Could COVID-19 restriction delays dent UK economic progress?
- The UK economy experienced rapid growth during May 2021 due to hospitality and tourism reopening
- Delayed lifting of UK COVID-19 restrictions could add further pressure to the hospitality and travel industry
- UK companies facing staff shortages due to coronavirus pandemic and see sharpest price increases since 1999
- Economists remain cautious on British pound (GBP) outlook ahead of Bank of England June monetary policy meeting
- There is a growing possibility of a fourth UK coronavirus lockdown
- Concerns over UK Chancellor Rishi Sunak’s budget outlined during March 2021
- Bank of England could increase UK interest rates early during 2022
- UK flash PMI to be released this week
The UK experienced rapid economic recovery during May 2021 in line with the hospitality and travel sectors’ reopening. However, UK Prime Minister Boris Johnson’s decision to delay the full lifting of coronavirus restrictions in the UK places many firms within these industries at greater risk.
According to the Lloyds Bank UK Recovery Tracker, 11 out of 14 UK sectors confirmed faster growth during May 2021, up from 9 sectors the previous month. The report illustrated that the UK hospitality and tourism sectors experienced the sharpest growth due to pent up consumer demand during the UK’s third coronavirus lockdown.
All sectors confirmed significant employment growth during May 2021, with the UK manufacturing sector revealing the highest number of jobs added. Jeavon Lolay, the head of economics at Lloyds Bank, highlighted that industries most affected by the coronavirus pandemic were now outperforming those still functioning during the lockdown.
Whilst the hospitality and travel sectors are currently on a high, research from CGA and AlixPartners revealed that over 25,000 licensed premises remained closed at the end of May 2021. The delay in lifting full coronavirus restrictions could see thousands of UK firms struggle to stay afloat. Michael Kill, the Night Time Industries Association chief executive, pleaded for Boris Johnson to lift all UK coronavirus restrictions on 5th July, claiming that the nightclub industry was on the verge of breaking.
Data from Lloyds Bank also confirms UK companies are hiking prices at the fastest rate since 1999. Mr Lolay confirmed that the UK economy now appears to be on a much sounder footing, but it is unclear how much of an impact the delayed lifting of UK coronavirus restrictions will have on these industries.
Last week it was revealed that UK inflation rose to 2.1% in May 2021, which caused alarm given that it surpassed the Bank of England’s 2% inflation target. Mr Lolay reiterated that it is still too soon to know if the increase will lead to spiralling inflation. Economists have confirmed that a spike in inflation is a typical pattern once there is a relief following an extended period of economic uncertainty.
UK firms facing significant staffing shortages
Although many UK firms have recently added further jobs, it’s forecast that the ongoing woes of Brexit and the coronavirus crisis could prompt over 4 million job losses. There is a wide range of UK jobs left to fill, from bar and restaurant workers to fruit pickers. The lack of available staff has led many restaurants to limit their opening hours or turn away customers.
The start of the coronavirus pandemic saw thousands of immigrants return to their home country, leaving a staggering shortage of workers within the UK hospitality and agriculture industry, both of which rely heavily on migrant workers. Hospitality trade association UKHospitality revealed that 80% of its members lacked front of house staff, whilst 85% were in desperate need of kitchen staff. There are also reportedly 500,000 vacancies within the UK agricultural sector, despite the UK government extending visas for EU farmworkers.
Data from the Road Haulage Association reveals that there is also a substantial shortfall in UK truck drivers, with around 70,000 new drivers needed. The UK’s recent economic boom has led to rapidly increasing consumer demand, placing further pressure on the industry, creating delays in collections and deliveries.
Hair and beauty trade associate, the NHBF, highlighted the lack of trained stylists and barbering staff in the UK with a 13% decline in UK hairdressing and barbering apprenticeships.
However, James Reed of Reed recruitment has said that the current economic climate has made it easier to find new job opportunities, with workers now having more power than they may think.
Tony Wilson of the Institute for Employment Studies stated that staff shortages could reach levels that have not been seen in over twenty years. Figures from the Office for National Statistics show a rise in job vacancies rose 24% from March to May, reaching 758,000 openings. The news follows an announcement from fast food giants McDonalds revealing 20,000 vacancies as they open 50 new UK branches.
Economists are cautious over the British pound (GBP) outlook
Despite the recent rise in UK inflation, economists remain cautious on the outlook for the British pound (GBP) after experiencing a 1.60% drop against the US dollar (USD) and a 0.15% fall against the euro (EUR) last week.
The British pound’s (GBP) recent performance against its key currency competitors is failing to provide investors with confidence ahead of the Bank of England’s (BoE) monetary policy meeting on Thursday. Robert Howard, a Reuters market analyst, stated that the BoE might become more hawkish than anticipated this week in a bid to recover some of the losses seen in pound Sterling (GBP) against its currency rivals.
The predictions of the British pound’s (GBP) progress follows findings from a study conducted by FJP Investment stating that almost half of UK investors claim to be more risk-averse. The study consisted of 735 UK investors, 42% of whom said they had paused on conducting any substantial investments, waiting until the coronavirus pandemic had eased.
Jamie Johnson, CEO of FJP Investments, acknowledged the strong sentiment of increased risk aversion amongst investors, further prompted by Brexit woes.
Marc Cogliatti, Principal at Global Markets for Validus Risk Management, states there are multiple reasons to be cautious regarding the course of the British pound (GBP). Concerns have sparked from the stall in Sterling’s early-2021 rally against the euro (EUR) and the US dollar (USD) and the suspected trade war between the UK and EU concerning the Northern Ireland protocol.
Despite these concerns, Jane Foley at Rabobank believes it’s possible that the British pound to euro (GBP/EUR) exchange rate could reach EUR 1.19 by the end of 2021, which is a 1.19% rise. Currently, the British pound to euro (EUR) exchange rate stands at EUR 1.1671.
In addition to the BoE’s monetary policy meeting, the British pound (GBP) is also likely to be impacted by the release of UK flash Purchasing Managers Index (PMI) data this week. The data will further indicate how the UK economy has been performing as COVID-19 restrictions have gradually eased.
There is unlikely to be a significant shift in the Bank of England’s monetary policy this month, with any substantial changes likely to occur from August onwards.
It’s expected that the Bank will keep interest rates unchanged for the time being but could hike rates earlier than initially thought if inflation continues to rise. That being said, there are reports that the Bank remains divided over the future for quantitative easing measures.
Bank of England divided over UK quantitative easing
With the Bank of England’s June monetary policy meeting fast approaching, the Bank’s top officials are set to remain divided over how to proceed with UK quantitative easing. Reports indicate that the Bank may halt the UK government’s GBP 875 billion bond purchase programme on the back of last week’s UK inflation figures.
Last month saw BoE Chief economist Andy Haldane vote to stop bond purchases in August, though he remained alone in his stance. Whilst Mr Haldane is likely to maintain this view, there could be further members of the Monetary Policy Committee joining during the upcoming meeting.
Some economists have predicted that UK inflation had the potential to hit 3% this year versus the 2.5% expected by the BoE. The Bank also predicted back in February 2021 that UK economic growth for 2021 would be 5.0%. However, the figure has since been revised to 7.25%. As a result, it’s thought that the UK’s rapidly rising inflation could lead to the Bank increasing interest rates earlier than anticipated during 2022. This forecast, however, has also been much debated as ING do not believe that UK interest rates will be hiked before 2023, believing it to be unlikely that UK inflation will hit 2.5%.
The predictions follow last week’s news that the Federal Reserve could also hike US interest rates earlier than anticipated after inflation hit 5% in May. There’s the possibility that the BoE could increase UK interest rates before the Fed, which is a very rare action.
Last week, UK Chancellor of the Exchequer, Rishi Sunak, stated that the UK government’s spending during the coronavirus pandemic was down to taxpayers’ money, highlighting the UK’s financial constraints.
Discussing UK quantitative easing, Lord Turner of Ecchinswell stated that current measures are oiling a UK economic expansion, making it easy for the UK government to run up substantial deficits without the danger of setting a hike in interest rates.
There are also concerns as to what will happen once UK government initiatives such as the furlough schemes wind down, given the predictions of a third wave of coronavirus cases in the UK this winter.
A fourth UK lockdown could be on the horizon
Whilst the UK economy has revealed signs of strength, scientists have confirmed the rising possibility that the UK could undergo a fourth coronavirus lockdown this coming winter. The Scientific Advisory Group for Emergencies (Sage) predicts that the UK will experience a fourth wave of COVID-19 infections later this year and a rise in other respiratory viruses, such as pneumonia.
Dr Susan Hopkins, strategic response director for COVID-19 at Public Health England, stated that whilst she cannot predict the future, a fourth UK lockdown would be needed if hospitals once again become overwhelmed. However, Dr Hopkins also noted that there are likely additional tools and solutions that were not available last winter, such as greater testing capabilities and medication.
It’s also hoped that due to the UK’s swift response to administering coronavirus vaccines, the potential third wave of infections during this winter will not be as severe as the previous waves. The Pfizer vaccine is confirmed to be 96% effective against hospital admission and 92% for the AstraZeneca vaccine.