Will 2021 be another annus horribilis like 2020?

This has been quite a year to say the least as let’s face it how many of us had ever heard of Huhan province in China before? Back at the turn of the year the issue over there was pork and swine fever. But as you can see below we did get a warning that trouble was ahead from the Bank of England via the use of the phrase “on track” that became a metaphor for absolute disaster in the Greek crisis.

On the economic front, the bar is more modest. At its December meeting, the MPC had projected that UK growth would pick up from below to above potential rates, supported by a reduction of domestic uncertainties, and a modest recovery in global growth. On balance, early indications are that both conditions underpinning the projected UK recovery are on track. ( January 30th)

Now we face a situation where economic output as measured by GDP is about a tenth lower than it was then. Although there is a problem and in fact it is one driven by the way the Office for National Statistics has chosen to measure things. An apparently small shift from inputs to outputs did this.

The ONS figures suggest that the fall in public sector output accounted for over 6 percentage points of the 22 per cent fall in total GDP in the first half of 2020. In other words, over a quarter of the UK’s reported fall in GDP in the first half of this year has, in effect, been attributed to closing schools and stopping hospital operations. This might be accurate, but had the ONS assumed that health and education output was unchanged in the first half of 2020, on the grounds that inputs – staff employed – were unchanged, the fall in UK GDP would have been 16 per cent, not 22 per cent. ( Simon Briscoe)

Actually this does feed into a point I have regularly made over the years which are that the 3 different ways of measuring GDP can come to very different answers. This 6% gap between an income and an output measure is the highest I have noted.

Interest-Rates

The next stop on our journey is here

Bank Rate should be maintained at 0.75%;

This was a bit of a curate’s egg. Having failed to raise interest-rates as promised back in 2013 the Bank had of course done a reverse ferret on its Forward Guidance by cutting to 0.25% post the EU Leave vote. Then we got a couple of rises as someone looked at the back of a disused cupboard and asked “what does this button do?”.

However we now have an official Bank Rate of 0.1% which is 0.4% below the “Lower Bound” of the previous Bank of England Governor Mark Carney. So we get another reminder of how even the Oxford English Dictionary has taken punishment in these times.

But there is more because if we look forwards to December next year via an old stomping ground of mine which is short sterling futures ( more particularly options) we see that negative interest-rates are where bets have been placed. The numbers are marginal so you can also argue for 0% in the round but we remain singing along with Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

The reality is that in the real world we do have negative interest-rates as up to around the 6-year maturity the UK has negative bond yields. This has been quite a shift from the 0.64% of the 5-year yield as 2020 began and I pick that one out as it influences fixed-rate mortgages. If we look further out we see that the 50-year yield has (nearly) halved to 0.65%. This is a ying and yang moment because on one side the UK government can borrow historically high amounts at historically low levels. But on the other the business models of pension funds and long-term investments have been torpedoed.

This has been driven by the enormous scale of the bond buying by the Bank of England which has totaled some £290 billion this year with another £150 billion on its way in 2021.

We are all in it together

Well not quite as we mull two developments in the opposite direction. One evolved from a botched effort by the Financial Conduct Authority to reduce overdraft interest-rates. They miscalculated so badly that the 21% at the beginning of 2021 has been replaced by 33% now. This was announced by someone you may have heard of (Andrew Bailey) like this.

Our radical package of remedies will make overdrafts fairer, simpler and easier to manage. We are simplifying and standardising the way banks charge for overdrafts. Following our changes we expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day.

Also mortgage interest-rates for weaker credit ( lower deposits) have been rising in the latter part of 2020. This starts at a 15% deposit where the 2-year fix last year was 1.71% and is now 3%. If you only have a 5% deposit then the 2-year fixed rate is now over 4%.

The UK Pound

This has had a year where it has been singing along with The Wonder Stuff.

Dizzy,
I’m so Dizzy, my head is spinning
Like a whirlpool, it never ends
And it’s you girl, making it spin
You’re making me dizzy

Against the US Dollar it started the year around US $1.31 and with it now just above US $1.36 you might wonder what all the fuss is about? Except I still recall the twitter feeds of Financial Times journalists suggesting the only way was down at US $1.15. Indeed one recently suggested parity might be on the cards at yes you guessed it the recent low in the US £1.31s.

Another perspective is provided by the Japanese Yen which has had a strong 2020. We are at 141 Yen a bit below where we began the year. This is bad news for the Bank of Japan which continues to try to weaken it and is against the trend for them trying to take manufacturing back home. Oh well!

Comment

Okay so now let me look ahead. At some point in 2020 ( hopefully the second quarter) we can declare annual economic growth as surging again. But we will still be below pre pandemic levels and will not regain them. Official forecasts will predict a rosy 2022 in the same way they predicted a rosy 2021 only a few months ago.

In terms of interest-rates I still believe the trend is down. By that I mean official ones because as we have noted above real world ones have diverged. The threshold for interest-rate increases is now very high whereas any weakness makes central banks panic and run for the cut button. The same is true of bond yields where QE as a method of yield curve control looks ever more permanent in line with our “To Infinity! And Beyond!” theme.

As to the UK Pound £ we have ended up pretty much where I expected which is US $1.35 ( so strictly a cent out as I type this). It has been an odd year on that front as the Byline Times keeps popping up with the argument that hedge funds are controlling events such that they will make a fortune on any Brexit deal by being short the £.

I shall take a short break but will be back in the New Year so Merry Christmas and a Happy New Year to you all.

 

 

28 thoughts on “Will 2021 be another annus horribilis like 2020?

  1. All the very best to you Shaun and all the contributors and readers of this excellent blog. Hopefully 2021 will be a much improved year!

  2. Hello Shaun,

    Merry Christams and happy new year to you and to all your readers .

    I presume Italy is off this year (!) 😉

    Forbin

    • Hi Forbin

      Yes no trip to Italy and in truth I am not sure I missed it. The issue is not Italy it was going on a plane with all the issues about air circulation in a sealed vessel. Maybe I have watched the film Alien to many time….

      Merry Christmas

  3. Shaun,
    Many thanks for highlighting the fudging of HMG indices but fear worse is to come under the guise of fallout from Brexit & the pandemic in 2021. Austerity will be the autopilot setting unfortunately for us in the foreseeable future.
    On that dismal note seasonal greetings to you & fellow posters.

  4. All the best Shaun – good old short sterling! My son is punting SPACs on the back of all this QE – I’m reminded of the good old dot com bubble, but he’s making out like a bandit – 40% on the latest, and he got out too early. He’s 21! Anyway, have as good a Christmas as you can.
    Joss

    • Hi Joss

      I spent some time broking it ( Deutsche Bank) and trading it ( me) back in the days of the LIFFE floor. I can still do all the hand signals for reds ( next year/sequence) and greens ( the year after) proving that some things are for life….

      Merry Christmas

  5. hello shaun

    to answer the question “Will 2021 be another annus horribilis like 2020?”

    well , as you know, predictions are difficult , especially about the future !

    Yes I think the next 6 months will be 3.6 on the meter

    But remember what they said, it was as high as the counter would read (!!)

    oh well , eat , drink and be merry for tomorrow we diet !

    Forbin

  6. Thank you Shaun for unbelievable consistent brilliance of this site.
    Hope you have as good a Christmas as possible and a much better new year.
    On a personal note I am very pleased to report that our oldest son ignored two governments got on the plane from Heathrow to Toulouse yesterday and he is now enjoying Christmas with us. We will be zooming our youngest son in the US tomorrow who also ignored all prohibitions to travel from London to Denver earlier in the year to take up his PhD position.
    People can still make a difference in the face of autocratic pressure.
    Not a Yes Man, keep it going Shaun!

      • Yes he got a ‘quickie’ antigen at a central London clinic on his way to London. The BA checking in staff looked at it, but the French passport control did not!
        Youngest went via Amsterdam and Atlanta to Denver, no test , no nothing , just walked out of the airport in Denver, ( that was August mind).

  7. The good news before Christmas day is BREXIT now done subject to a vote in Parliament next Wednesday.

    Good deal or bad deal the fine print will be scoured over but in the meantime Keith Starmer says labour will accept the deal.

    Liberal leader is critical I have forgotten his name possibly because the party is irrelevant now and what would you expect from Nicholas Sturgeon she didn’t want to leave Europe.

    I think the deal will be passed in parliament and no one wants more arguing over to spill over into another new year as the liberal leader would prefer.

    The £ has fallen back a smidge from its highs it not racing away and to be honest a deal may have been priced in bit its early days.

    As to a New Year the most concerning thing now BREXIT is out of the way is coronavirus and infections are a little under 40,000 in the last 24 hours and admissions climbing at a rapid rate now. It will take time to roll out a vaccine to most of the population and I would expect that to take well into the second part of next year and in the meantime there will be serious economic damage next year.

    The GOV will have to continue to support the economy and as such I expect interest rates will be cut to zero soon after Christmas which will suit the UK in having to borrow more money.

    I don’t expect inflation to be a worry in the short term, with unemployment set to rise consumer spend will be curbed.

    Happy Christmas everyone and a happy new Year

    • Happy Christmas to you PP.
      I was just visiting the site to answer Shaun’s question re my comment and read yours. I think most people think this deal just before TransEnd brings matters to a close. It really doesn’t. In a lot of ways it is not nearly as significant as the WA on 31/1/20 which was Brexit. Up to 80% of the standards and regs the UK will have to meet to trade with anyone are not EU ones. They are set by international bodies quite a lot associated in some way with the UN. Take cars for example. The EU incorporates the agreed international standards and regs, now the UK has to also use the same and qualify with the international body if it wants to export any vehicles. it can’t just ‘do its own thing’. The same is true right across the spectrum of trades.
      The UK has to relearn doing this for itself. Its not going to be easy. Another example is the explosion of employing Spanish vets to fill some of the requirements to meet and test livestock standards.
      The relationship and ongoing discussions with the EU and a myriad of other trading standards bodies will never end.

  8. My best wishes to Shaun and his happy band of contributors and readers!

    Big pluses for 2021 are COVID-19 vaccines, the potential for a more pragmatic USA presidency and some basic narrow Brexit deal arrangements; hopefully enough to allow us to reduce the internal bickering of our populace and just start to plan the best way forward. It’s appears a thin set to pin hopes on, but fingers crossed!

    Good health to you and yours,
    Iain

  9. Thanks for another year of informative and insightful blogs, Shaun,
    Have a good break .
    With best wishes from the other side of the world. Eric in NZ.

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