Despite lockdown, there is growing confidence in the UK.
- Friday, January 29, 2021
The value of sterling has been improving and hit US$1.37 on the back of the Brexit deal and the relatively swift roll out of the Pfizer and AstraZeneca vaccines across the country. The fact that the pound has gained 19% in relative value over the past ten months illustrates a steady recovery in outlook for the UK.
The UK roll out of the vaccine is gathering pace with confidence in UK deliveries. This is supporting a lift in both currency and equity markets, which have until recently languished behind other major markets.
Despite this improvement in currency and stock market values, the third national lockdown has hurt the economy, with business confidence falling to the lowest level since last May. This outlook has prompted many economists to predict a double dip recession in the UK.
Chancellor Rishi Sunak, is being encouraged to extend the taxpayers funded furlough scheme beyond April. The current scheme is covering 80% of the income for around 5 million workers. The latest figures from the Office of National Statistics (ONS) confirms that in the three months to November, the UK rate of unemployment rose to 5% and that 1.72 million people are now out of work. The ONS confirmed that 828,000 workers had left company payrolls since the start of the pandemic in March. The worst hit group were the 16–24 year-olds and the hospitality and manufacturing sectors. With nearing 5 million benefiting from the furlough scheme, the ONS is conscience that unemployment could rise further particularly if the scheme ends at the end of April as is currently planned.
If Mr Sunak is to extend the furlough scheme it will add a further £3bn of cost per month onto the taxpayer. Business leaders are urging an extension, as the economy will not have recovered sufficiently by April for there not to be higher unemployment as a result. The British Chamber of Commerce are calling for an extension to the end of July. If this is implemented then furlough costs alone will hit £75bn. The Treasury has invested in total £280bn in job protection and business support.
With a budget planned for March, Rishi Sunak will be considering his options to both support the economy, particularly the hardest hit and a programme of tax increases that will start the long process of repaying our £2.1tn national debt. Sunak is reportedly looking at a £1000 single one off payment to the 5.7 million Universal Credit claimants instead of a £20 weekly increase. This would give a full year’s money up front and would be seen as a one off, rather than an increase in benefits that could be difficult to reverse.
It is predicted that businesses will be the first to see their tax rates increase with the re-introduction of business rates and a rise in the rate of corporation tax. Current corporation tax rates are 19% and the average in OECD countries is 23.5%. The debate will be about revenue versus Britain’s attraction to foreign business post Brexit.
New US President Biden’s massive spending spree on household and business support measures is giving cover to other counties to increase borrowing and to spend their way out of recession and into growth, and that this hoped for growth, then deflates their national debt levels. It worked for Roosevelt so could do so for Biden. Boris will be happy to follow suit as he focusses on rail expansion, broadband, fin tech, giga battery factories, infrastructure and house building.
The UK government borrowed £34bn in December alone. Of the £34bn, £10bn was spent on furlough and job retention and £9bn on vaccines, testing and medical equipment including PPE. UK borrowing currently stands at £271bn for this financial year and our national debt is £2.1tn, over 100% of our national GDP.
It has been estimated that over the past year 1.3 million foreign born UK residents have left the UK. Covid and three lockdowns have reversed the growth in immigration as people faced with the prospect of no work and relatively higher living costs have returned home. Once we do recover from Covid and lockdowns ended, the loss of 1.3 million workers may be felt with labour shortages in the UK. Therefore, there will be opportunities for the current unemployed workforce to pick up future labour demand.
On the other side of this immigration trend, it is expected that up to two million Hong Kong citizens will take up the UK offer of a residence visa over the next five years. There has been a surge in applications for British National Overseas passports with 732,000 BNO passport holders’ applications in 2020.
The FTSE 100 is likely to see some much-anticipated new names added to the index in the months and years ahead. The growth in the UK tech industry and particularly Fin Tech will result in new firms entering the top 100 UK firms. Interestingly, Food delivery business Deliveroo, has completed a fund-raising round that values the company at US$7bn and is now expected to list shortly. Checkout.Com, the payment processing company hit a US$15bn valuation on its latest fundraising round and is also likely to list soon. Revolut, the finance app is now valued at US$20bn. Challenger bank Monzo and TransferWise are also likely to seek listings in the near future. All these near future developments are good for the FTSE 100 as there are too few growth firms in the current index.
Technology companies account for 27% of the US S&P 500 index and the growth in tech has aided the 160% rise in the S&P 500 over the past decade. The same impact could significantly rise the FTSE 100 from bouncing around in the 6000 to 7000 point range. Greater growth prospects will attract new investment into UK business and also encourage more firms to float.
According to the Financial Times, the number of global tech related private firms that are valued over US$1bn has risen from 40 to 500 over the past seven years. These 500 firms have a combined value of US$1.5tn and will be the future hunting ground for new tech investment over the years ahead.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.