UK economy to be fuelled by consumer spending boom

  • 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
  • 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 from 30th June as outlined in his roadmap announcement.

image of retail store amid retail recession

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” following the easing of 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 as the UK is set to reopen businesses from 12th April, during which time it’s thought that the UK will experience a sharp economic recovery.

But COVID-19 vaccine optimism appears to be driving hopes of a return to normalcy earlier than expected, particularly as daily infections continue to decline.

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 post-Brexit tensions, with many UK businesses reporting disruption due to new trade rules and regulations.

UK lockdown lift plan

Plans to lift lockdown restrictions could be delayed

Whilst coronavirus cases in the UK are on the decline, the Study on Global Ageing and Adult Health (SAGE) is wary that infections could increase during the summer. As a result, the resumption of pub and restaurant dining could be delayed from the planned date of 17th May.

The study stated “It is highly likely that there will be a further resurgence in hospitalisations and deaths after the later steps of the roadmap.”

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. Cases in the UK are consistently lowering, with infections on 8th April standing at 3,030.

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.

Holidays abroad are currently banned in the UK and are expected to return on 17th May, with a traffic light system in place consisting of countries categorised by number of infections and vaccination efforts.

A close up image of twenty pound notes (sterling continues its recovery)

Pound Sterling retreats from highs against the euro and US dollar

Pound Sterling (GBP) has come under pressure against the safe-haven currencies this week as the UK vaccination programme came under threat from supply issues.

The British pound to euro (GBP/EUR) exchange rate is trading flat at EUR 1.15, while the British pound to US dollar (GBP/USD) exchange rate has tumbled to USD 1.38.

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.

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