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.