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UK economy weighed down by coronavirus surge

A research note from the Bank of America Merrill Lynch (BAML), stated  UK economic growth would slump in Q4 of 2020 following “Brexit risks, fading stimulus and new coronavirus lockdown restrictions.” BAML, went on to say that the new coronavirus measures would likely trigger a downturn that could ensue into the first quarter of 2021.

As we approach the end of January 2021, it seems that BAML’s predictions were correct, with many economists revising their Q1 forecasts for the UK economy. With full national lockdown restrictions re-imposed at the beginning of January, Morgan Stanley stated that the limitations would likely mimic the impacts of the March 2020 lockdown. Morgan Stanley has forecast  UK Gross Domestic Product (GDP) could contract by up to 3% during Q1.

Although much remains uncertain at this point, if Morgan Stanley is correct, this could have significant implications on pound Sterling (GBP) exchange rates and the Bank of England’s (BoE) monetary policy.

UK Economist at BAML, Robert Wood, said: “A slower recovery would result in mass unemployment, which we expect to peak at 8.4%.”  The new lockdown measures could also delay economic recovery by triggering increased consumer caution, which will likely hit the service sector particularly hard.

The UK government was forced to alter its guidance on restriction measures following the new strain of COVID-19 which led to rapid rises in hospital admissions in December, placing intense pressure on the NHS.

The new lockdown restrictions are expected to harm economic recovery, which already appears to be showing signs of slowing. The UK has also closed its travel corridors, meaning anyone travelling to the UK must present a negative coronavirus test prior to travel as well as quarantine for up to 10 days.

However, despite rising coronavirus cases, the UK is currently rolling out vaccines at a rapid rate, which is hoped to ease pressure on the NHS as well as improve the UK’s economic outlook.

Rishi Sunak Considers Extending Furlough Scheme Past April

Chancellor Rishi Sunak’s furlough scheme is currently due to expire in April end. However, there is speculation that the scheme could be extended until the summer as coronavirus restrictions look to remain in place for some time.

The reports follow urges from the Confederation of British Industry (CBI) and British Chamber of Commerce for the Chancellor to extend the scheme.

CBI director-general Tony Danker stated “the government must once again stand shoulder-to-shoulder with businesses to underwrite support for the duration, helping viable enterprises to last the course.”

Mr Danker went on to highlight that during this crucial period, many businesses will be deciding whether or not to carry on and must know sooner rather than later whether continued financial support will be available. It’s thought that the Chancellor will make an announcement regarding the continuation of furlough before the budget in March.

Small UK Businesses At Risk Of Steep Losses

According to a Simply Business survey of over 4,000 small and medium-sized enterprises (SMEs), small businesses in the UK are at risk of losing up to GBP 69BN, or USD 87.8BN due to the COVID-19 pandemic.

Simply Business found that the coronavirus-induced damage had cost the average small-medium sized company in the UK GBP 11,799 during 2020. Meanwhile, 62% of the businesses surveyed are less confident about their long-term prospects.

Over 234,000 small businesses in Britain have already closed since the outbreak gripped the UK and the future of SMEs is presenting a mixed picture following stricter lockdown measures introduced this month. With one in five firms admitting that they would not survive another lockdown, the British government has another challenge on its hands.

Despite the UK reaching a Brexit trade deal with the EU, Brexit has continued to weigh on the economy and the British pound (GBP), by increasing political uncertainty and more controversial issues remaining unresolved.

Pound Sterling On The Defensive Despite Warnings Of Challenging Times Ahead

The British pound (GBP) has edged higher against the US dollar (USD) and euro (EUR) following swift vaccination rollouts.

Pound Sterling (GBP) made a material recovery against the resurgent US dollar (USD) which has helped to drive the UK currency higher against other trading currency rivals such as the euro (EUR) and the Australian dollar (AUD).

At the time of writing, the British pound to euro (GBP/EUR) exchange rate is trading at EUR 1.13, while the British pound to US Dollar (GBP/USD) exchange rate is higher at USD 1.37.

Despite fears over economic recovery in the UK stalling amid new coronavirus restrictions, GBP found new life after Bank of England (BoE) governor, Andrew Bailey, stated that interest rates would not be lowered below zero for the time being. Yesterday the governor also stated his belief that the UK economy would see a sharp recovery as a result of the swift covid vaccine rollouts.

Although pound Sterling (GBP) fortunes have changed, expect choppy and volatile trading conditions with FX markets over the coming weeks as the long-term economic outlook remains uncertain.

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