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UPDATE 2-Rising COVID cases will stall UK recovery, budget watchdog warns

Wed, 7th Oct 2020 15:22

* OBR's Bean warns of growth "hiatus" as COVID cases
increase

* Recovery depends on getting cases under control

* UK now more sensitive to increases in debt costs - OBR's
Hughes
(Recasts with comment on COVID cases)

By David Milliken and Andy Bruce

LONDON, Oct 7 (Reuters) - A sharp rise in coronavirus cases
is likely to cause Britain's economic recovery to stall until
the resurgence comes under control, the country's budget
watchdog said on Wednesday.

Britain has recorded more than 14,000 new cases on each of
the past two days, the most since mass testing began in April,
and has increased curbs on socialising, with Scotland announcing
the closure of pubs in its two biggest cities.

"There will be some kind of hiatus in the recovery," said
Charlie Bean, a former Bank of England (BoE) deputy governor who
now serves on the board of the Office for Budget Responsibility,
which produces government economic forecasts.

"How long and how potentially deep that is, I think it's
very difficult to know at this stage until we see how effective
any measures are in bringing this resurgence of cases back under
control," he told parliament's Treasury Committee.

British economic output fell an unprecedented 25%
year-on-year in April, when the lockdown was tightest, and
output in the first half of 2020 slumped more than in any other
G7 economy.

Much of the economy has since rebounded. August gross
domestic product (GDP) data, due on Friday, is likely to show
output 7% below year-ago levels, say economists polled by
Reuters.

Nonetheless, government borrowing this year looks set to
rise to its highest since World War Two as a share of GDP, hit
by around 200 billion pounds ($258 billion) of emergency
spending and an expected slump in tax revenues.

RISING RATE SENSITIVITY

The OBR's new chair, Richard Hughes, echoed recent concerns
from finance minister Rishi Sunak, saying that surging public
borrowing - along with a change in the structure of the debt,
and side-effects of BoE asset purchases - created risks.

"Our public finances are now more sensitive to interest rate
rises than they were before the coronavirus shock because we
have a higher debt stock," Hughes said.

"They are also more sensitive because the average maturity
of our debt has been getting shorter."

Britain's public sector debt has historically had the
longest average maturity of any major economy. Even after the
latest increase, debt as a share of GDP is projected to stay
lower than in the United States, Japan or France.

Britain has issued more short-dated debt this year as it is
easier to sell in large volumes. The BoE's purchases of
long-dated bonds in exchange for central bank money also makes
the public finances more sensitive to any rise in short-term
interest rates.

The OBR said in July that a 1 percentage point rise in gilt
yields would raise debt servicing costs as a percentage of GDP
by just over 0.35 percentage points, compared with an estimate
of just over 0.15 percentage points in 2019.

Bean said there was no rush to reduce the budget deficit,
but action would be needed later, partly in case of "future bad
shocks further down the road".
($1 = 0.7741 pounds)
(Editing by Toby Chopra and Gareth Jones)

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