Global Markets Overview: UK
By James Parteka, Analyst at the York IFS Global Market Telegraph
FTSE 100 slides from worse than expected economic activity. Despite the lack of Christmas spending, increased savings could be a silver lining. Easyjet's revenues drop 88% as airline stocks continue to fall.
The FTSE 100 made some small gains on Monday last week before sliding back from impacts of the third wave of Covid-19, weak activity in the Services Sector and plans to quarantine arrivals at the UK's airports. The index was also hit from increased volatility in the US as hedge funds lost large amounts of money to retail investors led by a Reddit message board (r/wallstreetbets). A rising sterling has also slightly hampered the export-heavy FTSE 100. However, the high sterling shows market optimism in the UK vaccine rollout and falling cases despite recent controversy over the EU demanding AstraZeneca's UK vaccines to make up shortfall. The Purchasing Managers' Index for services shows that UK economic activity has dropped the most since May 2020 as the index fell to 38.8 down from 49.4 in December. It is the third consecutive month of a reading below 50 (anything below 50 shows a contraction in services activity) and the January figure was below economists' forecasts of 45.
Services make up 80% of the UK economy so the steep slump from post-Brexit red tape and the third national lockdown will likely cause a sharp drop in GDP in the first quarter of 2021, creating the possibility of a double-dip recession. Small businesses have been facing difficulties with Brexit red tape as the UK is no longer part of the EU's single market.
UK consumer spending is currently 35% lower than levels seen in early January last year. With the Christmas spending period over and a third national lockdown in place, households have started saving again. Even in December, many retailers missed out on a Christmas shopping boost with volume by sales increasing just 0.3% in December compared to November. Last-minute coronavirus restrictions and increasing cases resulted in a 1.9% year on year fall of volume by sales (Dec 2019 – Dec 2020), the largest on record.
One positive outcome could be the increase in the UK households' saving ratio (savings as a percentage of disposable income). Before 2020 the ratio rarely went above 10% due to the near-zero interest rates set by the Bank of England since the 2008 financial crisis. The savings ratio jumped to 27% in Q2 2020 and currently sits at 16.9% (Q4 2020). Not only does a higher savings rate mean households have spare liquid cash to spend when they fall on hard times (extremely likely at the moment), reducing the output volatility of the UK economy. Domestic savings are also directly tied to the level of investment in an economy which can boost long-run growth and productivity. This would be a welcome sight for the UK, where productivity has lagged far behind other countries in the G7. Any long-term impacts will need the increased savings rate to become a structural change to the UK economy, not just a temporary one.
With new travel bans on the UK imposed by European countries and the recently inaugurated US President Joe Biden announcing he will also bring back the UK travel ban, UK airline share prices have dropped. EasyJet's share price has fallen almost 20% over the past two weeks, declining 5% last Wednesday alone. British Airways owner International Consolidated Airlines Group (IAG) has had its share price fall around 15% over the same timeframe. Airlines have been some of the hardest hit from the pandemic as international travel from tourism and business has almost ground to a halt; global air traffic dropped by 60% in 2020.
EasyJet had a difficult end to 2020 with revenues dropping 88% in the final quarter; the airline now expects to run only 10% of its 2019 schedule in Q1 2021. EasyJet also suffered a shareholder revolt where 42% of shareholders voted against EasyJet's top directors' re-election, including the airline's founder and biggest shareholder Sir Stelios Haji-Ioannou. The revolt took place as directors announced they were ready to comply with EU regulations after the Brexit transition period, which demands airlines with EU operating licences to be majority-owned by EU nationals. From January UK investors will no longer count towards this. This change will greatly impact UK investors, who were recently denied voting rights by Ryanair and Wizz Air over the new post-Brexit trading rules.
This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 14.1 in early February 2021.