UK economy shrank 2.6% in November; firms win Covid-19 insurance case – as it happened

Graeme Wearden

from on 2021-01-15 16:59 (#5CVX5)

Rolling coverage of the latest economic and financial news, as UK GDP falls for the first time in six months

Latest: FTSE 100's worst week since end-October
US retail sales and consumer confidence fall
V ictory for small UK firms in Covid-19 insurance case
Introduction: UK economy contracted in November - first time since April
Smaller fall than economists feared

4.59pm GMT

And finally....Britain's FTSE 100 index has posted its worst week since the end of October.

The blue-chip index has fallen nearly 1% today, closing 66 points lower at 6735.

Hard on the heels of the poor US employment data comes a disappointing retail sales number for December. Estimates were for it to be flat, but it fell by 0.7%.

The November number was revised down as well, making it a painful year end for the retail sector. It's hard to think that the start of 2021 will show any improvement unless Biden can get cash into people's pockets quickly."

Much of the gains that there achieved recently were in anticipation of Biden's stimulus announcement. Lofty equity valuations combined with concerns that countries are going to extend their lockdowns have encouraged traders to exit the market.

Pfizer said the rolling out of its vaccine in Europe will be slowed in the near-term as the pharma giant upgrades its production facility, the news is playing into the bearish move too.

Stocks are in the red as dealers are cutting back on their equity positions now that Biden's relief package has been announced.

It is a little worrying that retail sales fell by 0.7% in December, the all-important shopping month. The November metric was revised from -1.1% to -1.4%. In addition to that, the New York Fed manufacturing reading for January was 3.5, the lowest in seven months. Lately there has been growing evidence the US economy is cooling and today's reports adds weight to that view.

3.57pm GMT

The oil price is also dropping today, with Brent crude shedding 2.6% to around $55 per barrel.

Reuters reports that concerns about the latest lockdowns imposed in Chinese cities are pushing oil lower, alongside the general risk-off mood in the markets today.

3.37pm GMT

This barrage of bad economic news seems to be weighing on the markets - with the FTSE 100 index now down 98 points, or 1.5%, in late trading.

Mining companies are among the fallers, with Anglo American losing almost 6%.

Joe Biden has now released details of his proposed $1.9 trillion stimulus plan and while positive for helping to revive the US economy, financial markets have already priced in the good news and are now starting to worry about the negative side, namely how it will be funded.

The large scale of the proposed support measures adds fuel to the fire that taxes and interest rates will have to go up. Both have negative connotations for equities, therefore casting a cloud on the ability for stock markets to keep rallying at the same pace they have enjoyed for much of 2021.

3.11pm GMT

Consumer confidence across the US has fallen, following the attack on the Capitol last week and the ongoing Covid-19 pandemic.

The University of Michigan's consumer sentiment index has dipped to 79.2 for January, down from 80.7 in December, and lower than the 80.0 reading expected.

U.S. consumer sentiment dipped in early January as Americans reacted to the assault on the Capitol building in Washington and a relentless surge in COVID-19 infections and deaths, weighing on the economic outlook, the University of Michigan said on Friday.

The University of Michigan's consumer sentiment index dropped to 79.2 early this month from a final reading of 80.7 in December. Economists polled by Reuters had forecast the index would be little changed at 80.

#UnitedStates Michigan Consumer Sentiment Prel at 79.2 https://t.co/CYGdEmm87g pic.twitter.com/KlAA9mqFm8

2.43pm GMT

The New York stock exchange has opened in the red, as the markets end the week on the back foot.

Markets have largely shrugged off President-elect Joe Biden's fiscal package realizing the number would inevitably end up being negotiated lower with the debate possibly dragging into April or longer if the Republicans have their way. And that's far too complacent for markets and the Democrats 2022 agenda.

In particular, the Democrats and Biden will be extremely anxious to avoid the mistake former President Barack Obama made in his first term of the financial crisis of not pushing fiscal aggressively enough. Most Democrats believe that cost them the next round of midterm elections. Biden will do everything he can to put his fiscal agenda centre stage, likely holding back on tax hikes and pushing the economy as much as he possibly can to retain Congress in 2022

2.11pm GMT

Despite this slowdown, US retail sales are still higher than a year ago - lifted by a surge in online spending during the pandemic.

Ben Casselman of the New York Times tweets:

Retail sales fell for the third straight month in December -- clear sign the resurgent pandemic is taking a toll. pic.twitter.com/ylVxOJoErX

Important to note, though, that unlike with most measures of the economy, retail sales are actually ABOVE their prepandemic level. Up 2.6% from February, and 2.9% over the past year. So not a clean story like with jobs. pic.twitter.com/oI0FbGvG4B

Very different story with restaurants, of course. They were down much more in December (-4.5%), and are down more than 20% since before the pandemic. pic.twitter.com/JFQXLOTwWb

Online sales are falling back to earth, which is no surprise (still up 19% from a year ago). Similar story with grocery stores. But falling sales in categories that were thriving, combined with renewed declines in pandemic-hit sectors, means lower retail spending overall. pic.twitter.com/TCy4lV7U72

1.38pm GMT

Just in: US retail sales were much weaker than expected in December, in another signal that America's economy is suffering from the Covid-19 pandemic.

Retail sakes fell by 0.7% last month, the third monthly fall in a row - sharply below forecasts that they'd be unchanged.

BREAKING:

*U.S. RETAIL SALES FALL -0.7% IN DECEMBER, EST. -0.2% pic.twitter.com/r48qEqeTTI

BREAKING! US retail sales down for three months in a row. pic.twitter.com/uc3rvnR6Ve

Yikes (part II after initial jobless claims)! US retail sales unexpectedly fell 0.7% in December. 0.0% was expected. pic.twitter.com/Omm7wT4OcY

ECONOMY WATCH: U.S. retail sales fall 0.7% in December. November also worse than previously reported. Third straight decline. Coronavirus whacks economy again, and it's not going to get much better until the vaccines are more widespread and the pandemic fades.

1.21pm GMT

Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy, has also hailed the Supreme Court ruling on business interruption insurance - calling it a lifeline' for tens of thousands of small firms:

A very welcome decision by the Supreme Court

This will be a lifeline for tens of thousands of hairdressers, bars, restaurants and other small businesses that did the right thing and closed their doors to protect the health of the nation https://t.co/kWPtjeEZcp

The FCA test case, coined as probably the most important insurance decision of the last decade", reached a culmination today as the Supreme Court handed down its judgment. This case has served to be a lengthy and significant battle, directly affecting 370,000 policyholders with wider implications for 700 types of polices across over 60 insurers.

Representing a landmark victory for many small businesses across the country, the Supreme Court found in favour of the FCA and the Hiscox Action Group and ultimately removed many of the hindrances that policyholders might have faced when claiming for cover.

1.07pm GMT

Here's Mel Stride MP, Chair of the Treasury Committee, on the Supreme Court's ruling on business interruption insurance:

This ruling will be welcomed by many businesses who are struggling through the pandemic; it may provide a lifeline for many of them.

As the Treasury Committee has been urging, it's right that the FCA will now ensure that valid claims are paid by insurers as quickly as possible."

12.43pm GMT

Getting back to UK GDP... the NIESR thinktank predict the economy will slow sharply over the last quarter of 2020, and then contract in the first quarter of 2021.

They also point out that the negative short term economic cost of lockdowns is outweighed by the long-term health and economic benefits of combating Covid-19.

OUT NOW: Our latest #NIESRGDP Tracker suggests a slowing of growth in #GDP to 0.9% in 2020Q4, implying a contraction of 9.8% in 2020 overall, & negative #growth of 3.4% in 2021Q1

Full analysis with more graphs here #DoubleDipRecession https://t.co/T8rBADNdtd

12.25pm GMT

The Supreme Court ruling is a comprehensive and resounding victory for policyholders", says legal firm Mishcon de Reya, who represents the Hiscox Action Group (businesses seeking insurance payouts for disruption in the pandemic)

Richard Leedham, partner at Mishcon de Reya, explains:

We are glad that the Supreme Court has found that the vast majority of policyholders of non-property damage Business Interruption (BI) cover will have cover for their business interruption losses caused by the national response of the Government to COVID-19. This includes most of the members of the Hiscox Action Group, whom we represented in the case, and RSA and now all QBE policyholders whom we represented at first instance through my partner Sonia Campbell and Hospitality Insurance Group Action. The Supreme Court has recognised that, just when this cover was needed most by thousands of UK businesses, insurers were wrong to argue that coverage was applicable only if there were narrow local restrictions, that they could deny claims because the cover had not been intended to be provided and/ or because the interruption and therefore losses would have happened in any event.

The judgment should be a massive boost to all businesses reeling from a third lockdown who can now demand their claims are paid. In a detailed analysis of insurance law on proximate cause and causation, the Supreme Court has clearly and efficiently torpedoed the academic and convoluted arguments of insurers and laid down clear guidance as to how these claims should be paid.

BREAKING: @UKSupremeCourt backs policyholders in @TheFCA test case judgment.

Partner @RichardLeedham: The judgment should be a massive boost to all businesses reeling from a third lockdown who can now demand their claims are paid. The hope and expectation of our clients... 1/2

...is that the claim adjustment process starts immediately and that insurers will not continue to cause further distress by any more unnecessary delay." 2/2 @GroupHiscox

12.16pm GMT

Insurance group Hiscox (one of the insurers in today's case) says:

The Judgment handed down today comprises more than 100 pages of legal analysis by the Supreme Court addressing important points of insurance law and setting new precedent for over 50 insurers and almost 400,000 policyholders.

The Supreme Court largely confirms the outcome of the High Court's ruling that, except in rare circumstances, cover is restricted to Hiscox policyholders who were mandatorily closed.

Hiscox has added $48m to its expected bill for business interruption claims. It's last estimate for Covid losses was $387m. This would bring the net bill to $435m for last year alone.

But the news may not be as bad as some investors had expected. After plunging into the red immediately after the judgement was released, Hiscox' share price is now up 2.4%, since the trading update and its increased loss estimate.

11.24am GMT

Tens of thousands of small businesses that were forced to close during the Covid-19 pandemic are now set to receive payouts on insurance claims following what was described as a historic victory" at the supreme court, my colleague Rupert Jones writes.

Judges threw out the appeals from six insurers and largely supported the arguments made by the Financial Conduct Authority and a policyholder action group.

Tens of thousands of small businesses will receive insurance payouts covering losses from the first national lockdown, following a court ruling.

The Supreme Court found in favour of small firms receiving payments from business interruption insurance policies.

Tens of thousands of small businesses set to receive insurance payouts covering losses in the first national lockdown, following Supreme Court ruling https://t.co/I8WO5zWxP0

11.14am GMT

The Federation of Small Businesses is also celebrating the Supreme Court's ruling in favour of policyholders in the landmark Financial Conduct Authority (FCA) business interruption insurance test case.

FSB chair Mike Cherry says businesses who are covered by disease or denial of access clauses in their insurance policies should receive payments quickly.

Today's judgement is a big victory. It cements the high court's decision to grant businesses left on the brink the insurance pay-outs they are rightfully owed. For many, it has been a long and difficult road to get to this stage so this will bring clarity and hope to the thousands of firms which have been left in financial limbo for almost a year.

While this is good news, and while the law has to follow procedure, it's disappointing that so many small businesses have had to wait to get the money they desperately need under policies they believed were there to protect them, policies they bought in good faith.

10.55am GMT

UK business groups are welcoming the Supreme Court ruling that thousands of businesses should be covered by their insurance for losses caused by coronavirus lockdowns.

Michael Kill, CEO of the Night Time Industries Association, says:

This is a moral victory for thousands of businesses with Hiscox Business Interruption Insurance, that have been placed under unnecessary financial hardship because of the legal process that has been drawn out much longer than was necessary by Insurers"

We are extremely pleased that the Supreme Court has dismissed the insurers appeal claims and supported the rights of thousands of businesses to be able to claim against their BI Insurance"

BREAKING NEWS: Supreme Court have just ruled that the six big insurers DO have to pay out due to COVID for those with relevant business interruption cover. Critical payment made without delay

10.48am GMT

The FCA has said the Supreme Court has substantially allowed" its appeal against the insurance industry on behalf of policyholders hurt by the pandemic.

Sheldon Mills, the FCA's executive director for Consumers and Competition, says payouts should be made quickly:

Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. This test case involved complex legal issues. Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today's judgment decisively removes many of the roadblocks to claims by policyholders.

We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.

10.47am GMT

In a boost for firms hurt by the pandemic, The UK Supreme Court has ruled that thousands of businesses should be insured for losses amassed after the national lockdown.

The ruling settles a test case that pitched the markets regulator, the Financial Conduct Authority, against major insurers.

Insurers lost a last-ditch attempt to dodge payouts to thousands of small businesses that were forced to close during lockdown, as the U.K.'s top court ruled in favor of policyholders in a dispute over Covid-19 claims.

The U.K. Supreme Court ruled Friday that policies sold by six firms including RSA Insurance Group Plc and Hiscox Ltd. cover losses sustained when businesses were shut down to help slow the spread of the outbreak. The firms had appealed a lower-court decision in September that found some policies in a test case brought by the U.K.'s top markets regulator should pay out.

British insurers fall short in a last-ditch attempt to dodge payouts to thousands of small businesses that were forced to close during lockdown https://t.co/60H4uiznqz

Substantial win for the FCA and policyholders in today's Supreme Court ruling on business interruption insurance. One lawyer calls the ruling a "catastrophe for insurers". Will raise hopes of payouts for hundreds of thousands of firms.

10.21am GMT

European stock markets have dipped this morning.

In London the FTSE 100 is down 48 points, or 0.7%, at 6753, even though the UK economy didn't shrink as much as expected in November.

That is down to the fact that passing legislation under reconciliation' does have its limits and aspects of the fiscal plan that have no Republican support could end up being removed.

The process of reconciliation' is complicated by what's known as the Byrd Rule" offers a way for Senators to object, with the Senate presiding officer then taking the advice of the non-partisan Senate parliamentarian to decide on the outcome. So the Democrats do not have carte-blanche in pushing this bill through.

A little bit of buy the rumour, sell the fact about equity indices as they tread lower in the wake of president-elect Joe Biden's $1.9tn stimulus package.

Like a good Roman emperor it's got something for everyone - lots of bread, lots of circuses. The sticking plaster will suffice for now and we'll see what the infrastructure package looks like in due course.

9.56am GMT

Here's our economics editor Larry Elliott on today's GDP figures:

Why was the drop smaller than expected? For a start, more of the economy remained open in November than it did during the first lockdown. Factories kept turning out goods, construction work was allowed, children continued to go to school.

In addition, a couple of one-off factors supported activity. One was that the knife-edge state of trade negotiations between the UK and the EU encouraged firms to stockpile as insurance against a no-deal outcome. A second was that there was a delay between England's lockdown being announced and the restrictions coming into force, which allowed people to do some early Christmas shopping or have a meal out.

9.52am GMT

Paul Dales of Capital Economics has an encouraging take - he thinks the UK will avoid a double-dip recession, given the November slump wasn't as bad as feared.

He explains:

As long as GDP didn't fall by 1.0% m/m or more in December, then the economy wouldn't have contracted in Q4 as a whole. January's third lockdown, during which the schools are closed too, will take the level of GDP a bit lower than in November.

But the growing immunity of the economy to lockdowns is encouraging, means that vaccines may allow it to get back to its pre-crisis peak earlier than most had assumed and supports our view that the Bank of England won't need to resort to negative interest rates.

9.16am GMT

Why wasn't November's contraction wasn't as severe as March and April, during the first lockdown?

Jonathan Athow, the UK's deputy national statistician, has written an interesting thread on this issue. The good news is that companies were better prepared this time - with retailers boosting their online sales, and more pubs and restaurants offering takeaways and click-and-collect.

After 6 months of growth, the economy started shrinking again in November as tighter restrictions were in place. (Though there were variations across Wales, England, Scotland and Northern Ireland.) (1/n)

The economy shrank by 2.6% in November. In normal times this would be a significant downturn, but it is much smaller than the falls seen with the first restrictions in the spring: April GDP fell by around 20%. In that sense it is good news. But why the smaller fall? (2/n) pic.twitter.com/a9QNgAfpLX

Firstly, some industries remain very depressed. Airlines (air transport in the chart) for example, were operating at very low levels in October so there wasn't much further for their output to fall. This is different from the picture in Mar/Apr. (3/n) pic.twitter.com/ssQh6goDxR

The same is true, though perhaps less pronounced, for bars/restaurants and other parts of the service sector. (4/n)

Secondly, some sections of the economy have undergone a structural shift that has allowed them to continue to meet demand/produce output. Perhaps the best example is in retail. Overall sales in November were higher than pre-pandemic despite the restrictions. (5/n) pic.twitter.com/p3V1r5hqsZ

This is due, in part, to the shift online, which allowed sales to continue when shops were shut. These structural shifts create winners (on-line retailers) and losers (high-street), so a positive overall story can hide some significant distress for some businesses. (6/n)

There are also knock-on effects of this move on-line, with courier/postal services seeing growth through the pandemic. (7/n)

And there have been wider changes: food retailers have gained at the expenses of restaurants, and home improvement shops have benefited as consumers appeared to shift expenditure from other activities such as holidays and travel. (8/n)

Thirdly, individual industries (and businesses) have become more resilient to the restrictions. We saw big falls in construction during the first set of national restrictions, but continued growth during the November restrictions. (10/n) pic.twitter.com/im0yPoRraP

This is likely due to social distancing in workplaces, etc. that have allowed operations to continue. (11/n)

Overall, the economic impacts are smaller this time. But we should not lose sight of the fact that the economy has still taken a large hit from the pandemic, and beneath the surface there are hugely different experiences for different sectors, businesses and people. (ENDS)

8.45am GMT

Here's my colleague Richard Partington on today's GDP report:

The UK economy is heading for a double-dip recession after official figures confirmed a renewed slump in November as the second wave of the coronavirus pandemic took hold.

The Office for National Statistics said gross domestic product (GDP) fell by 2.6% month-on-month in November, when the government launched the second national lockdown in England and amid tougher controls in Scotland, Wales and Northern Ireland. City economists had forecast a steeper fall of 5.7%.

8.35am GMT

The Covid-19 pandemic has now caused the three largest falls in monthly UK GDP since records began in January 1997, the ONS says:

8.16am GMT

James Smith, research director of the Resolution Foundation, predicts the UK is falling into a double-dip recession, having contracted by 2.6% in November.

The sharp GDP fall in November as England entered its second national lockdown suggests that the UK is in the midst of a double dip recession as it starts the year with even stricter restrictions.

But while the economic story today is of only the second-ever double dip recession on record, the story of the year will be a vaccine-driven bounce back in economic activity for sectors like hospitality and leisure.

Second wave of virus = double dip recession for the economy. GDP shrank 2.6% in November - leaving output a huge 8.5% below pre-pandemic levels. Lucky there's light at the end of the tunnel because the tunnel's a disaster... pic.twitter.com/fcGIXZljgX

With the enforcement of a second lockdown in November 2020, GDP recovery went into reversed. Indeed, November's GDP stood at 8.9% below its pre-pandemic level, sharply down from 6.5% one month earlier. This looks really bad but UK economic performance has been revised slightly upwards for the May to October period!

Looking forward, the economic picture remains bleak, at least in the short run. In response to additional anti-contagion measures (most notably the third lockdown in January 2021), Google mobility developments, which serve as a proxy for consumer expenditure suggest a further drop in economic activity for 2021Q1:

8.04am GMT

James Sproule, UK chief economist of Handelsbanken, predicts that UK GDP will keep falling through December and January:

This morning's numbers are considerably better than forecast and would give credibility to ONS data suggesting that those businesses which have been able to remain open, have become increasingly adept at maintaining revenues despite lockdowns.

This said, at least two more months of negative data can be expected, with December reflecting widespread near lockdown and January the renewed national lockdown, before some sort of steadier path upwards can be anticipated.

7.48am GMT

Alpesh Paleja, CBI lead economist, is optimistic that the covid-19 vaccination programme will help the economy recover from its lockdown downturn.

With the country locked down for virtually all of November, the reduction in economic activity comes as no surprise.

But, as expected, the impact of the second lockdown was significantly smaller than the downturn seen in the spring. Steps taken by businesses earlier in the year to Covid-proof their operations - combined with the time-limited nature of the restrictions, and schools remaining open - meant more companies were able to continue trading safely.

7.46am GMT

Economist Samuel Tombs of City firm Pantheon is encouraged that November's GDP figures aren't as bad as feared:

A reassuringly small 2.6% m/m drop in GDP in November (consensus was -4.6%, Pantheon -3.5%) shows that many businesses are adapting well to lockdown conditions. GDP will be lower this month, but won't be anywhere near the lows seen last Spring. pic.twitter.com/Xo64ES7EbO

On bright side, economy weathered second Nov lockdown better than first as schools, construction & factories (some also have been busier ahead of Brexit transition end) stayed open - altho didn't compensate for slump in retail, restaurants, hairdressers etc where many shuttered

7.42am GMT

Customer-facing services companies suffered the biggest drop in output in November, as many were forced to shut down again, as this chart shows:

This monthly growth is driven by increases in both infrastructure (9.6%) and private new housing (4.7%) meaning both sectors are above their pre-pandemic February 2020 levels at 9.1% and 4.2% respectively.

7.37am GMT

Chancellor of the Exchequer, Rishi Sunak, says the fall in GDP in November shows the scale of the challenge facing the country:

It's clear things will get harder before they get better and today's figures highlight the scale of the challenge we face.

But there are reasons to be hopeful- our vaccine roll-out is well underway and through our Plan for Jobs we're creating new opportunities for those most in need. With this support, and the resilience and enterprise of the British people, we will get through this."

7.29am GMT

The ONS tweets:

GDP fell 2.6% in November and is now 8.5% below its pre-pandemic peak.

Services fell 3.4% (9.9% below peak), manufacturing grew 0.7% (4.9% below peak) and construction grew 1.9% (0.6% above peak) https://t.co/6fqYOZzPUw pic.twitter.com/6YBdd5BBFg

November saw the third largest fall in services since records began in 1997.

Learn more about the impacts of #coronavirus on the UK economy in November in our new article https://t.co/dNH5WyrH3U pic.twitter.com/W4WPq6Vona

7.23am GMT

Here's a sectoral breakdown of the UK economy in November:

7.22am GMT

The UK's service sector suffered the biggest fall in growth in November, contracting by 3.4%.

Unsurprisingly, the hospitality sector shrank the most - with pubs and restaurants forced to close during the November lockdown.

There were falls in output in all 14 services sub-sectors between October and November 2020. The largest contributor to this fall was accommodation and food service activities, followed by wholesale and retail trade, other service activities and arts, entertainment and recreation, because of the reintroduction of restrictions in some parts of the UK.

These four sectors accounted for nearly 80% of the fall in services.

7.12am GMT

7.08am GMT

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

The UK economy has shrunk again, as restrictions imposed to fight the spread of the Covid-19 pandemic weigh on growth.

The UK economy takes its first step towards a double-dip recession with a 2.6% fall in GDP in November, during the second English lockdown. First monthly decline after 6 consecutive months of growth during the summer.

BREAKING: #UK final November GDP figures not as bad as expected:

-2.6% M/M (consensus -5.7%)
+4.1% 3m/3m (consensus +3.4%)
-8.9% Y/Y (consensus -12.1%)

While construction input continued to increase in November, output in headline GDP, services and production fell.

Following six consecutive monthly increases, including an upwardly revised 0.6% increase in October, real gross domestic product (GDP) fell by 2.6% in November 2020.

Restrictions were in place to varying degrees across all four nations of the UK during November.

There's no time to waste. We have to act and we have to act now."

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