The yield on the benchmark UK gilt dipped early in January as Prime Minister Boris Johnson announced fresh lockdown measures to stem a rapid increase in Covid-19 infections. Over January as a whole, however, the benchmark gilt yield rose from 0.20% to 0.33%.
- Further details were released about the UK’s first “green” gilt issue
- The UK economy contracted by 2.6% in November
- Government borrowing continued to soar
The yield on the benchmark UK gilt dipped early in January as Prime Minister Boris Johnson announced fresh lockdown measures to stem a rapid increase in Covid-19 infections. Over January as a whole, however, the benchmark gilt yield rose from 0.20% to 0.33%. Further progress was announced in the planned issuance of the UK’s first “green” government bond during the month. Chancellor of the Exchequer Rishi Sunak intends to reveal more information about the issuance at the Budget on 3 March.
“Activity in the UK is predicted to remain below pre-pandemic levels until 2022”
The rate of consumer price inflation rose from 0.3% to 0.6% year on year during December as higher prices for clothing and transport offset lower food prices. Lockdown measures in England resulted in a contraction of 2.6% in the UK economy during November, leaving it 8.5% below pre-pandemic levels. The services sector was particularly hard hit amid restrictions on consumer-facing businesses. Business activity declined sharply during January, according to IHS Markit, which warned that the UK risks a double-dip recession.
The International Monetary Fund (IMF) raised its forecast for global economic growth this year from 5.2 to 5.5%, but downgraded its UK estimate from 5.9% to 4.5%. Although economic activity in the US and Japan are expected to recover to pre-pandemic levels during the second half of 2021, activity in the UK and the eurozone is predicted to remain below pre-pandemic levels until 2022.
Government borrowing rose to £270.8 billion in December. For December itself, it reached £34.1 billion, representing the highest-ever amount for the month of December, and the third-highest borrowing figure in any month since records began in 1993. The Office for Budget Responsibility (OBR) has calculated that borrowing could reach £393.5 billion by the end of March 2021. Public sector net debt reached 99.4% of gross domestic product in December – its highest level since 1962.
Credit ratings agency Fitch affirmed the UK’s credit rating at AA- with a “negative” outlook. Fitch highlighted factors including the UK’s high income, its diversified and advanced economy, strong governance, and sterling’s reserve currency status, and also the very long average maturity of public debt, which is among the highest of all Fitch-rated sovereigns, and “mitigates refinancing and interest rate risks. On the other hand, Fitch cited high and rising public sector indebtedness and the negative impact of the coronavirus pandemic on the country’s public finances.