UK’s record borrowing; BoE jobless warning; PayPal move lifts Bitcoin – as it happened

Rolling coverage of the latest economic and financial news

Time for a quick recap

Britain is on track to smash previous borrowing records, after running a record deficit of over £36bn in September. The UK has now borrowed £208.5bn since April, nearly four times as much as in the last financial year.

Related: UK public finances pushed into £36bn deficit as inflation rises

Related: UK borrowing on course to exceed £1bn a day but markets unperturbed

Related: 170,000 jobs in UK’s live music sector ‘will be lost by Christmas’

It has 346 million active accounts worldwide, and processed 222 billion dollars in payments just in the second quarter.

Cryptocurrency transactions on PayPal will be settled in regular currencies, such as the U.S. dollar, meaning merchants won’t get paid in virtual coins.

Ouch. That late selloff has pushed the FTSE 100 index of blue-chip companies to its lowest closing level in five months.

The Footsie has ended the day down 112 points or 1.9% at 5,776, its lowest close since 14th May. It’s also its worst one-day fall in a month, and means the index is down 23% this year.

Optimism is circulating with respect to the possibility of the UK and the EU achieving a trade deal, hence the upward move in sterling. Stocks like Diageo, AstraZeneca, Unilever and GlaxoSmithKline and British American Tobacco are weighing on the British index because of the rally in the pound.

The companies all earn a relatively high portion of their total revenue from overseas, so sterling’s positive run has pushed them into the red. The major European indices are showing losses too as traders on this side of the Atlantic are worried about the tougher restrictions brought on by the pandemic.

Stocks are falling sharply in late European trading, with the FTSE 100 briefly touching its lowest level in five months.

hideous last hour of trade in Europe – FTSE makes new intra day low pic.twitter.com/ik4CMDEjuv

US has also rolled over after a positive start pic.twitter.com/LcBw2FOGo6

Nigel Green, chief executive of deVere Group, agrees that Paypal’s move into digital currencies is very significant.

Green says:

“The decision by one of the biggest payment companies in the world to allow customers to buy, sell and hold Bitcoin is yet another example that exposes Bitcoin deniers and cryptocurrency cynics as being on the wrong side of history.

Let’s be clear: This is a major step forward towards the mass adoption of digital currencies.

Bloomberg reports that its Galaxy Crypto Index, which tracks some of the largest digital coins, rose by as much as 5.1% after PayPal announced it would soon let US customers use cryptocurrencies.

It says:

Bitcoin increased as much as 4.9% to $12,488 Wednesday, surpassing the previous high for the year of $12,473 set in August. Gains among so-called alt coins were even larger, with Litecoin jumping more than 11% and Bitcoin Cash surging 8%.

Here’s a video clip promoting PayPal’s embrace of cryptocurrencies:

Today, we are announcing the launch of a new service that will enable customers to buy, hold and sell #Cryptocurrency directly from their PayPal account. https://t.co/QS6JRmG9hs pic.twitter.com/uHBatfZkbF

Sterling is extending its gains, on the back of a Bloomberg report that the Brexit talks will soon resume.

Here’s the details:

Trade talks between the U.K. and European Union are on the verge of resuming after positive contact between the two sides, three people familiar with the discussions said.

A decision could come in the next 24 hours, with negotiators ready to sit down immediately with the goal of finding a deal by mid-November, according to the people, who spoke on condition of anonymity because the talks are private.

BREAKING: Brexit trade talks between the U.K. and European Union are on the verge of resuming, with the aim of a deal by mid-November https://t.co/YTdwXP3Y1z pic.twitter.com/864eTYnAq1

#BREXIT TALKS SET TO RESTART, AIMING FOR DEAL BY MID-NOVEMBER – BBG
*A decision could come in the next 24 hours, with negotiators ready to sit down immediately with the goal of finding a deal by Nov. 13, according to the people

Newsflash: Bitcoin has hit its highest level of the year, after Web payment platform PayPal said it would allow its US customers to buy, sell and hold bitcoin and other virtual coins.

Reuters has the details:

PayPal customers will also be able to use cryptocurrencies to shop at the 26 million merchants on its network starting in early 2021, the company said in a statement.

PayPal hopes the service will encourage global use of virtual coins and prepare its network for new digital currencies that may be developed by central banks and corporations, President and Chief Executive Dan Schulman said in an interview.

The news sparked an exuberant response from crypto fans who pointed to a string of recent announcements that suggest wider acceptance by old-school financial mainstays.

Two public companies — Square Inc. and MicroStrategy Inc. — said recently that they invested in Bitcoin. And Fidelity Investments announced in August that it’s launching its first Bitcoin fund, adding its establishment name and star power to the often-maligned asset class.

This PayPal news is the biggest news of the year in crypto. All banks will now be on a race to service crypto. We have crossed the rubicon people. Exciting day. https://t.co/hXpiJEDOb3

The New York stock market has made a very muted start to trading.

The Dow Jones industrial average has dipped by 36 points to 28,271, as investors continue to fret about whether a US stimulus package will be agreed (the two sides are still talking).

Britain’s music industry has given a stark illustration of the labour market ‘scarring’ which Sir Dave Ramsden fears — warning that 170,000 jobs could be lost before the end of the year.

The UK’s live music sector is facing the loss of 170,000 jobs – almost two-thirds of its workforce – as the beleaguered industry approaches a “cliff edge” after the winding up of the government’s furlough scheme at the end of the month.

The sector, which has, in effect, been shut down since March, is estimated to be hit by an 80% decline in revenues this year, according to a report.

Related: 170,000 jobs in UK’s live music sector ‘will be lost by Christmas’

Meanwhile in Canada, inflation has picked up after its summer lull, as in the UK.

The pound has hit a six week high, following Sir Dave Ramsden’s reluctance to try negative interest rates.

Sterling has risen to $1.3094, its highest level since 8th September, after the Bank of England deputy governor said now was not the time to cut Bank Rate below zero.

No Bank of England speech is complete without a reference to negative interest rates — the latest weapon in the BoE’s armory.

Sir Dave Ramsden doesn’t sound eager to pull the trigger, though.

While there might be an appropriate time to use negative rates, that time is not right now, when the economy and the financial system are already grappling with the effects of an unprecedented crisis, as well as the myriad uncertainties the crisis has created.

Just in: Bank of England deputy governor Sir Dave Ramsden has warned that unemployment could rise more sharply than forecast, and that wage growth could also falter as the pandemic continues.

In a speech just released, Ramsden warns that younger workers, and those at the start of their careers, could be particularly impacted by Covid-19.

As flagged in the MPC’s September minutes, there is a real risk of a more persistent period of higher unemployment, and the recent strength of income growth might not be sustained.

I remain particularly concerned that we could also see structural headwinds to recovery in the labour market, with particular impacts on younger workers and those joining the workforce.

The UK Treasury has trumpeted the jump in housing transactions in September (see earlier post) as proof that the stamp duty holiday is working.

Our stamp duty cut helped boost house sales by more than 20% in September, supporting hundreds of thousands of jobs as buyers spend their cash savings on their new homes

From removal companies to decorators, builders & furniture sellers, every sale counts https://t.co/raYvA44sKE pic.twitter.com/ayOMHjxMGD

“This spike is undoubtedly supplemented by the stamp duty holiday, but is also symbolic of a more enduring lift in the market as the effects of lockdown come to bear on people’s long-term planning and increased demands on their living space. We already know that the house builders and developers are working really hard on design and delivery, to identify and serve the adjusted demands of the purchaser.

This continues to transition and evolve at pace. This sure makes the new build housing product more attractive than ever before, serving as a further incentive to move and generating activities throughout the new and used housing market.’’

“Here is official confirmation that the market did indeed get up to a canter over the summer months. The annual rate of growth soared as buyers frustrated by lockdown and lack of space crammed into the market in search of larger properties. That alone explains this sudden rally, as the stamp duty holiday was only introduced in July. A lag will mean any extra demand it created will not be seen in the Land Registry figures before the end of the year.

“The question is how long this surge can last, with speculation already swirling that the market is set for a fall. Such predictions are probably premature.

Back to the public finances… and economics editor Larry Elliott points out that the UK is on track to borrow a billion pounds ever day this year.

The financial markets, though, are unperturbed by the record-breaking deficit…

During the financial crisis of 2008-09, public borrowing soared to more than £150bn – or just under 11% of national output at the time. Paul Dales at Capital Economics says the final total for 2020-21 could be £390bn, almost 20% of GDP. As things stand, that looks a reasonable estimate.

In that context, Whitehall may struggle to explain why it has taken such a tough line in its negotiations with Greater Manchester over a tier 3 support package, with the two sides wrangling about £5m. When borrowing is on course to exceed £1bn a day, £5m is a drop in the ocean.

Related: UK borrowing on course to exceed £1bn a day but markets unperturbed

Credit rating agency Moody’s has warned that no-deal Brexit would be even more damaging to UK car producers than Covid-19.

A new Moody’s report shows that the automotive industry would suffer the biggest hit from a disorderly Brexit, along with aerospace, chemicals and the ports.

“In the event of a no-deal Brexit, domestic demand is unlikely to offset the profit pressures UK automakers will face as tariffs, trade barriers and currency depreciation come into play.

The UK economic environment is already uncertain, and a no-deal Brexit would only exacerbate this further, creating more challenges for carmakers.

Today’s UK public finances are an excellent opportunity to publish this long thread written by economist Tony Yates over the weekend, on the wider issue of Covid-19 borrowing and government debt:

OK, I’ll bite. This is an excellent question, not just a genuine one. https://t.co/MfBFn2euxI

There is not a mechanism in place to write off most of each other’s debt. There doesn’t need to be.

Not all governments are borrowing, for starters. The ones that are are borrowing from their citizens, and foreign citizens, who have stuff to lend.

These are probably mostly the rich, the middle aged, who are saving, and will accept government IOUs, and the old, who have piles of assets and are ok with more of them being in government IOUs, for now.

You can tell that this isn’t a problem yet because there is plenty of demand by those who have savings to swap them for government bonds as they get issued, as the bonds trade for a high price [very low interest rate].

Alongside these sales to citizens, there is the small matter too of central banks creating money to buy quite a lot of them.

@Aiannucci rightly wonders what will happen at the end of all this? Will all governments agree just to cancel the debts? Implicitly saying ‘because of course no way can we pay them back’.

Obvs I can’t tell what will happen in the future. It may be that some govts decide, or are forced to say ‘sorry, not paying that IOU’ and default. I hope that this doesn’t happen, and it doesn’t need to happen.

Provided the costs of servicing the debt stay low, the debt can be ‘rolled over’ pretty much indefinitely, allowing some combination of the following to get it to ‘go away’…..

By ‘rolling over’ I mean: when one IOU comes due, you make good on it by first finding a new person who has savings who is happy to have a new IOU from you.

And slowly, over time, then, the debt burden is shrunk by 1) a bit of gentle tax raising, 2) allowing economic growth to shrink debt relative to national income, 3) probably a bit of inflation too.

This is how ‘paying down’ WW2 debt worked for the UK. Probably we had too much inflation; and the tax was levied covertly by repressing the savings/investment industry in the UK [‘financial repression’].

Behind the original question is the implicit worry that this can’t go on forever, can it? No, it can’t, there are limits to how many of these IOUs you can hope to sell to citizens at home and abroad.

But these limits seem to be a long way off at the moment. It’s important not to abuse the privilege that is afforded us by being able to sell these IOUs to fund the national crisis effort now. Because our kids and our kids’ kids might need to do the same themselves.

Not abusing that privilege means doing pretty much what the buyers of the IOUs could have hoped and expected when they parted with their savings. Following through and making good on them as and when.

To be sure you can do this you can’t let the amount of debt outstanding get too far out of line with the income you can lay your hands on as a govt. What ‘too far’ is very difficult to know. And we have learned that ‘too far’ is further than we thought say 20 years ago.

Hawkish govts and commentators have done lots of damage by abusing this perfectly sound logic that there are limits, confecting arguments that finances are about to hit the skids. [Those invoking the Reinhardt/Rogoff spreadsheet with the error in, for example].

These things are invoked – in good or bad faith idk, probably incidences of both – to force us to think we have to have small, ungenerous states with mean policies that don’t properly compensate people through recessions and hardship.

Invoking the limits argument in bad faith, or just badly, has also stoked the equally bad idea [emanating particularly from MMT] that there are no limits, or no practical limits, that taxes don’t fund govt spending, and that you can use the printing presses and not worry about it

Which brings me to the money bit. You didn’t, but you might well have reasonably interjected, when I mentioned that central banks were buying a lot of debt: ‘aha, what’s going on there, isn’t *that* just more made up debt and isn’t this just going to have to be cancelled?’

Again, who knows, but there is no need for a bad outcome here. The money created, so long as it continues to go hand in hand with relative stable prices, reflects the same demand [mostly by own citizens in this case] to put some of your worth into just another govt IOU.

This IOU has a picture of the queen on it and gets exchanged in shops. Not the same as a govt bond, but is not so different either. At some point, we do have to worry about making sure that the money printing gets ‘undone’, as and when not undoing it threatens high inflation.

Remember before that I said that some of the shrinking of the real value of the actual govt IOUs would happen with inflation. That will be engineered, if all goes well, with delicate printing of the picture of the Queen on them IOUs.

The answer is YES! Colossal fiscal support, much more generous than we are offering currently, is needed to support compliance with social distancing, and to compensate those affected as much as possible.

In this way, the government uses the benefits of its predecessors not having abused the perpetual ability to raise finance, to raise it and act like a social insurer.

We weren’t individually prepared, and could not have insured ourselves against covid if we tried. The govt support and financing is a call on an insurance policy maintained by all past and future generations, one that we contribute to a bit ourselves in analogies to premiums.

In figuring out the ‘insurance payouts’, we have to be careful to note the terribly regressive nature of the shock. Poor people find it harder to socially distance in small accommodation, more densely populated areas, and are less likely to be doing nice work from home.

And the insurer [that’s us really] has to be mindful of the overall scheme. Remember future generations are going to have their own disasters, some of which are foisted on them by our neglect of our collective failure to address carbon emissions.

By ‘be mindful’ I mean, return the favour of not abusing the accumulated reputation for not abusing the privilege of being able to raise money cheaply, and respect therefore the fiscal limits, a long way off and uncertain though they may be.

At the same time as cautioning against abuse, we have to balance this by remembering that the accumulated reputation for not abusing the financing privilege is not and end in itself, just like price stability [what you get by not abusing money printing privilege] is not an end.

THE WHOLE POINT of previous generations investing the effort of discipline is that we can do the financing, and protect the fabric of the state when we need to do really big things to achieve it.

There will obviously be a huge program of macroeconomic stimulus post crisis, resilence building in state services, and, IMO, a necessary re-drawing of the state to make those services better, and to contribute to a redistribution of sorts to compensate for the regressive crisis.

The UK housing sector picked up pace in August, as the government’s stamp duty holiday encouraged people to consider moving house.

The number of UK residential property transactions rose to 101,920 in September, as demand for property rose.

Provisional residential transactions estimates in September 2020 have noticeably increased compared to August 2020, likely due to the continued release of pent-up demand within the property market since March 2020 and early impacts from the temporarily increased nil rate band of SDLT (stamp duty land tax).

The pound has shrugged off Britain’s record borrowing, and is getting a boost from the latest Brexit headlines.

Hopes that the UK and EU could reach a trade deal have pushed sterling back over $1.30 against the US dollar, for the first time in nearly a week.

Brexit talks stalled last week, when the U.K. put formal negotiations on hold after the European Council. U.K. officials said that without a signal from the EU that it is also ready to make concessions, formal talks can’t resume.

Barnier stressed that the EU is ready to compromise in order to reach a deal.

Michel Barnier: Brexit agreement “within reach”: https://t.co/Hi2MRrGMII

Michel Barnier: Brexit agreement ‘within reach’ The #EU’s chief negotiator Michel Barnier on Wednesday told the European Parliament that “an agreement is within reach if both sides are willing to work constructively.” Brexit talks stalled last … https://t.co/kYR5UYLdDC #Europe pic.twitter.com/7ieGV0fddE

Here’s the damage this morning:

It’s turning into another bad morning in the City.

The FTSE 100 index of blue-chip stocks has fallen by 90 points, or 1.5%, to 5798 points – not far from the five-month lows hit in September.

another test coming? #FTSE100 Sep lows at 5771 pic.twitter.com/wLMI1AjszD

The latest is that the House Democratic Speaker Pelosi’s deadline for a deal yesterday came and went with no decision, but the two sides continued to talk.

Treasury Secretary Mnuchin made comments suggesting a deal is close on a deal closer to $1.9 trillion, while the chief question may be whether there is sufficient support for a deal among Senate Republicans to pass the deal, with Senator Mitt Romney arguing against a deal of the current size.

Those fretting about Britain’s record surge in borrowing should remember the International Monetary Fund’s view — austerity is not an inevitable consequence of Covid-19.

The IMF warned last week that governments should not withdraw their current economic support packages, as this would derail the recovery and be counterproductive.

“The [public debt] ratio in our projections stabilises and even declines slightly towards the end of our projections which shows that Covid-19 is a one-off jump up in debt and with low interest rates, the debt dynamics stabilise.”

Here’s our news story on this morning’s economic data:

Related: UK public finances pushed into £36bn deficit as inflation rises

Speaking of pensions… one centre-right thinktank has today urged the government to rip up the triple-lock.

The Centre for Policy Studies (CPS) argues that the UK could save £2bn a year if it ditched the commitment to raise pensions by at least 2.5%. It favours a double lock, in which pensions would rise each year by whichever was the higher of earnings or inflation.

Related: Scrap pensions triple lock to help save UK finances, says influential thinktank

September’s 0.5% inflation reading will have wide-ranging implications – as it is used to set increases on business rates and state benefits.

The Press Association have a handy explanation:

The September figure is used to decide the annual increase in business rates. While retail, leisure and hospitality firms have been given a one-year business rates holiday, this is set to end on March 31 just before the new rate kicks in on April 1.

September’s CPI is also used in the calculation for state pensions, although the triple-lock rule means the payout will be the highest figure out of CPI, earnings growth for the year to July, or 2.5%.

Former pensions minister @stevewebb1 says despite today’s 0.5% CPI increase state pensioners are set to benefit from a 2.5% increase next April – five times the rate of inflation. It means a single pensioner currently receiving the full new state pension of £175.20 (1/2)

Would get an extra £4.40 per week, while an older single pensioner on the old basic state pension of £134.25 would get an extra £3.35 per week. (figures rounded to nearest 5p) (2/2) https://t.co/4V0w1k4T8t

September’s inflation report also shows the impact of Covid-19 on the economy.

A jump in the cost of second-hand cars helped to push the consumer prices index up to 0.5%, from just 0.2% in August. That appears to be due to commuters choosing to drive to work rather than take the bus or train, due to fears of catching the virus.

The contribution from the purchase of vehicles was solely because of second-hand cars, where prices have risen by 2.1% between August and September 2020, compared with a 1.4% fall between the same two months a year ago.

This is widely reported to be because of increased demand for used cars as people seek alternatives to public transport.

An upward contribution (of 0.30 percentage points) came from catering services, where prices rose by 4.1% between August and September 2020, compared with a rise of 0.2% between the same two months in 2019.

The rise this year reflects the end of the Chancellor’s Eat Out to Help Out scheme, which affected the prices of food and non-alcoholic drinks in participating restaurants, pubs and cafés on Mondays to Wednesdays during August.

September CPI back up slightly to 0.5% from 0.2% in August, as ‘eat out to help out’ ends (plus a revival in the second hand car market).

Overall picture, however, is ongoing reductions in inflation in nearly all categories, with deflation in five of twelve . pic.twitter.com/o4nZn7uio6

The news that Britain is smashing monthly borrowing records, without any problems in the markets, must be galling for those Northern leaders demanding more economic support.

The UK effectively borrowed more than a billion pounds every day last month, which dwarfs the £65m support package which Andy Burnham, the mayor of Greater Manchester, was seeking…. let alone the £5m difference which sunk yesterday’s negotiations.

When dealing with sums like this, it does rather beggar belief that the UK government and leaders in Manchester are quibbling over as small a sum as £5m.

It’s like discussing a rounding error, and UK gilt markets don’t seem that concerned, given the eye watering sums being spent elsewhere around the world.

Related: Chaos and fury as Boris Johnson forces curbs on Greater Manchester

The chancellor, Rishi Sunak, has responded to today’s borrowing figures:

“Whilst it’s clear that the coronavirus pandemic has had a significant impact on our public finances, things would have been far worse had we not acted in the way we did to protect millions of livelihoods.

“Over time and as the economy recovers, the government will take the necessary steps to ensure the long-term health of the public finances.”

Sunak says of soaring borrowing: things could have been far worse https://t.co/4B4bQZOb9f pic.twitter.com/O567otmLQV

Paul Dales of Capital Economics predicts that the UK deficit could hit an unprecedented £390bn by the end of the financial year — but that’s no reason not to provide more economic help:

Public sector net borrowing (exc. Banking groups) of £36.1bn (consensus £33.6bn) was the third highest since records began in 1993. Even so, borrowing in the fiscal year to date is 20.6% below the OBR’s July projection.

But the stuttering recovery and further fiscal support are likely to mean that the pace of borrowing is higher than the OBR expected in the second half of the fiscal year. As a result, the budget deficit may eventually reach £390bn this year (19.6% of GDP), some £18bn more than the OBR’s £372bn projection. But with 10-year gilt yields currently just 0.19%, the markets don’t seem to care one bit.

Channel 4’s Helia Ebrahimi points out that Britain has now racked up six months of record-breaking borrowing in a row.

More staggering numbers on U.K. govt borrowing

Deficit was £208.5bn in first 6 months of year, highest ever @ONS says each of the 6 months were records

Today’s @ONS figures show government borrowing exceeded £208bn between April and September 2020.

This compares to £31bn in the same period last year and is more than in any year on record. But it is £54bn, or one-fifth, less than the @OBR_uk’s ‘central’ scenario projection. pic.twitter.com/5hDvf990sx

FWIW, government borrowing continues to *undershoot* the latest official estimate from the OBR. Indeed, actual borrowing in April to September was £54.2 billion lower than projected.

(Useful for anyone arguing against tax rises, or for a few million extra for Manchester…) pic.twitter.com/9BQo9dCzX1

Another astonishing fact – since April, the UK has borrowed almost four times as much as the previous financial year.

The ONS says:

The coronavirus (COVID-19) pandemic has had an impact on public sector borrowing that is unprecedented in peacetime.

Provisional estimates indicate that the £208.5 billion borrowed in the first half of the current financial year (April to September 2020) was nearly four times the £54.5 billion borrowed in the whole of the last full financial year (April 2019 to March 2020).

With deft understatement, the ONS points out that the £36bn borrowing in September was ‘substantially’ higher than a year ago (about six times higher!)

We’re also just learned that Britain’s inflation rate picked up last month.

The consumer prices index rose to 0.5% in September 2020, up from 0.2% in August.

U.K. inflation 0.5% in Sept up from 0.2% in Aug; end of Eat Out to Help Out meant restaurant prices spiked says @ONS

Inflation still well below 2% so no barrier here to @bankofengland pumping more £ into economy next month

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

Britain has racked up another month of unprecedented borrowing, as the economic cost of Covid-19 continues to mount.

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