UK economy suffers record slump due to COVID-19 restrictions
- UK economy suffers its worst economic slump in over 300 years
- Bank of England (BoE) Chief Economist Andy Haldane expects UK economic growth to be fuelled by a consumer spending boom
- Boris Johnson’s roadmap out of lockdown could be delayed
- British pound tumbles amid a return to caution in currency markets
The UK economy suffered its steepest annual contraction on record in 2020 due to coronavirus lockdown restrictions. Although the UK has avoided a double-dip recession due to Q4 growth, economic output slumped by 9.9% in 2020.
According to the Office for National Statistics (ONS), all of the four main sectors that feed into UK gross domestic product (GDP) declined, with the steepest fall tracked in the construction sector, which contracted by 12.5%.
However, the UK economy looks on course to stage a swift recovery in 2021 after the ONS revealed that UK GDP grew by 1% in the last three months of the year – at the top end range of preliminary readings.
The ONS said that UK economic output expanded by 1.2% month-on-month in December after declining by 2.3% in November.
Yet, Suren Thiru, Head of Economics at the British Chambers of Commerce said: “There is little to cheer in the latest data which confirms that 2020 was a historically bleak year for the UK economy.”
While the Bank of England (BoE) expects UK GDP to rebound in 2021, they predict further economic fallout in the first three months of the year due to the impact of the third national lockdown and post-Brexit headwinds.
According to the BoE’s projections, the UK economy will contract by a further 4% in Q1 of 2021 and take a year to return to its pre-COVID size, providing that the UK’s vaccine rollout continues at a rapid pace.
However, other economists have warned that outlook might be too rosy and expect UK output to remain well below pre-pandemic levels for the foreseeable future.
Conversely, some economists share the BoE’s optimistic view and expect pent-up consumer demand will unleash a spending boom once lockdown restrictions are lifted.
Most also believe that Britain could evade two consecutive quarters of contraction in 2021 if UK Prime Minister Boris Johnson lifts lockdown restrictions in March.
UK economic growth set to soar amid spending boom speculation
Bank of England Chief Executive, Andy Haldane insists the British economy will bounce back like “a coiled spring” after UK Prime Minister Boris Johnson eases COVID-19 restrictions.
My Haldane said British households would have amassed “accidental savings” worth a predicted GBP 250BN by June-end, which he expects will fuel a spending boom post-lockdown as Britons are “desperate to get their lives back.”
After months of being unable to travel, eat out, and engage in social activity due to COVID-19 lockdown restrictions, he expects a massive wave of pent-up demand to be released this summer.
Mr Haldane went on to say that the UK’s COVID-19 vaccination programme has allowed the UK economy to turn a “decisive corner” as the reduced chance of death or severe illness will encourage people to engage in social activity and, in turn, fuel a rapid return to prosperity.
His upbeat assessment comes alongside reports that Boris Johnson is doing everything in his power to unveil his lifting lockdown plan on February 22nd after a No10 spokesperson said the lockdown exit roadmap could be delayed.
However, government scientists have said the Prime Minister should not ease coronavirus restrictions until the number of daily cases in the UK consistently falls below 10,000.
But COVID-19 vaccine optimism appears to be driving hopes of a return to normalcy earlier than expected.
According to a Reuters poll of leading economists, recent growth figures have also proved that the UK is more resilient to COVID restrictions, which should ensure the Bank of England refrains from taking interest rates to negative.
Most of those polled expect the British economy to return to its pre-COVID size within the next two years, with growth forecasts for 2022 revised up from 5.3% to 5.5%.
However, Britain must also navigate concerns over new covid variants of the virus and fresh Brexit tensions, with many UK businesses reporting disruption due to new trade rules and regulations.
BoE Governor Andrew Bailey also made a shocking announcement on Thursday, after he said that Brussels is dragging its heels over giving London access to its financial market.
Meanwhile, coronavirus mutations could delay plans to reopen the UK economy, which would hurt the country’s economic recovery outlook.
Plans to lift lockdown restrictions could be delayed
After previously promising to unveil his lockdown exit roadmap on February 22nd, a spokesperson for the Prime Minister broadened the deadline and said lockdown lifting plans would be published some point in the week.
The No10 representative said: “We’ve been clear we will publish the roadmap on the week of the 22nd and will give schools a minimum of two weeks’ notice to prepare for the return of school children.”
However, if the roadmap is not published on February 22nd, and at the end of the week, this would mean school children would not return to the classroom until March 12th at the earliest – a Friday and a week later than the previously proposed date of March 8th.
The British government is believed to have widened the deadline due to scientists’ warnings over infection rates, hospitalisations and death rate figures, which remain high.
Sir Jeremy Farrar, director of the Wellcome Trust, said the British government should not ease lockdown measures until the daily cases rate is under 10,000.
He also warned against lifting lockdown restrictions prematurely when the risk of new COVID-19 variants poses a real threat to public health and said that new border controls would have minimal impact in preventing transmission.
New travel rules have caused chaos at airports, with travellers reporting four-hour arrival queues at Heathrow as Britons scramble to come home before the quarantine hotel mandate comes into effect.
Returning travellers were also in an uproar over the British government’s new COVID hotel quarantine booking, which crashed minutes after launching.
The government shrugged it off as a “minor technical issue” and relaunched the site at 10 AM on Friday.
With so much coming out of the UK today regarding economic data and coronavirus developments, pound Sterling (GBP) is also trading lower ahead of the weekend.
Pound Sterling retreats from highs against the euro and US dollar
Pound Sterling (GBP) has come under pressure against the safe-haven currencies following UK gross domestic product (GDP) data and a slightly more cautious stance in foreign exchange (FX) markets.
However, the British pound to Japanese yen (GBP/JPY) exchange rate is trading 0.2% higher than its opening level at JPY 144.888.
Bullish momentum in pound Sterling (GBP) exchange rates also appears to have paused amid some profit-taking, meaning the UK currency could reverse its fortunes if global stocks markets rally.
Following the UK-EU Brexit trade agreement, GBP has become increasingly exposed to broader moves in the stock market, tracking equity markets higher when rally and reversing when sentiment fades.
Moreover, as the UK appears to have avoided a double-dip recession and continues to lead the race to immunisation, GBP should continue to remain well-supported in the near-term, providing vaccine rollouts continue to drive risk appetite.