COVID-19 vaccine rollout key for UK economy and GBP recovery

• UK economy facing double-dip recession due to lockdown 3
• Government borrowing could reach half a trillion in 2021 due to financial support measures
• UK Service Sector PMI failed to make a substantial recovery in Q4 last year
• Businesses across the UK less optimistic about their future prospects
• Pound Sterling in for near-term pain against a host of major currencies

The UK economy is forecast to endure some near-term pain due to Prime Minister Boris Johnson’s third national lockdown, which is expected to trigger a double-dip recession in Britain.

Although economists expect the economy to make a sharp rebound in the summer months of 2021 as more people receive the COVID-19 vaccine, mutant strains have become a cause for concern.

Pound Sterling (GBP) also took a battering following the announcement of lockdown 3 in England, which the UK government implemented to curb the rapidly spreading virus.

The British pound (GBP) tumbled against all its G10 currency rivals in the wake of the news and remains suppressed in mid-week trade amid reports stating that the UK is facing its first double-dip recession in five decades due to England’s new lockdown.

Leading economists have warned that public sector borrowing could reach GBP 450BN in the 2020/21 financial year, with the current COVID-19 restrictions expected to cost the UK approximately GBP 400M a day.

Chancellor Rishi Sunak announced the latest support measures on Tuesday, including GBP 4.6BN worth of bailout grants for retail, hospitality and leisure businesses and a GBP 594M discretionary fund to aid other firms that don’t qualify for the support grants.

With borrowing ballooning, experts warn that the UK will be living with high deficits for years as the country suffers a borrowing “hangover”.

In a report published by The Telegraph, Heteronomics Chief Economist, Philip Rush said: “It’s possible that UK borrowing could hit half a trillion in the 2020/21 financial year if the British government continues to introduce new fiscal stimulus measures.”

Mr Rush also expects public sector borrowing to be upwardly revised for the 2021/22 financial year as the UK’s economic outlook continues to deteriorate.

Meanwhile, global forecasting and quantitative analysis leaders, Oxford Economics, estimates business output contracting by at least 4% in the first quarter of 2021 – approximately GBP 24.6BN lower than estimations made before the UK lockdown.

Even if the UK government lifts the lockdown in the February half-term, the Centre of Economics and Business Research predicts Britain will have spent GBP 390M every working day.

The effects of preceding lockdowns have already triggered a sharp contraction in UK gross domestic product (GDP), with the services sector taking a notable hit in the last few months.

Now that significant parts of the economy are closed again, Howard Archer, of the EY Item Club economic believes UK economic growth will be 0.7% lower than previously forecast for 2021.

UK service sector endured a challenging final quarter

The UK economy made a tentative return to growth in Q4 as the November lockdown caused a slowdown in economic activity across the country.

Several economists predict the UK will lag behind its peers regarding recovery due to the sharp contraction witnessed in Q2 last year, the implications of Brexit, low business investment and the country’s large services sector.

According to IHS Markit and CIPS, the UK’s service sector PMI remained below 50 in December at 49.4. While this was an increase on November’s multi-month low of 47.6, COVID-19 restrictions weighed on activity in the sector as the PMI reading remains in contraction territory.

A recent survey also revealed that UK shop prices plunged in December during the run-up to Christmas, as non-food stores and retail firms hardest hit by the pandemic continued to offer considerable discounts.

Data released by the British Retail Consortium (BRC) showed that UK shop prices declined by an annualised rate of 1.8% in December, while food price inflation slumped to 0.4% – the lowest level in more than two years.

Food and retail isn’t the only industry reeling from the pandemic’s impact as the automotive industry has suffered one of its worst years in decades.

UK new car registrations tumble to the lowest level in three decades

According to preliminary figures released by industry trade bodies, new car registrations plunged to their lowest level in 30 years in 2020 from 2.3 million to 1.63 million. It was also the fastest one-year decline since World War Two, with the bulk of lost sales recorded during the first UK lockdown in March.

The Society of Motor Manufacturers and Traders (SMMT) Chief Executive, Mike Hawes said: “half a million units were lost in the three months to May 31st.”

While many dealers have adapted their services to include a click and collect option for buyers to combat the impact of lockdown restrictions, they have been unable to recover the units lost earlier in the year.

Unsurprisingly, many businesses across the country are notably downbeat about their prospects for the future and no doubt, Boris Johnson’s third lockdown will have elevated concerns.

According to a quarterly survey released by the British Chambers of Commerce (BCC), many firms showed no improvement in the last quarter of 2020 amid ongoing weakness in business conditions stemming from the November lockdown.

The BCC’s survey of 6,203 businesses, the majority being small and medium-sized enterprises (SMEs) revealed that these firms’ key indicators remained significantly below pre-pandemic levels during the final three months of the year.

BCC Economics Head, Suren Thiru, said: “The services sector faced a particularly challenging quarter, with consumer-facing businesses significantly affected by the reintroduction of COVID restrictions.”

He noted that while the manufacturing sector ended 2020 on a more upbeat note “this is more likely to reflect a temporary boost from Brexit stockpiling rather than evidence of a recovery in the sector.”

Luke Hildyard, director of High Pay Centre, also shone a light on the growing divide in wages between workers at the top of the chain and those at the bottom.

Pay gap between the bottom workers and chief executives widens

Despite the financial strain caused by the pandemic, Mr Hildyard said research shows that FTSE 100 chief executives now receive approximately 120 times more than the average worker in the UK – a significant increase in pay differences seen over recent years.

Mr Hildyard attributed the widening gap to the “outsourcing of low-paid work and the decline of trade union membership.”  He noted that ministers should open a debate over the way Britain’s largest firms are governed.

Some critics have hit back at Mr Hildyard’s analysis, arguing that chief executives’ contribution is incredibly beneficial to the broader economy. However, given that so many people face redundancy, it’s understandable why Mr Hildyard has raised concerns about pay inequality.

While the furlough scheme, which has been extended to April, has been a lifeline for businesses and livelihoods, this is only temporary relief.

Instead, investors, businesses, and global financial markets appear to be putting their faith in COVID-19 vaccine rollouts’ success to support recovery.

COVID-19 vaccine rollout could buoy recovery in the global economy

According to an analysis by the World Bank, the global economy could rebound by 4% in 2021 if COVID-19 vaccines trigger mass immunisation.

However, a survey of nearly 100 economists is less optimistic about the UK’s recovery outlook. Despite hopes of coronavirus vaccines prompting a strong rebound in consumer activity, they don’t expect the UK to return to its pre-crisis size until Q3 of 2022.

With COVID-19 cases running rampant across the UK and stricter lockdown measures being imposed to curb the spreading, hopes of a robust economic rebound are fading, which is also being reflected in pound Sterling’s (GBP) current valuation.

Besides the South African rand (ZAR), the British pound (GBP) is trading on a softer note against all its major trading partners on Wednesday.

At the time of writing, the British pound to South African rand (GBP/ZAR) exchange rate is trading 0.2% higher at ZAR 20.4315, albeit this has more to do with speculation that South Africa will impose a nationwide lockdown rather than GBP strength.

The British pound to Australian dollar (GBP/AUD) exchange rate has slumped by 0.4% in midday trade to 1.7468, while the British pound to Swiss franc (GBP/CHF) exchange rate is 0.2% lower at 1.194.

However, Tuesday’s rally in the Canadian dollar (CAD) appears to have stalled as the British pound to Canadian dollar (GBP/CAD) exchange rate is flat at CAD 1.7275.

That being said, one analyst has said negative sentiment towards pound Sterling (GBP) had reached “saturation point”, and the UK currency could recover over the coming weeks, supported by Boris Johnson’s Herculean vaccine target.

The Prime Minister expects to vaccinate 14 million of the UK’s most vulnerable groups against COVID-19 by mid-February. If this is successful and the government lifts restrictions next month, sentiment towards pound Sterling (GBP) will likely shift, and the currency could have a good year.