exports ahead of the UK’s departure from the EU at the end of the year, providing a fillip for many companies.

“However, while the lockdown will be temporary, so too will this pre-Brexit boost.”

Should there be a tax on working from home?

Working from home has allowed millions of people to continue working during the Covid-19 pandemic. But not every job can be done remotely, and a new report argues that home-working should be taxed in order to help support people whose jobs are under threat.

Deutsche Bank strategist Luke Templeman proposed a tax of 5% of a worker’s salary, which would be paid by the employer. In cases where an employee is provided with a desk but chooses to work from home instead, the worker would pay the tax out of their salary for each day they work from home.

The report argues that those who can work from home receive direct and indirect benefits, including savings on travel, lunch and clothes, as well as greater job security, convenience and flexibility.

For the UK, the tax equates to just under £7 per day, based on a salary of £35,000.

The self-employed and those on low incomes would be excluded and the tax would only apply outside the times when the government advises people to work from home.

Research by Deutsche Bank has shown that, after the pandemic has passed, more than half of people who worked from home for the first time want to continue doing so for between two and three days a week.

“The sudden shift to working from home means that, for the first time in history, a big chunk of people have disconnected themselves from the face-to-face world yet are still leading a full economic life,” Templeman said.

“That means remote workers are contributing less to the infrastructure of the economy whilst still receiving its benefits.”

Income generated by the tax would be paid to people who can’t do their jobs from home, for example to support them while they retrain or to recognise essential workers on low wages who assume a greater Covid risk.

‘Real living wage’ for UK workers rises to £9.50 an hour

More than 250,000 people who work for an employer accredited with the Living Wage Foundation are set to get a pay rise.

Almost 7,000 employers across the UK have pledged to pay the rate recommended by the Living Wage Foundation to ensure all staff earn a wage that meets the real cost of living, and covers everyday needs. The “real Living Wage” rates are independently calculated based on what people need to live on.

The rates for 2020/21 have been announced as £9.50 an hour in the UK (a 20p increase) and £10.85 in London (10p increase).

The UK Government’s compulsory minimum, the National Living Wage, currently stands at £8.72 an hour for anyone over the age of 25.

A full-time worker paid the new £9.50 real Living Wage will receive over £1,500 in additional wages annually compared to the current Government minimum. For a full-time worker in London this figure rises to £4,000.

Over 800 additional employers have been accredited with the Living Wage Foundation since the start of the Covid-19 pandemic, including Tate and Lyle Sugars, Network Rail and Capital One.

“It has been the cleaners, security guards and catering staff who have kept our factories clean, safe and well-fed over the last six difficult months,” said Gerald Mason, senior vice president of Tate and Lyle Sugars. “We’re pleased to recognise their value and role in helping us feed the nation.”

CFOs don’t expect recovery until next summer

Almost two-thirds (62%) of finance leaders in the UK believe that demand for their own businesses is unlikely to recover to pre-pandemic levels until after the second quarter of 2021.

Despite the ongoing uncertainty, however, the majority expect to take back furloughed staff, with an average of 82% of employees expected to remain on payrolls after the scheme closes at the end of October.

The Deloitte survey of 102 chief financial officers and group finance directors took place between 22 September and 6 October 2020.

“Business leaders expect a longer haul back to pre-Covid levels of activity,” commented Ian Stewart, chief economist at Deloitte. “With further restrictions coming into effect, businesses have scaled back expectations and are focused on strengthening their businesses and their balance sheets.

“British businesses are gearing up for a long winter with Covid-19, with a full recovery on the horizon only after next summer.”

In other findings, CFOs expect the negative effects of the Covid-19 pandemic to overshadow those of Brexit. Three-quarters (75%) of CFOs expect the pandemic to have ‘significant’ or ‘severe’ negative effects on their businesses over the next 12 months. By contrast, 23% expect similar negative effects due to Brexit.

Hiring and capital expenditure will be reduced more substantially over the next year in the event of the UK leaving the European Union without a deal, however.

Around a third (30%) of finance leaders said they would reduce hiring in the event of a Brexit ‘no-deal’, compared to 15% in a ‘thin-deal’ scenario, which would ensure tariff-free goods trade only. Just over a quarter (26%) of CFOs said they would decrease capital expenditure in a no-deal scenario, compared to 11% in the event of a thin-deal.