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UK economy at the crossroads before lockdown ends

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Richard Partington Economics correspondent
·7-min read
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<span>Photograph: Dan Kitwood/Getty Images</span>
Photograph: Dan Kitwood/Getty Images

Covid cases fall during lockdown

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The number of daily new confirmed coronavirus infections has fallen in the past month but remains higher than in the first wave of the pandemic. As the government plots a course to relaxing Covid restrictions in four stages this spring, the seven-day average for the number of deaths within 28 days of a positive Covid-19 test has fallen to 400, from almost 1,300 in early January. After the government hit its target to offer the vaccine to the four most at risk groups in the UK, almost 18 million people have had a first jab. Almost 650,000 have had a second.

Mobility climbs despite continued lockdown

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The number of trips taken on UK roads and public transport has increased slightly in the past month, in a sign that more people are starting to leave their homes despite the continued lockdown. According to Apple mobility data – which records requests made to Apple Maps for directions – bus and train journeys are still down by more than half from pre-pandemic levels but have crept up in recent weeks. Mobility levels are higher than during the first lockdown, reflecting a lesser impact on economic activity.

Stock market gains after unlocking roadmap

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Shares in the British companies most likely to benefit from the easing of Covid restrictions have rallied on the London stock market after Boris Johnson set out the government’s roadmap for ending lockdown in England. However, concerns are growing that a faster economic recovery would trigger a surge in inflation, which could force central banks to raise interest rates. It comes at a time when several global markets, including the Dow Jones and the Japanese Nikkei, are close to record highs. The FTSE 100 has risen by about 150 points since the start of the month, to trade at about 6,600. The index of leading UK company shares still remains about 1,000 points below its pre-pandemic level in early 2020.

Inflation edges higher as food prices rise

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Rising food prices drove up inflation in January. The consumer prices index (CPI) rose to 0.7% from 0.6% a month earlier as food and household goods stores put up their prices, and offered fewer discounts this year on items such as beds and settees. The Office for National Statistics (ONS) noted price rises on frozen fish fingers, vegetables such as cauliflowers, and premium crisps. Analysts said the inflation rate would probably rise further over the coming months as the economy gradually reopens.

Business activity stronger than feared in February

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Britain’s economy showed signs of steadying in February after the plunge in business activity in January when lockdown measures were reintroduced. Closely watched surveys of company managers showed the situation improved for services firms but the economy still remained in contraction as restrictions took their toll. The flash IHS Markit/Cips purchasing managers index jumped to 49.8 from 41.2 in January, just below the 50 mark that divides expansion from contraction. With rising Covid infections on the continent, activity in the eurozone remained subdued. However, activity hit a six-year high in the US. Although losing some momentum, China’s economic recovery continued.

Unemployment rises despite furlough extension

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The impact of Covid-19 on the economy drove up the unemployment rate to 5.1% in the three months to the end of December – representing 1.74 million people – up from 5% in the three months to the end of November, according to the ONS. The jobless rate was 4% before the pandemic struck. However, figures from HMRC showed 83,000 employees were added to company payrolls in January, in a promising sign for the jobs market despite the third lockdown. It comes after the chancellor, Rishi Sunak, extended the furlough scheme, now due to run until the end of April. The chancellor is coming under pressure to provide extra support as job losses climb.

Retail sales plunge during third lockdown

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British retail sales fell by 8.2% in January from a month earlier amid the toughest Covid lockdown since the first wave of the pandemic. With the closure of stores on high streets and in shopping centres, sales plunged across the retail sector, apart from food stores and online, where spending increased. Internet sales accounted for a record 35.2% of sales last month, up from 29.6% a month ago, when more physical shops were open in the run-up to Christmas. A year ago, online sales were running at 19.5%. The ONS said after steadily recovering from the impact of the first lockdown, the latest restrictions had pushed the volume of sales down to 5.5% below pre-pandemic levels.

Budget deficit rises before chancellor’s budget

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Sunak’s budget on 3 March will be framed by record levels of government borrowing and debt as state spending soars in response to Covid and tax revenues collapse. Public sector borrowing was £8.8bn in January, the highest on record for a month when self-assessed tax receipts usually help to generate a surplus. It takes the budget deficit – the gap between spending and receipts – to about £271bn for the first 10 months of the financial year, up £222bn on a year ago. December’s borrowing pushed the national debt – the sum total of every deficit – to £2.1tn, or about 97.9% of gross domestic product, the highest debt ratio since the early 1960s. Sunak has said “hard choices” must be taken to balance the books. But economists warn austerity or tax rises could derail the UK’s economic recovery.

Double-dip recession avoided despite record slump

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Official figures confirmed the UK economy suffered its biggest annual decline in 300 years in 2020 amid the fallout from the coronavirus pandemic, but that a double-dip recession at the end of the year was avoided. The ONS said gross domestic product fell by 9.9% in 2020, the biggest decline since 1709, as no sector of the economy was left unscathed. However, companies learning to adapt to lockdown and looser controls in December helped the economy to grow by 1% in the final three months of the year. Although avoiding a return to recession during the second wave of the pandemic, economists expect GDP is shrinking again at the start of 2021 amid the toughest lockdown since the first wave of Covid-19.

House prices fall as stamp duty deadline looms

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House prices in the UK fell in January by the most in almost a year, as the Covid homebuying boom fuelled by the government’s stamp duty holiday fades. With the end of the tax break looming at the end of March and disruption from the renewed lockdown, the price of an average property fell 0.3% month on month, according to Halifax. The fall ends a seventh-month streak of house price growth as Britons scrambled to take advantage of the stamp duty holiday. Property industry experts have warned prices could fall dramatically this year after the tax break ends and as unemployment rises. Sunak is, however, reportedly considering an extension at the budget.

And another thing we’ve learned this month … Household savings could power economic revival but inequality has risen

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British households have saved record amounts during the coronavirus pandemic as people have spent less money during lockdown and made savings on travel costs and eating out while working from home. The chief economist at the Bank of England, Andy Haldane, says this means families are poised “like a coiled spring” to fuel a rapid return to economic growth with a multibillion-pound spending spree. Official figures show record repayments on credit cards and personal loans and the UK’s households savings ratio – a snapshot of savings as a proportion of disposable income – hitting a record high of 27% in June last year, and staying at historically high levels since. But this rise in average saving masks severe financial pain for lower-income households bearing the brunt of Covid job losses. It is mostly those in the top 40% saving money and it is unclear how much of those savings will be spent in the recovery.

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