Full story: Borrowing surge amid crisis
Here’s our economics editor Larry Elliott on the jump in UK borrowing:
The government was forced to borrow a record £62bn to balance its books in April as the public finances felt the strain from a shutdown of the economy that saw high street spending plummet by an unprecedented 18%.
Figures from the office for national statistics highlighted the dramatic impact of the Covid-19 restrictions introduced in late March on activity – with public borrowing up by more than £50bn on the same month a year earlier and spending in clothes stores down by 50%.
The ONS said there had been a sharp drop in all the state’s main sources of revenue – income tax, national insurance, VAT and corporation tax coupled with a marked increase in spending. With the economy at a virtual standstill, the government borrowed as much last month as in the whole of the previous financial year.
Retail sales slump: What the experts say
Britain’s retailers are suffering from one of the most “profound shifts” in consumer behaviour in a century, says Lynda Petherick, managing director at Accenture.
April was always going to be the month when the full force of government lockdown measures would hit retailers. Clothing has continued to suffer, and though there are still some bright spots in grocery, “panic-buying” and online household goods orders subsided slightly as consumers continued to restrict their shopping trips.
Yes – these are hard times for the sector, however there are lessons to be learned if retailers are to come out the other side of the pandemic ready to respond. Online sales continue to reach new heights, suggesting that consumers have been quick to shift their buying habits – a trend which is only likely to continue. Retailers will need to act quickly and deliberately to improve their capabilities if they are to drive growth and profitability in an increasingly digital future.”
Lisa Hooker, consumer markets leader at PwC, hopes that the worst may be over though, after the 18% slump in April:
However bad April’s figures are, we believe that retail has reached a turning point in the Covid-19 crisis. In the short term, May has already seen a loosening of lockdown restrictions across all the home nations. Indeed, enterprising operators have begun to reopen cautiously, from garden centres to some furniture stores coming back for the bank holiday weekend.
Economist Rupert Seggins has shown the unprecedented scale of the drop in April:
As rumoured, the UK government has extended its mortgage payment holiday scheme by three months.
It’s also extended the ban on home repossessions until the end of October, in an attempt to prevent the pandemic leading to rising homelessness.
My colleague Mark Sweney explains:
More than 1.8 million homeowners have taken a three-month mortgage holiday since the scheme was announced in March to help borrowers in financial difficulty because of the coronavirus crisis, according to Treasury figures. It was due to expire at the end of June.
“We’re doing everything we can to help people with their finances at this difficult time and that includes making sure people get the support they need with their mortgages,” said John Glen, the economic secretary to the Treasury. “That’s why we’re working with the banks and lenders to extend payment holidays if people need them.”
Covid-19 fears and Hong Kong tensions hit markets
Over in the City, shares are dropping as investors worry about the economic impact of Covid-19.
The FTSE 100 index of leading UK-listed shares dropped by 110 points, or 1.8%, in early trading to 5903. That wipes out most of this week’s gains. Nearly every share is down, led by financial services firms like Prudential (-9%), HSBC (-5.8%) and Standard Chartered (-4%).
The slump in retail sales, and the spike in borrowing, are a reminder of the economic cost of the pandemic. Recent hints from the Bank of England that it could impose negative interest rates in the UK are weighing on bank stocks too.
Shares are also down in Germany and France. Traders are worried that China has dropped its annual GDP target today – clearly growth this year is simply too bad [Beijing has an remarkable track record of achieving these targets…]
But there’s another reason for the sell-off: China’s ruling Communist Party has proposed a controversial national security law for Hong Kong to ban “treason, secession, sedition and subversion”.
The proposal, which could bypass Hong Kong’s lawmakers, would also allow the central government to set up “security organs” in the territory.
It’s likely to inflame tensions with pro-democracy supporters in the city state, and with the White House too, as Jim Reid of Deutsche Bank told clients:
This will likely draw a large amount of opposition given the pro-democracy protests in the country over the past year. This could be another wedge between China and the US, given how many US politicians on both sides of the aisle supported HK’s efforts last year.
UK internet shopping hits record high
Online spending surged last month, as the lockdown encouraged more Britons to order groceries, wine, household goods and other items online.
The ONS reports that 30.7% of retail spending took place online in April, up from 19.1% a year earlier.
Simon French of Panmure Gordon has tweeted more details:
Over 14% of UK shops reported no turnover at all in April, due to the Covid-19 shutdown.
That includes 27% of clothing and footwear outlets (where takings halved last month!), and almost 40% of department stores.
This morning’s retail sales report also shows that sales at supermarkets dropped slightly compared with March.
But alcohol and tobacco outlets posted rising sales, defying the 18% plunge across the industry. Here’s the full details:
UK borrowing: What the economists say
Paul Dales of Capital Economics predicts Britain’s deficit could hit 17% of GDP this year. That’s an immense figure — exceeding the last financial crisis, when the deficit hit 10% of annual output.
With little prospect of a swift return this year towards pre-crisis levels of economic activity, we expect borrowing to total £340bn (17.5% of GDP) over 2020/21, which would be over £40bn more than the OBR’s forecast.
Overall, the small easing of the lockdown on 13th May probably means that retail sales started to edge higher in May and that the government might not have had to borrow quite as much as in April. But it’s very clear that the retail activity will remain worrying weak for some time yet and that the government will have to borrow a few hundred billion pounds this year.
Jeremy Thomson-Cook, chief economist at financial services group Equals, says we should welcome the jump in borrowing – the alternative is worse.
The UK’s budget deficit is at the highest level since records began in 1993. This is a good thing; if your house is on fire, you don’t ask the Fire Brigade to only use a certain amount of water.
The water will need to keep flowing and the deficit will continue to grow because the alternative – a deeply scarred economy – is far worse.”
Howard Archer of EY Item Club points out that falling tax receipts also hit the public finances:
Central government receipts fell 26.5% year-on-year in April, as they were impacted by a combination of sharply contracting economic activity, markedly rising unemployment and weaker earnings, and companies being allowed to delay tax payments.
“Income and capital gains tax receipts were down 36.0% year-on-year in April, as jobs were lost and pay hit. There was also a fall of 14.1% in corporation tax receipts while VAT receipts were down 43.6% year-on-year.
Here’s some snap reaction to the surge in UK government borrowing to £62bn last month.
The BBC’s Dharshini David points out that Britain just borrowed more in April than it had expected to borrow in the whole financial year, before the pandemic struck:
Her colleague Kamal Ahmed has some historical context, for those who can’t remember 1993 (my main memory is of a young Shane Warne….)
Torsten Bell of Resolution Foundation says government borrowing is going to rocket this year, to protect us from even more economic harm:
John Hawksworth of PwC predicts the UK could borrow as much as £300bn in the current financial year — six times as much as previously planned.
Introduction: Government borrowing hits £62bn in April
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
We start with some breaking news — UK government borrowing hit its highest level on record last month amid the Covid-19 pandemic, as retail sales across the country plunged at a record pace.
The Office for National Statistics has just reported that public borrowing in April is estimated to have surged to £62.1bn. That’s £51.1bn more than in April 2019, and the highest borrowing in any month since records began in January 1993.
Indeed, it’s almost as much as the UK borrowed in the whole of the last financial year:
This is an early sign of the massive cost of the government’s attempts to limit the damage of the Covid-19 crisis, including its jobs guarantee scheme. It’s also due to a sharp drop in tax takings.
But the ONS also cautions that “the effects of COVID-19 are not fully captured in this release”.
The ONS has also reported that retail sales across the UK slumped at an unprecedented rate in April.
Sales fell by over 18% compared with March, due to the widespread shutdown of non-essential shop, taking turnover down to its lowest level since 2005.
The ONS explains:
- The volume of retail sales in April 2020 fell by a record 18.1%, following the strong monthly fall of 5.2% in March 2020.
- All sectors saw a monthly decline in volume sales except for a record increase in sales for non-store retailing at 18.0% and a continued increase in sales for alcohol stores at 2.3%.
- The volume of clothing sales in April 2020 plummeted by 50.2% when compared with March 2020, which had already fallen by 34.9% on the previous month.
This comes as fears over the UK hospitality industry grow, with many pubs, bars and restaurants warning they will close some outlets permanently.
Stock markets are also under pressure, after China abandoned its long-held practice of setting a GDP target – presumably because growth has been so badly hit by the pandemic.
More details and reaction to follow!
- 7am BST: UK public sector net borrowing for April
- 7am BST: UK retail sales for April