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Worse Than Covid? Risks to UK Economy as Brexit Deadline Nears – BNN

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(Bloomberg) — With the U.K. economy suffering more from the coronavirus than most advanced nations, the stakes couldn’t be higher as Brexit trade negotiations enter their endgame.

Gross domestic product will likely be smaller than what it would have been had the U.K. stayed in the European Union regardless of the outcome. But reaching an accord would help avoid major trade disruptions come Jan. 1.

Leaving without a deal, meanwhile, means that Brexit could end up inflicting more lasting damage than the pandemic, according to economists. Both sides say the onus is on the other to make a decisive move before the transition ends in just over a month.

The following charts illustrate what’s at stake for the U.K. economy.

The pandemic has put Britain on course for its deepest economic slump since the Great Frost of 1709. By the first quarter of 2025, GDP will be 3.1% lower than anticipated in March, according to estimates by the Office for Budget Responsibility released on Wednesday. The fiscal watchdog deems the loss of output to be permanent.

In a separate analysis, the OBR said transitioning into a free-trade agreement with the EU would shave 4% off GDP in the long run. A no-deal scenario — meaning a shift to World Trade Organization rules — would mean losing another 1.5%. Dan Hanson of Bloomberg Economics puts the combined cost higher still, at 7% of GDP.

Jobs are also on the line. Unemployment is set to peak at 7.5%, or 2.6 million people, next year under the OBR’s central scenario that a trade deal be reached. A no-deal exit pushes the rate up to 8.3%.

Financial services and export-reliant manufacturing sectors such as the car industry, food and textile producers stand to be among the hardest hit if trade talks fail.

There are concerns that the time and money spent dealing with the pandemic has left many firms ill equipped to cope with the potential costs and disruptions ahead. A Bank of England survey of chief financial officers last month found less than 4% of them were fully prepared for the end of the transition period.

Before the pandemic, businesses were already holding back on spending as they awaited greater clarity over Britain’s post-divorce relationship with Europe. Now Covid-19 has added to the difficulties, decimating investment this year and risking their ability to do so in future.

No matter what the outcome of the talks, a period of adjustment is likely to make it hard for companies to know how best to invest for the future, but a move to WTO terms risks keeping spending depressed for longer, hitting already weakened productivity.

The bigger the economic shortfall, the bigger the persistent budget deficit that Chancellor of the Exchequer Rishi Sunak needs to fill.

Even if a trade deal is struck, balancing day-to-day spending and revenue by the middle of the decade will require 27 billion pounds ($36 billion) of tax increases or spending cuts, according to the OBR. That figure could rise to 34 billion pounds if firms are hit by new tariffs and curbs on trade with the EU.

©2020 Bloomberg L.P.

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ECB's latest stimulus expected to have little impact on euro zone economy – Reuters poll – Cape Breton Post

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By Richa Rebello

BENGALURU (Reuters) – The European Central Bank’s new policy package will have little effect on the euro zone’s coronavirus-ravaged economy, according to the forecasts of a Reuters poll of economists, who nearly halved their outlook for first-quarter growth.

Despite the ECB’s decision to top up its pandemic emergency purchases by half a trillion euros to 1.85 trillion euros and extend the programme for nine months, the bloc’s economic outlook remains bleak.

The Reuters poll consensus of over 80 economists forecast the euro zone economy shrank 2.5% last quarter after expanding 12.5% in the third quater and was expected to grow 0.6% this quarter, nearly half the 1.1% predicted a month ago.

It was then expected to expand 2.3%, 1.9% and 1.0% in the second, third and fourth quarters, largely unchanged from last month’s forecasts collected just before the ECB introduced more stimulus.

Over 70% of economists, or 28 of 39 who replied to an additional question, said the ECB’s latest policy moves would have little impact on the euro zone economy. The others said it would provide a significant boost.

“Interest rates are already so low and policy is ultra-loose, so for now, monetary policy cannot impact investment or consumer demand. Thus we do not think the ECB can influence the economy strongly at this time,” said Christoph Weil, senior economist at Commerzbank.

“We expect a bitter couple of months. Lockdowns will dampen the economy and we expect falling GDP in the last quarter of 2020 and in the first quarter of this year. So technically a recession”.

Graphic: Reuters Poll – Euro zone economic growth and inflation outlook: https://fingfx.thomsonreuters.com/gfx/polling/rlgvdgleepo/Euro%20zone%20economic%20outlook.PNG

Of the participants in the Jan. 11-15 survey, over 25% expected the euro zone – where growth plumbed to an historic low in the first half of 2020 – to have again entered a technical recession, defined as two consecutive quarters of contraction.

On an annualised basis, the economy was expected to have shrunk 7.3% in 2020, roughly in line with the last poll, but for this year, the median was downgraded to 4.5% from 5.0% last month. For 2022, the growth forecast was upgraded to 3.9% from 3.5%.

“The start of the year continues to bring bad news for Europe as the health situation deteriorates. With lockdowns already being extenin several countries, short-term risks to the economic outlook are clearly skewed to the downside, especially as the vaccination roll-out is still slow,” said Angel Talavera, head of Europe economics at Oxford Economics.

“The new and more transmissible variants of the virus mean a further deterioration could happen very quickly.”

Over 70% of respondents, or 30 of 42, who replied to a separate extra question said the economy would return to pre-crisis levels within two years, including six who said within a year. The others said it would be more than two years.

Graphic: Reuters Poll – Euro zone economy and the European Central Bank’s policy outlook: https://fingfx.thomsonreuters.com/gfx/polling/xegpbemwgvq/Reuters%20Poll%20-%20Euro%20zone%20and%20ECB%20policy%20outlook%20-%20January%202021.PNG

The two largest euro zone economies were expected to grow much slower in 2021 compared with expectations in October. Germany was forecast to grow 3.7%, down from 4.6%, and the outlook for France was downgraded to 5.9% from 6.9%.

Euro zone inflation, which remained in negative territory for five straight months last year, was expected to remain below the ECB’s target of just under 2%, averaging 0.9% in 2021 and 1.3% in 2022.

A slim majority, over 52% of economists, or 21 of 40 who answered a separate question, said a significant pick-up in inflation was likely. Seventeen said it would remain around the same as 2020 and two said deflation was more likely.

“If history is any guide, any too-high expectations of inflation can be shattered. But we have very supportive fiscal policy and a number of structural factors that could support higher inflation a little further down the road,” said Florian Hense, senior Europe economist at Berenberg.

(For other stories from the Reuters global economic poll:)

(Reporting by Richa Rebello; Polling by Sujith Pai and Swathi Nair; editing by Jonathan Cable and Larry King)

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China's economy grows 2.3% in 2020 as recovery quickens – CNN

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The world’s second largest economy expanded 2.3% in 2020 compared to a year earlier, according to government statistics released Monday.
It’s China’s slowest annual growth rate in decades — not since 1976 has the country had a worse year, when GDP shrunk 1.6% during a time of social and economic tumult.
But during a year when a crippling pandemic plunged major world economies into recession, China has clearly come out on top. The expansion also beat expectations. The International Monetary Fund, for example, predicted that China’s economy would grow 1.9% in 2020. It’s the only major world economy the IMF expected to grow at all.
The pace of the recovery appears to be accelerating, too: GDP grew 6.5% compared to a year ago, faster than the third quarter’s 4.9% growth.
“The performance was better than we had expected,” said Ning Jizhe, a spokesman for China’s National Bureau of Statistics, at a press conference in Beijing.
The country scrapped its growth target last year for the first time in decades as the pandemic dealt a historic blow to the economy. GDP shrank nearly 7% in the first quarter as large swaths of the country were placed on lockdown to contain the spread of the virus.
Since then, though, the government has attempted to spur growth through major infrastructure projects and by offering cash handouts to stimulate spending among citizens.
Industrial production was a particularly big driver of growth, jumping 7.3% in December from a year earlier.
“In and out of lockdown ahead of everybody else, the Chinese economy powered ahead while much of the world was struggling to maintain balance,” wrote Frederic Neumann, co-head of Asian economics research at HSBC, in a Monday research report.
This has “put a floor under growth” in other regional markets, he added. Surging Chinese investment in infrastructure and property, for example, has been a boon to countries like Australia, South Korea and Japan that exported supplies to China.
Trade has also been strong. China’s overall surplus for the year hit a record $535 billion, up 27% from 2019, according to statistics released last Friday. Analysts pointed out that the country benefited from a lot of demand for protective gear and electronics as people around the world worked from home.
Chinese markets reversed opening losses Monday to rise following the announcement. The Shanghai Composite (SHCOMP) gained 0.8%, while the Shenzhen Component Index — a benchmark for the city’s tech-heavy exchange — rose 1.6%. Hong Kong’s Hang Seng Index (HSI) increased 1%.
There are still some weak spots, though. Retail sales lost a little steam in December, rising 4.6% compared to November’s 5%. For the entire year, retail sales slumped 3.9%. Ning, the National Bureau of Statistics spokesperson, blamed the waning sales on a resurgence of coronavirus in some places.
The “sporadic” cases in China “will bring uncertainty to [our] economic recovery,” he added.
Even so, Ning said the country believes the pandemic is under control, and said authorities expect people to spend more money this year.
Analysts from Capital Economics, meanwhile, believe the outlook is “bright” in the near term.
“Despite the latest dip in retail sales, we see plenty of upside to consumption as households run down the excess savings they accumulated last year,” wrote Julian Evans-Pritchard, senior China economist for Capital Economics, in a Monday note. “Meanwhile, the tailwinds from last year’s stimulus should keep industry and construction strong for a while longer.”

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ECB's latest stimulus expected to have little impact on euro zone economy – Reuters poll – The Guardian

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By Richa Rebello

BENGALURU (Reuters) – The European Central Bank’s new policy package will have little effect on the euro zone’s coronavirus-ravaged economy, according to the forecasts of a Reuters poll of economists, who nearly halved their outlook for first-quarter growth.

Despite the ECB’s decision to top up its pandemic emergency purchases by half a trillion euros to 1.85 trillion euros and extend the programme for nine months, the bloc’s economic outlook remains bleak.

The Reuters poll consensus of over 80 economists forecast the euro zone economy shrank 2.5% last quarter after expanding 12.5% in the third quater and was expected to grow 0.6% this quarter, nearly half the 1.1% predicted a month ago.

It was then expected to expand 2.3%, 1.9% and 1.0% in the second, third and fourth quarters, largely unchanged from last month’s forecasts collected just before the ECB introduced more stimulus.

Over 70% of economists, or 28 of 39 who replied to an additional question, said the ECB’s latest policy moves would have little impact on the euro zone economy. The others said it would provide a significant boost.

“Interest rates are already so low and policy is ultra-loose, so for now, monetary policy cannot impact investment or consumer demand. Thus we do not think the ECB can influence the economy strongly at this time,” said Christoph Weil, senior economist at Commerzbank.

“We expect a bitter couple of months. Lockdowns will dampen the economy and we expect falling GDP in the last quarter of 2020 and in the first quarter of this year. So technically a recession”.

Graphic: Reuters Poll – Euro zone economic growth and inflation outlook: https://fingfx.thomsonreuters.com/gfx/polling/rlgvdgleepo/Euro%20zone%20economic%20outlook.PNG

Of the participants in the Jan. 11-15 survey, over 25% expected the euro zone – where growth plumbed to an historic low in the first half of 2020 – to have again entered a technical recession, defined as two consecutive quarters of contraction.

On an annualised basis, the economy was expected to have shrunk 7.3% in 2020, roughly in line with the last poll, but for this year, the median was downgraded to 4.5% from 5.0% last month. For 2022, the growth forecast was upgraded to 3.9% from 3.5%.

“The start of the year continues to bring bad news for Europe as the health situation deteriorates. With lockdowns already being extenin several countries, short-term risks to the economic outlook are clearly skewed to the downside, especially as the vaccination roll-out is still slow,” said Angel Talavera, head of Europe economics at Oxford Economics.

“The new and more transmissible variants of the virus mean a further deterioration could happen very quickly.”

Over 70% of respondents, or 30 of 42, who replied to a separate extra question said the economy would return to pre-crisis levels within two years, including six who said within a year. The others said it would be more than two years.

Graphic: Reuters Poll – Euro zone economy and the European Central Bank’s policy outlook: https://fingfx.thomsonreuters.com/gfx/polling/xegpbemwgvq/Reuters%20Poll%20-%20Euro%20zone%20and%20ECB%20policy%20outlook%20-%20January%202021.PNG

The two largest euro zone economies were expected to grow much slower in 2021 compared with expectations in October. Germany was forecast to grow 3.7%, down from 4.6%, and the outlook for France was downgraded to 5.9% from 6.9%.

Euro zone inflation, which remained in negative territory for five straight months last year, was expected to remain below the ECB’s target of just under 2%, averaging 0.9% in 2021 and 1.3% in 2022.

A slim majority, over 52% of economists, or 21 of 40 who answered a separate question, said a significant pick-up in inflation was likely. Seventeen said it would remain around the same as 2020 and two said deflation was more likely.

“If history is any guide, any too-high expectations of inflation can be shattered. But we have very supportive fiscal policy and a number of structural factors that could support higher inflation a little further down the road,” said Florian Hense, senior Europe economist at Berenberg.

(For other stories from the Reuters global economic poll:)

(Reporting by Richa Rebello; Polling by Sujith Pai and Swathi Nair; editing by Jonathan Cable and Larry King)

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