UK bounces back from double-dip recession fears
Fears over the UK economy suffering a double-dip recession have become a thing of the past as UK inflation surpassed the Bank of England’s (BoE) target rate last month. April 2021 saw the reopening of thousands of non-essential businesses, supporting the UK’s gradual economic recovery.
UK Prime Minister Boris Johnson revealed his roadmap strategy out of lockdown back in February and it appears that the UK is on track to see a lifting of restrictions from the revised target date of 19th July 2019. New UK Health Secretary, Sajid Javid expressed this week that he saw no reason to delay the full lifting of coronavirus restrictions any further.
Although coronavirus cases in the UK were steadily on the decline, there has been a recent rise in cases as a result of the Delta COVID variant. New daily average cases in the UK have risen to 17,616, up from around 2,500 cases back in May 2021. However, due to the rapid levels of coronavirus vaccines that have been administered in the UK, there are currently less hospital admissions this time around.
The UK economy experienced an economic contraction in Q1, although managed to avoid a double-dip recession as March 2021 data proved to be better than expected. As a result of the UK’s strong economic performance during Q2 of 2021, the BoE recently revised their gross domestic product (GDP) figures for 2021 by 1.5% compared to the previous month.
Strong UK economic rebound During Q2
The reopening of the UK economy during April 2021 caused the British pound (GBP) to edge higher against its main currency rivals, though it also remained sensitive to loss of momentum in the UK’s vaccination programme.
Throughout Q2, the British pound (GBP) has wavered against its currency competitors as a result of Delta variant concerns and post-Brexit issues, most notably the Northern Ireland protocol.
Despite the setbacks seen in the UK’s vaccination rollout during the start of Q2, public spending saw a significant increase as restaurants and pubs reopened for outdoor dining. The Bank of England (BoE) had previously likened the UK economy to coiled up spring waiting to be released as the British public showed their eagerness to return to normality.
UK inflation exceeded the Bank’s target rate of 2% during May 2021, reaching 2.1%. However, BoE Chief Economist, Andy Haldane says there is the possibility that UK inflation could reach 4% by the end of the year.
The economic progress experienced in Q2 is in stark contrast to the previous quarter. The beginning of Q1 was a struggle for the UK economy as IHS Markit/CIPS revealed that the UK’s services sector, which accounts for 80% of the economy plunged in January due to the closure of non-essential stores, pubs and restaurants, entertainment venues and leisure centres.
Meanwhile, public sector borrowing surged to its highest December level on record to GBP 34.1BN, while the UK’s private sector activity plummeted to its lowest level over eight months.
In a survey of European and US economists conducted by Romesh Vaitilingam, 86% of the study participants believed that the UK economy would be at least 7% smaller in 2030 than it would have been if Britain had not left the European Union.
Mr Vaitilingam noted that only 25% of respondents were convinced that the EU economy would suffer the same fate, while 41% believed Brexit would have a far less severe impact on the bloc.
UK unemployment continues to fall
Recent data has revealed that UK unemployment figures have shown signs of improvement. UK unemployment fell 5% in the three months to January after the BoE stated that unemployment in 2021 would be less severe than initially predicted. It was anticipated that unemployment could peak to 6.5% towards the end of 2021 after the furlough scheme winds up at the end of September. However, it remains to be seen whether this will be the case, given the UK’s current economic progress.
Since April, UK firms have been hiring more staff to meet the rising demands of consumers. The UK unemployment rate fell to 4.7% in the three months to April and fewer companies are relying on the Government’s furlough scheme.
Earlier this year, a study by the Alliance for Full Employment (AFFE), backed by former UK Prime Minister Gordon Brown, reported that approximately 300,000 people in the UK were missing off UK jobless figures due to how the government collects labour data.
Mr Brown suggested that this could have a devastating impact on people’s livelihoods as the schemes and employment programmes that Chancellor Rishi Sunak is devising may fail to meet the UK’s actual needs.
Gordon Brown said the government has not devoted enough funding to job support programmes and urged ministers to “launch a far more ambitious and extensive job-creation programme to prevent an unemployment tsunami.”
Official figures have also revealed a stark reality for over-50s, who, according to the analysis, are three times more likely than any other age group to be unemployed for two or more years.
The 5% of the working population who were unemployed during Q1 was equivalent to around 1.7 million people. However, tax records and benefit claims suggest that more than 2 million people in Britain are out of work, and the AFFE expects this figure to rise to 3.5 million in 2021.
Although Rishi Sunak’s furlough scheme has offered many people a lifeline, the outlook for the labour market once the scheme winds up remain uncertain.
Some of the worst-hit industries, namely hospitality, retail and nightlife, face a “financial armageddon” with workers in these sectors believed to be most at risk of unemployment.
British nightlife industry implores the UK government for support
Several concerns have been raised over the inadequacy of government measures for the UK’s nightlife industry, which is facing an existential crisis due to COVID-19 lockdown restrictions.
The government has constantly u-turned on support for the industry, which has left clubs across the country crippled with financial debt.
In October 2020, Boris Johnson unveiled a GBP 257 million aid package for UK cultural venues; however, the GBP 1,000 grants given to nightclubs has been slammed as “derisory and insulting.”
Most late-night venues have been shuttered since the pandemic began last March and nightlife industry leaders are urging the government to provide substantial support for an industry, which has mainly been neglected amid the crisis.
Leaders across the industry have implored staff, avid nightlife goers and others involved in the industry to take part in a Parliamentary enquiry so that MPs can address the long-term challenges facing the sector and produce concrete recovery plans.
However, with UK government borrowing hitting its highest monthly level on record in December, financial pressures on the Treasury are exacerbating.
The Office for Budget Responsibility (OBS), forecast public sector borrowing rising to nearly GBP 400BN in the 2020/21 financial year, which would denote the largest peacetime deficit in UK history.
However, given that the UK is a relatively flexible and highly adaptable economy, it could undergo a swifter recovery than expected.
Britain’s lead in the coronavirus vaccine race is also supporting this theory. It is believed that once the UK’s four priority groups are inoculated, Boris Johnson will lift lockdown restrictions on a more permanent, stable basis from 19th July, which was extended from the initial date of 30th June 2021.
UK economy to undergo a robust recovery
The International Monetary Fund (IMF) has recently stated that the UK is likely to see faster economic growth than both the US and the EU, largely down to the success of its vaccination programme. It’s predicted that the UK economy will see 5.3% growth in 2021, followed by 5.1% in 2022. In comparison, the US is thought to see 6.4% growth in 2021 and 3.5% in 2022.
Independent economist, Julian Jessop, believes that the government should prioritise Brexit opportunities and minimise the disruption caused by new trading rules with the EU to support economic recovery.
He noted that Brexit has already had a positive impact on the UK’s coronavirus vaccine rollout, given that the country was only able to approve the vaccine early because they were no longer confined to EU rules.
Inevitably, the possibility of COVID-19 restrictions being extended has cast a shadow over the UK’s economic recovery outlook, and expectations for Bank of England (BoE) intervention is growing. However, speculation over the bloc being slower to exit the pandemic due to its laggard vaccine rollout is ultimately supportive of Britain’s economic outlook, and in turn, pound Sterling (GBP).
Pound Sterling expected to gain in medium to long-term
Pound Sterling (GBP) is trading on a softer note in currency markets this week amid concerns over the Delta COVID variant, which has renewed demand for safe-haven currencies such as the US dollar (USD), euro (EUR) and Japanese yen (JPY).
However, several FX strategists do not expect risk-off currencies to be able to secure more than a near-term reprieve due to ongoing global COVID vaccine rollouts.
Despite the more cautious mood, pound Sterling (GBP) is flat against the riskier Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD) going into New York trading hours due to the rising coronavirus infections within the UK.
The Australian dollar (AUD) and Chinese yuan (CNY) are expected to be some of 2021’s strongest-performing currencies, supported by expectations for their relative countries to display a robust economic performance compared to its peers.