Julia Kollewe 

Pound hits $1.40 on vaccine optimism; UK retail sales tumble 8.2% – as it happened

Sterling hits $1.40 for first time in nearly three years as Uber drivers win a landmark victory; UK public finances record the first January deficit in 10 years
  
  

Wads of British Pound Sterling banknotes are stacked in piles.
Wads of British Pound Sterling banknotes are stacked in piles. Photograph: Leonhard Föger/Reuters

Closing summary

The pound has powered past $1.40 for the first time in almost three years and has clawed most of the losses suffered since the Brexit vote in June 2016. It hit $1.4036, the highest level since 20 April, 2018, and is getting closer to $1.4860, the level it was at a day before the the referendum result was announced.

So far this year, sterling has gained 2.7% against the dollar, and it is the best-performing G10 currency. It has been lifted by the UK’s rapid vaccination drive, which has raised hopes of economic recovery in the months ahead.

The jump in the pound came despite a sharp decline in UK retail sales in January during the lockdown. The UK government borrowed £8.8bn in January, the first January deficit in 10 years, and the biggest borrowing since records began in 1993.

Stock markets are grinding higher in Europe and the US, buoyed by vaccine optimism.

Bitcoin has hit a fresh record high, rising 2.6% to $52,932, putting it on course for a weekly gain of over 8%. It has gained 60% in value so far this month and its market value is approaching $1 trillion.

Today is an exciting day for anyone working in the gig economy. Uber has lost its appeal in the UK’s Supreme Court against a landmark employment tribunal ruling that its drivers should be classed as workers with access to the minimum wage and paid holidays.

The decision has legal consequences for the pensions and benefits entitlements for these workers. Richard Lee, a partner at the law firm Gowling WLG, says:

This decision is the final confirmation that individuals working for Uber (and other businesses using this working model) are to be treated as workers and depending on the level of earnings they will now be entitled to be enrolled into an appropriate pension arrangement with minimum contributions of 3% from their employer.

It is one of a string of cases challenging the self-employed status of gig-economy workers, including action against the minicab firm Addison Lee and the delivery groups CitySprint, Excel and eCourier.

Thank you for reading. Have a great weekend, and stay safe! -JK

Updated

US business activity at 6-year high – PMI

Business activity across the US strengthened to the highest level in almost six years in February, according to a closely watched survey from IHS Markit. Its flash purchasing managers index rose to 58.9 from 58.3 in January, and is better than the 58 expected by analysts. The rise in business activity was the strongest for almost six years, as service sector firms noted greater client demand.

  • Flash U.S. Composite Output Index at 58.8 (58.7 in January). 71-month high.
  • Flash U.S. Services Business Activity Index at 58.9 (58.3 in January). 71-month high. Flash U.S. Manufacturing PMI at 58.5 (59.2 in January). 2-month low.
  • Flash U.S. Manufacturing Output Index at 57.7 (60.5 in January). 4-month low.

Chris Williamson, chief business economist at IHS Markit, says

Despite headwinds of Covid-19, extreme weather and record supply chain delays, US businesses reported the fastest output growth for almost six years in February.

The data add to signs that the economy is enjoying a strong opening quarter to 2021, buoyed by additional stimulus and the partial reopening of the economy as virus related restrictions were eased on average across the country.

Business sentiment remains buoyant, boosted by hopes of further stimulus and the vaccine roll out, but it’s disappointing to see this not yet translate into stronger jobs growth. Many service sector firms in particular remain reluctant to hire, cautious about adding to overheads.

Wall Street has opened higher, and European markets are also grinding higher.

  • Dow Jones up 67 points, or 0.21%, at 31,560
  • S&P 500 up 12 points, or 0.32%, at 3,926
  • Nasdaq up 63 points, or 0.46%, at 13,928
  • UK’s FTSE 100 up 13 points, or 0.21%, at 6,631
  • Germany’s Dax up 11 points, or 0.82%, at 14,001
  • France’s CAC up 39 points, or 0.69%, at 5,766
  • Italy’s FTSE MiB up 28 points, or 0.27%, at 10,746

Lunchtime summary

The pound has jumped 0.4% against the dollar to $1.4026, the first time it has hit $1.40 since April 2018, as investors are betting on a swift economic recovery on the back of the UK’s successful vaccination drive.

Stock markets are drifting higher after three days of losses, with investors clinging to hopes of economic recovery on the back of Covid-19 vaccination campaigns in the months ahead. The pan-European index is 0.52% ahead.

The FTSE 100 index in London is 0.23% ahead, buoyed by mining and banking shares. NatWest has recovered and is now among the biggest risers even though it swung to a full-year loss. Even so, it resumed dividend payouts, like Barclays yesterday. NatWest shares are up nearly 4% while Barclays is 3.8% ahead.

NatWest also declared its intention to pull out of the Republic of Ireland and to wind down Ulster Bank. This puts 3,000 jobs at risk, according to the Unite union.

Shares in the Parisian luxury house Hermès rose as much as 5.7% after the maker of chic handbags and silk scarves reported a sharp recovery in sales in the fourth quarter, driven by a near-50% jump in sales in Asia.

The Frankfurt stock market rose 0.83%, the Paris bourse added 0.82% and the borsa in Milan rose 0.87%. US stock futures are pointing to a higher open on Wall Street in an hour’s time.

Markets have been buoyed by positive vaccine news. Pfizer/BioNtech’s Covid-19 vaccine greatly reduces virus transmission, two Israeli studies have found. You can read more on our coronavirus live blog.

At the same time, big pharma companies are under growing pressure to provide fairer access to vaccines.

The scramble over Covid vaccines should alert rich countries to the power of profit-driven companies that control production of crucial medicines, said Mustaqeem De Gama, South Africa’s delegate at the World Trade Organization (WTO) on intellectual property rights.

Some good vaccine news from Pfizer/BioNTech on their mRNA vaccine for coronavirus that is commonly stored at -70C. It is actually stable at lower temperatures for two weeks, tweeted Pfizer chief executive Albert Bourla.

CBI: manufacturing remains patchy

Manufacturing activity remains patchy, but has held up better than during the first lockdown, according to the latest CBI industrial trends survey. Factory output fell slightly in the quarter to February, but at a slower rate than in the first Covid-19 lockdown last spring.

The survey of 296 manufacturers found that output increased in 11 of the 17 sub-sectors. However, growth in these sub-sectors was outweighed by sharp falls in others – particularly motor vehicles & transport equipment and food, drink & tobacco. Looking ahead, manufacturers anticipate output to be broadly flat over the next three months, marking a notable improvement on expectations of a significant decline in January.

Total orders books improved, to a similar position as in December 2020, while export order books worsened from January. Both continue to be far weaker than their long-run averages.

Alpesh Paleja, CBI lead economist, says:

Manufacturing activity remains patchy, but so far appears to have taken a smaller hit than in previous lockdowns. However, a stubbornly mixed picture persists among the different manufacturing sub-sectors, pointing to the asymmetric impact of restrictions.

With some much-needed clarity coming down the track in the Government’s roadmap for easing lockdown, it is vital that manufacturers are supported beyond April, in line with the restrictions that will remain.

Immediate steps to extend the Job Retention Scheme and deferring VAT repayments until the end of June are essential, alongside business rates relief to protect jobs.

More reaction to the Uber landmark ruling, our main story today.

Martin Chitty, employment partner at law firm Gowling WLG says:

Uber has lost the argument at every level with the Supreme Court today adopting in clear and unqualified terms the reasoning of the previous decisions. The degree of control Uber has – in terms of price setting, excluding drivers if they decline pick-ups, the inability of drivers to be anything more than single-trip conveyors with no passenger relationship and the warning issued for bad reviews all point to them being workers.

The Supreme Court took a purposive view of the legislation – it is there to protect those who have a limited bargaining power. Uber’s argument that they did what hotel booking sites do was rejected. This ends the argument in the UK courts – Uber 0 Drivers 4.

Bitcoin hits new record, market cap approaches $1 trillion

Bitcoin has hit a fresh record high, rising 2.6% to $52,932, putting it on course for a weekly gain of over 8%. It has gained 60% in value so far this month and its market value is approaching $1 trillion (it’s currently at $981.8bn).

The world’s best-known digital currency is attracting more buyers as it has gained acceptance from a number of mainstream investors and companies, including the electric carmaker Tesla, Mastercard and the US bank BNY Mellon.

However, there are still many critics who point out that bitcoin is highly volatile and question its intrinsic value. Analysts at JPMorgan said bitcoin’s current prices are well above estimates of fair value, and noted that its mainstream adoption increases bitcoin’s correlation with cyclical assets, which rise and fall in line with economic changes, thereby reducing the benefits of diversifying into cryptocurrencies.

Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, with questionable diversification benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is mainstreamed.

Yesterday, Tesla boss Elon Musk, whose recent tweets have helped fuel bitcoin’s rally, said owning it was only a little better than holding cash. But he also defended Tesla’s purchase of $1.5bn bitcoin.

Updated

All-male boards have disappeared from the UK’s 350 largest listed companies, according to monthly statistics compiled for the 30% Club, which campaigns for gender diversity in senior management of businesses, reports my colleague Jo Partridge.

This is only the second time that all FTSE350 firms have had at least one female board member - although the goal achieved last May only lasted temporarily. Luxury carmaker Aston Martin was the final FTSE-350 firm to retain an all-male board until the start of this month, when it appointed Anne Stevens to its board.

However data compiled by BoardEx showed that 19 out of those 350 companies only have one female board member. Only 70% of the 350 firms have 30% or more female representation - the target promoted by the 30% Club.

The eradication of all-male boards is cause for celebration, said Ann Cairns, global chair of the 30% Club and executive vice-chair of Mastercard, however she warned there is more work to be done to improve diversity.

Time and again research has shown companies with diverse boardrooms and senior leadership outperform their peers. Simply put, diversity is good for business.

Last year’s fleeting experience of their disappearance across the FTSE 350 proves how fragile progress in the UK’s corporate gender diversity remains. And there’s even more work to do to bring female representation up to parity on those boards, let alone boost the numbers of female chairs, CEOs and CFOs.

Let’s take another look at the purchasing managers surveys from IHS Markit/CIPS for the UK, which indicated that joint services and manufacturing activity was close to stabilising this month.

Howard Archer, chief economic advisor to the forecasting group EY Item Club, says:

The ‘flash’ purchasing managers’ survey for the UK manufacturing and services sectors indicated that overall activity was close to stabilisation in February after contracting at the fastest rate for eight months in January.

While the improvement in activity eases some concern about the potential size of contraction in the UK economy in Q1, it still appears that the UK is being much more affected by lockdown and restrictions now than it was in Q4 2020. The EY Item Club expects the economy will experience a Q1 contraction – possibly around 4% quarter-on-quarter.

After Q1, the EY Item Club expects the economy to benefit progressively through 2021 from the roll-out of COVID-19 vaccines. Consumers look well-placed to play a key role given the recent high savings ratios, although much will depend on how much unemployment ultimately rises. After an extended period of weakness, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy.

The group is predicting GDP growth of 5.0% in 2021 followed by expansion of 6.5% in 2022, with the economy regaining its peak level of fourth-quarter 2019 GDP in the third quarter of next year.

Updated

Back to the Uber landmark ruling.

TUC general secretary Frances O’Grady has called on the government to use the much-delayed employment bill to reform the law around worker status.

No company is above the law. Uber must play by the rules and stop denying its drivers basic rights at work. This ruling is an important win for gig economy workers and for common decency. Sham self-employment exploits people and lets companies dodge paying their fair share of tax.

Unions will continue to expose nasty schemes that try and cheat workers out of the minimum wage and holiday pay.

But we also need the government to step up to the plate... Everyone should qualify for employment rights unless an employer can prove they are genuinely self-employed.

In football news, Kyril Louis-Dreyfus has become the youngest chairman in English football after his protracted takeover of Sunderland was finally approved by the English Football League on Thursday, writes our north-east football correspondent Louise Taylor.

The 23-year-old Frenchman is the son of the late billionaire Robert Louis-Dreyfus, the former Marseille owner, and he can look forward to a trip the directors’ box at Wembley next month when Sunderland face Tranmere Rovers in the final of the Papa John’s Trophy.

Lee Johnson’s side are seventh in League One, one point below the play-off zone, and their new owner is targeting an eventual return to the Premier League. Louis-Dreyfus said:

I am proud to become a custodian of this esteemed institution but I also recognise the significant responsibility that comes with it.

I am confident that together we can weather the present storm and put solid foundations in place to bring sustainable and long-term success to the club.

Sunderland’s former owner, Stewart Donald, will retain a minority shareholding as will the directors Charlie Methven and the Uruguayan businessman Juan Sartori. Donald said the takeover means Sunderland are now debt free.

And here is our story on the pound, which rose through $1.40 for the first time since April 2018 earlier today, and is now hovering just below at $1.3996.

Here is our full story:

Uber has suffered a landmark defeat in the UK’s Supreme Court, which means Uber drivers – who were deemed as self-employed – will now be classed as ‘workers’ in the UK, and qualify for certain employment rights. Seb Maley, chief executive of the consultancy Qdos, says:

This is a landmark victory for Uber drivers. It has the potential to set a precedent for all gig economy workers, many of whom need and deserve employment rights.

The ruling should serve as a stark reminder to businesses that employment status isn’t always clear cut, and that decisions must be made carefully. If a firm engages an individual under the wrong status, the cost - both financially and reputationally - can be massive.

But while many gig economy workers want greater protection and employment benefits, we shouldn’t assume that all self-employed people need them. There are hundreds of thousands, if not millions of people working for themselves who want to remain entirely independent.

Landmark victory for Uber drivers

The Supreme Court has dismissed Uber’s appeal against a landmark employment tribunal ruling that its drivers should be classed as workers with access to the minimum wage and paid holidays, writes my colleague Sarah Butler.

Six judges handed down a unanimous decision backing the October 2016 employment tribunal ruling that could affect millions of workers in the gig economy.

The Supreme Court highlighted that any attempt by organisations to draft artificial contracts aimed at side-stepping basic protections were void and unenforceable.

Judges criticised the controversial contracts Uber asked their drivers to sign saying they “can be seen to have as their object precluding a driver from claiming rights conferred on workers by the applicable legislation.”

In the judgment, Lord Leggatt said he was ‘not convinced’ that the contractual arrangements Uber conducted with drivers was compliant with the regulatory regime supervised by Transport for London.

UK downturn in February less bad than feared – PMI

The UK downturn was less bad than feared in February, the flash PMI reading from IHS Markit/CIPS suggests. Its composite index, which comprises manufacturing and services, jumped to 49.8 from 41.2 in January, just below the 50 mark that divides expansion from contraction.

Things improved for services firms, despite the Covid-19 lockdown, although activity continued to decline. Manufacturers have been boosting production but output was hit by Brexit, which has made it harder to export, and fell to a nine-month low.

  • Flash UK Composite Output Index Feb: 49.8, 2-month high (Jan final: 41.2)
  • Flash UK Services Business Activity Index Feb: 49.7, 4-month high (Jan final: 39.5)
  • Flash UK Manufacturing Output Index Feb: 50.5, 9-month low (Jan final: 50.7)
  • Flash UK Manufacturing PMI Feb: 54.9, 2-month high (Jan final: 54.1)

Chris Williamson, chief business economist at IHS Markit, says:

The UK economy showed welcome signs of steadying in February after the severe slump seen in January, albeit with business activity remaining sharply lower than late-last year due mainly to the ongoing national lockdown.

Although the hospitality sector, including hotels and restaurants, reported a further steep decline, as did the transport and travel sector, rates of contraction eased considerably. Business and financial services companies meanwhile recovered to register modest expansions, helping the hard-hit service sector to come close to stabilising.

In contrast, the manufacturing sector’s performance worsened amid escalating Brexit-related export losses and supply chain disruptions. More than half of all companies reporting lower exports attributed to the decline to Brexit-related factors. Brexit was also the most commonly cited cause of supply delays.

More encouragingly, although the data hint at a renewed contraction of the economy in the first quarter, business expectations for the year ahead improved to the highest for almost seven years, suggesting the economy is poised for recovery. Confidence continued to be lifted by hopes that the vaccine roll-out will allow virus related restrictions to ease, outweighing concerns among many other firms of the potential further damaging impact of Brexit-related trading issues.

Updated

FTSE 100 dragged down by retail sales, NatWest loss

The FTSE has been yo-yoing this morning, dipping into negative territory and is now up 0.1% again, after the disappointing UK retail sales figures which showed a much larger-than-expected drop of 8.2% in January.

NatWest shares, down 0.99%, are also weighing on the bluechip index, after the bank – renamed from Royal Bank of Scotland – slumped to a loss of £351m for 2020 versus a profit of £4.2bn a year earlier.

NatWest also confirmed that it intends to pull out of Ireland, with plans to wind down and sell assets from its local Ulster Bank operations after an “extensive” review.

Our banking correspondent Kalyeena Makortoff reports:

NatWest has cut its banker bonus pool to the lowest level since its financial crisis bailout, after swinging to a full-year loss in 2020.

The bank was stung by a surge in bad debt provisions, having put aside £3.2bn to cover a potential jump in defaults because of the coronavirus pandemic. The loss ends three straight years of profit for the lender, which has struggled to stay out of the red since its £45bn bailout in 2008.

The bonus pool for NatWest bankers has been cut by 33% as a result, leaving staff to share £206m. It is the lowest total since it came into state ownership at the height of the financial crisis. The bank, which is still 62% taxpayer-owned, paid its chief executive, Alison Rose, £2.6m for 2020. Rose voluntarily waived her bonus in light of the Covid-19 crisis.

However, the bank is restarting its dividend after the Bank of England lifted its temporary ban on shareholder distributions in December to allow limited payouts. NatWest’s rival Barclays has also resumed payouts.

Updated

Bitcoin has just hit a new record high, rising more than 2% to $52,757.

Eurozone services hit in February while factories thrive

Service sector firms in the eurozone were hit by lockdown measures and declined further in February while factories raced ahead, according to IHS Markit’s closely-watched surveys.

The composite PMI, seen as a good economic indicator, pointed to further contraction in business activity across the eurozone, but edged closer to the 50 mark separating growth from contraction. The flash reading was 48.1 in February, up from January’s 47.8.

  • Flash Eurozone PMI Composite Output Index at 48.1 (47.8 in January). 2-month high.
  • Flash Eurozone Services PMI Activity Index at 44.7 (45.4 in January). 3-month low.
  • Flash Eurozone Manufacturing PMI Output Index at 57.5 (54.6 in January). 4-month high.
  • Flash Eurozone Manufacturing PMI at 57.7 (54.8 in January). 36-month high.

Chris Williamson, chief business economist at IHS Markit, says:

Ongoing Covid-19 lockdown measures dealt a further blow to the eurozone’s service sector in February, adding to the likelihood of GDP falling again in the first quarter. However, the impact was alleviated by a strengthening upturn in manufacturing, hinting at a far milder economic downturn than suffered in the first half of last year. Factory output grew at one of the strongest rates seen over the past three years, thanks to another impressive performance by German producers and signs of strengthening production trends across the rest of the region.

Vaccine developments have meanwhile helped business confidence to revive, with firms across the eurozone becoming increasingly upbeat about recovery prospects. Assuming vaccine roll-outs can boost service sector growth alongside a sustained strong manufacturing sector, the second half of the year should see a robust recovery take hold.

One concern is the further intensification of supply shortages, which have pushed raw material prices higher. Supply delays have risen to near-record levels, leading to near-decade high producer input cost inflation. At the moment, weak consumer demand – notably for services – is limiting overall price pressures, but it seems likely that inflation will pick up in coming months.

Sterling hits $1.40 for first time in nearly 3 years

Sterling has just hit $1.40 against the dollar for the first time in nearly three years, despite the poor UK retail sales data. Traders are betting on a faster economic recovery in the UK thanks to its rapid Covid-19 vaccination campaign.

The pound rose 0.2% to $1.4005, the highest level since April 2018.

Updated

Ruth Gregory, senior UK economist at Capital Economics, says the chancellor should resist the urge to try to reduce the budget deficit in the budget on 3 March and instead focus on continuing to support those areas of the economy that need it.

Borrowing still looks on track to come in below the OBR’s November forecast and our forecast of £410bn (19.6% of GDP). What’s more, our optimistic view that the crisis won’t lead to big long-term scarring effects should allow the deficit to fall back to pre-virus levels by 2024/25 without the need for major tax rises.

So the big risk is that the chancellor withdraws the fiscal support too soon. That could undermine the economic recovery and cause more problems for the public finances than it solves.

We already noted that the UK public finances are much better than expected, as tax receipts have held up well. Ed Conway, economics and data editor at Sky, also observes that debt interest payments are at a record low, making it cheaper for the government to service its debt – and buys it time.

Germany’s up next. The eurozone’s biggest economy has fared better than France: business activity has strengthened in February and overall output is expanding, thanks to a recovery in the export-led manufacturing sector.

  • Flash Germany PMI Composite Output Index at 51.3 (Jan: 50.8). 2-month high.
  • Flash Germany Services PMI Activity Index at 45.9 (Jan: 46.7). 9-month low.
  • Flash Germany Manufacturing Output Index at 62.2 (Jan: 59.0). 3-month high.
  • Flash Germany Manufacturing PMI at 60.6 (Jan: 57.1). 36-month high.

Phil Smith, associate director at IHS Markit, says:

February’s flash PMI results point to ongoing resilience in the German economy midway through the opening quarter, despite the country remaining under strict lockdown measures. Ongoing weakness in services, where large parts of the sector remain either closed or disrupted by virus containment measures, continues to be counterbalanced by strong, export-driven growth across manufacturing.

Updated

Here is our full story on UK retail sales and government borrowing.

The impact of the UK’s third lockdown on the economy has been laid bare by official figures showing that spending in stores and online fell by more than 8% last month while government borrowing was the highest for a January since modern records began, writes our economics editor Larry Elliott.

All sectors of retailing except for food and online outlets were affected by the imposition of tough new restrictions across the UK, and although the Office for National Statistics said the decline was not as severe as the 22% drop in the first lockdown last April, it was substantially worse than the 3% drop the City had expected.

The closure of non-essential stores hit two sectors – clothing and footwear, and household goods – particularly hard. Clothing sales were down 35% from December, while household goods registered a drop of almost 20%.

The flash PMI readings for France are out. While manufacturing improved in February, a further decline in the service industries led to a deterioration in the overall private sector amid fresh coronavirus restrictions introduced at the start of the year.

  • Flash France Composite Output Index at 45.2 in February (47.7 in January), 3-month low
  • Flash France Services Activity Index at 43.6 in February (47.3 in January), 3-month low
  • Flash France Manufacturing Output Index at 52.4 in February (49.5 in January), 5-month high
  • Flash France Manufacturing PMI at 55.0 in February (51.6 in January), 3-year high

Markit says:

February PMI data pointed to the quickest decline in French business activity for three months, as restrictions designed to stem the spread of the coronavirus disease 2019 (COVID-19) continued to hinder economic activity. Output has now fallen in each of the past six months.

Updated

Isabel Stockton, research economist at the Institute for Fiscal Studies, explains:

January usually sees the government collect more in revenues than it spends. Today’s public finance numbers – the last before the Budget – suggest that in January the Government actually borrowed £8.8 billion. This is the first January deficit in ten years and brings the total amount borrowed so far this financial year up to £271bn.

Compared to January 2020, central government receipts in January 2021 were down by £0.8bn while day-to-day spending by central government was up by £20 billion. This included £5bn spent on the Coronavirus Job Retention Scheme and Self-Employment Support Scheme, and a £6bn increase on last January in the amount transferred to local authorities.

While every month since the first lockdown has seen a record level of government borrowing, the ONS estimates for borrowing over the ten months from April 2020 to January 2021 are actually currently running £69bn below the OBR’s latest forecast, which was for borrowing to total £340bn over the same period.

But the ONS estimates are very likely to be revised up. The OBR forecasts already include an allowance for the part of the loans – in particular Bounce Back Loans – made by the Government but which will never be repaid, and this adds to government borrowing now. In contrast the ONS figures do not include any estimate of this. When this is incorporated the borrowing figures will be pushed up, by an estimated £30bn over the financial year. This will bring them closer to, but likely still running below the OBR’s forecast.

As the Chancellor prepares for the upcoming Budget on March 3rd, he will be in no doubt that this year’s borrowing will be record-breaking. But it would be a mistake to try to consolidate the public finances now. The economic scars left by the crisis will be a crucial determinant of its fiscal legacy, and ensuring the recovery in output – and with it government revenues – is as complete as it can be is should be a key focus of the Budget. Substantial net tax rises are likely to be needed at some point to reduce borrowing and keep inflation low, but for now these should wait.

UK records first January deficit in 10 years

Let’s take a closer look at the public finance figures. The first January deficit in 10 years was caused by lower tax receipts from VAT and business rates, coupled with a Covid-19 related spending splurge.

The ONS says:

  • Central government tax receipts are estimated to have been £63.2bn in January 2021, £800m lower than in January 2020, with notable falls in taxes on production such as Value Added Tax (VAT) and Business Rates.
  • Self-assessed Income Tax receipts were £16.8bn in January 2021, £1.4bn more than in January 2020; in the light of the government’s tax deferral policy, it is advisable to look at combined self-assessed Income Tax receipts across the whole financial year when drawing conclusions from year-on-year comparisons.
  • Central government bodies are estimated to have spent £81.9bn on day-to-day activities (current expenditure) in January 2021, £19.7bn more than in January 2020; this includes £5.1 billion expenditure on coronavirus job support schemes.
  • Public sector net borrowing (excluding public sector banks, PSNB ex) in the first 10 months of this financial year (April 2020 to January 2021) is estimated to have been £270.6bn, £222bn more than in the same period last year and the highest public sector borrowing in any April to January period since records began in 1993.

Some economists point out that the figures are actually much better than expected, as tax receipts have held up well.

Updated

Paul Craig, portfolio manager at Quilter Investors, has looked at the £8.8bn public sector deficit in January:

With the first January deficit since for 10 years, today’s borrowing figures remain a stark reminder of the position the country finds itself in, but right now the overall number doesn’t matter so much. Although unlikely to be implemented, the Bank of England is keeping negative rates on the table and ultimately the cost of borrowing and symbiotic relationship between the BoE & Treasury is the defining difference from other crises.

With the budget right around the corner, the Chancellor needs to be wary of the risks that remain present with withdrawing the support schemes too soon. A recent British Chambers of Commerce survey pointed out that one in four jobs are at risk if furlough was to end, reminding Rishi Sunak of not only the short term risks but also that the economy faces structural changes to employment that needs to be dealt with.

As such, we should expect the support schemes to remain in place for some time yet as the government try to plug the holes, while also trying to get the stimulus to work its magic in revitalising the economy.

That said, the vaccine rollout has been a huge success to date and as such we continue to expect a solid recovery in the second half of the year. While the ramifications of the Brexit deal do seem to be spilling over into 2021, we believe the outlook for strong, competitive companies in the UK is positive and they should be in a position to take advantage of not only government stimulus but also a return to consumer demand.

European stock markets are flat to slightly higher at the open.

  • UK’s FTSE 100 up 0.14%
  • France’s CAC up 0.2%
  • Spain’s Ibex flat
  • Italy’s FTSE MiB up 0.2%

Sales at non-food stores slumped 24.4% in January from December, the ONS said. Department stores and clothes shops have been worst hit, as people have been buying clothes either online or in supermarkets during lockdowns.

This compares with declines of 19% and 41% in March and April, before six months of growth saw non-food stores return to the levels of sales seen before the pandemic. In November new store closures led to a monthly drop of 8.8% before a small recovery of 3.8% in December, when restrictions were eased.

Updated

Jace Tyrrell, chief executive at New West End Company, which represents 600 businesses on Oxford Street, Regent Street, Bond Street and in Mayfair, says:

Six weeks into the new year, and the retail and hospitality sector has already had to forego vital trading moments such as the January sales, Chinese New Year, and Valentine’s Day.

But hope is on the horizon, and we are confident that visitors will come back to the West End once lockdown is eased. The launch of Westminster City Council’s £150m Oxford Street District transformation is further evidence that there is huge appetite to invest in creating an altogether stronger high street.

But for now, retailers must wait with baited breath for the Prime Minister’s roadmap out of lockdown on Monday. We require clarity and decisiveness to ensure that there are no further lockdowns, and assurance from the government that support will be made available to retailers in bridging the gap until sales can properly resume.

Lisa Hooker, consumer markets leader at PwC, says:

There are signs that retailers have adapted better to the latest lockdown. While non-grocery stores took the brunt of the pain, with sales volumes declining by a quarter, they were still over 50% higher than in the first lockdown last April.

As with last year, online made up the slack, with consumers turning to their phones and PCs to shop in record levels. Over 35% of retail sales were online in January, even higher than the previous peak of 34% in May 2020. And with less demand than the traditional Christmas peak, online penetration of grocery sales also reached a new peak of over 12%.

Looking forward, all eyes will be on the Prime Minister’s announcement of a reopening timetable expected this Monday as well as the Budget on 3 March. While the first quarter of the year is traditionally quieter for retailers, stores will be hoping that a rapid re-opening will allow shoppers to spend the estimated £10,000 that households have saved on average during the lockdowns.

Retailers will also be hoping for extensions to government support, such as the extension of the furlough scheme beyond April, and extension of the commercial property moratorium on evictions and the business rates holiday beyond March, as has already happened in Scotland.

Here is some instant reaction to the retail sales data.

Aled Patchett, head of retail and consumer at Lloyds Bank, says:

While retail activity in January is so often characterised as ‘out with the old, in the new’, the ongoing lockdown has seen most retailers carry the challenges of the pandemic over into 2021. Though the January sales did encourage an online spending spree among consumers it by no means compensated for the footfall that would have otherwise given high streets and shopping centres a New Year’s booster.

Non-essential retailers will be particularly concerned by rumours that they won’t be able to reopen for some weeks yet and are naturally continuing to demand greater clarity.

They’ll also be looking for support and reassurance from the Chancellor’s upcoming Budget – be it the extension of existing measures or the reform on business rates that the sector has long-called for.

With the pandemic exacerbating the ongoing migration towards online fulfilment, and internet-only retailers swooping on legacy assets in the last few weeks, we may finally have reached a tipping point in the sector.

Introduction: UK retail sales tumble despite online surge

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

We’ve woken up to news that UK retail sales tumbled 8.2% in January from December, according to the Office for National Statistics. The decline is far bigger than the 2.5% drop predicted by City economists. Sales were down 5.5% when compared with January 2020.

All non-essential shops had to shut again in January after a new lockdown was declared to stop the spread of new Covid-19 variants. This obviously affected sales, but not to the same extent as the first coronavirus lockdown last spring, when sales slumped by 22.2% in April compared with the pre-pandemic level in February.

Sales fell in all sectors except for non-store retailers and food stores, which reported growth of 3.7% and 1.4% respectively. Online spending surged to 35.2% in January, the highest on record and up from 29.6% in December. All store types reported higher online sales, with supermarkets and other food stores reaching an historic high of 12.2% of sales made online.

Separate figures showed that the government borrowed £8.8bn in January, the first January deficit in 10 years (as this is a big tax-gathering month) and the biggest January borrowing since monthly records began in 1993.

However it was less than the £24.5bn forecast by the City. This took borrowing since the start of the financial year in April to £270.6bn, reflecting the surge in spending and tax cuts announced because of the pandemic.

Later this morning we’ll be getting PMI surveys across Europe and the US in the afternoon, which will shed some light on how economies fared in February during the latest lockdowns.

Stock markets tumbled yesterday (the FTSE 100 closed down 1.4% while the Dow Jones lost 0.38%) and Asian stocks followed suit, retreating from all-time highs, after disappointing US jobless data and higher long-term bond yields dented investor confidence. Japan’s Nikkei closed 0.72% lower while the Australian market lost 1.28% and Hong Kong’s Hang Seng slipped 0.16%.

Oil prices have retreated from 13-month highs. Brent crude is down 1.05% at $63.26 a barrel while US futures are 1.19% lower at $59.8 a barrel.

The agenda

  • 8:15am GMT: France Markit Manufacturing/Services/Composite PMI Flash (February)
  • 8:30am GMT: Germany Markit Manufacturing/Services/Composite PMI Flash (February)
  • 9am GMT: Eurozone Markit Manufacturing/Services/Composite PMI Flash (February)
  • 9:30am GMT: UK Markit Manufacturing/Services/Composite PMI Flash (February)
  • 11am GMT: UK CBI Industrial Trends (February)
  • 2:45pm GMT: US Markit Manufacturing/Services/Composite PMI Flash (February)
  • 3pm GMT: US Existing Home sales (January)

Updated

 

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