UK economy will be subject to enormous strains says Rishi Sunak

Ahead of tomorrow’s Spring budget, UK Chancellor of the Exchequer, Rishi Sunak, has stated that the UK economy will be subject to ‘enormous strains’ as a result of COVID-19.

Whilst the UK economy has shown signs of improvement this year thanks to the successful vaccination programme, Mr Sunak highlighted that the UK’s high level of coronavirus related debt will soon need to be paid off.

The past few weeks have seen the British pound (GBP) soar against major currencies as a result of rapid coronavirus vaccinations but growth appears to have stalled during the start of the new trading week.

The British pound to euro (GBP/EUR) exchange rate now stands at EUR 1.16 and the British pound to US dollar (GBP/USD) exchange rate has dipped to USD 1.39, having reached as high as USD 1.41 the previous week.

The UK government’s coronavirus support measures have racked up to GBP 270 billion worth of debt. Financial support during the coronavirus pandemic has included the furlough scheme and business COVID support loans as it’s revealed that over 726,000 jobs have been lost due to the coronavirus crisis.

The UK’s national debt now stands at GBP 2.1 trillion as Mr Sunak states that paying this off with low-interest rates will leave the UK’s finances ‘exposed’.

During tomorrow’s budget, the Chancellor is set to reveal a number of plans to help further support UK workers and struggling businesses through to the summer months.

UK Economy Will be Subject to Enormous Strains Says Sunak

UK government set to unveil furlough extension

To avoid further job losses this year, the Chancellor is expected to unveil an extension to the UK furlough scheme as well as further financial support for firms that may be forced to close as a result of this years’ stringent coronavirus restrictions.

According to recent headlines, Mr Sunak will extend the furlough scheme until the 31st June 2021, which was previously due to end in April. It had been feared that following the wind up of the scheme that mass redundancies would occur, particularly as Prime Minister Boris Johnson planned for non-essential businesses to reopen that same month.

The extension of furlough would therefore allow many businesses to get back on their feet and have the chance to be in a stronger position by the time June arrives.

The hospitality industry has been particularly devastated by coronavirus restrictions, having been forced to shut since the beginning of 2021, only allowing takeaway options. Restaurants and pubs can begin opening from 12th April for outdoor dining and can begin indoor service from 17th May.

The Bank of England (BoE) previously stated that the UK will experience a sharp recovery once the economy begins to open, noting that the public is desperate to socialise and spend their money once again.

If this trend does prove to be the case and coronavirus vaccines prove to be effective, then it’s thought that the UK economy could return to pre-pandemic levels by the beginning of 2022.

UK trade faces difficulties

It’s been a difficult start to the week for the British pound (GBP) as it slides against all major currency competitors, having been previously recognised as one of the best performing currencies so far this year.

This week’s better than expected UK manufacturing data was not enough to boost the British pound (GBP), with February’s reading reaching 55.1, compared to 54.1 the previous month. Despite the growth, February was a particularly difficult month for trade due to supply chain disruptions and delivery delays caused by a mixture of COVID-19 and the ongoing effects of Brexit.

James Brougham, senior economist at Make UK stated “It would appear that short-term practical barriers are currently limiting the UK manufacturing sector’s overall medium-term recovery potential.”

The future for UK trade was also knocked last week as US President, Joe Biden, halted Boris Johnson’s plans for a quick US-UK trade deal. Under the Trump administration, progress of an imminent trade deal with the US seemed optimistic, though President Biden has made clear that his priority is focusing on US unemployment and leading the nation through COVID-19.

Chief trade counsel, Katherine Tai, stated that there would be a review of the negotiations, dashing UK hopes of securing a quick trade deal.

GBP/EUR Slips Ahead of UK Budget Announcement

The British pound’s (GBP) rally against the euro (EUR) appears to have come to an end after economists had predicted that the British pound to euro (GBP/EUR) exchange rate could soon reach as high as EUR 1.20.

Having nearly hit the EUR 1.17 mark, the British pound to euro (GBP/EUR) exchange rate is now trading just below EUR 1.16 as investors remain cautious ahead of tomorrow’s Spring budget announcement.

George Vessey, the UK currency strategist at Western Union, stated “additional fiscal support should underscore the constructive outlook for the UK economy and bullish bias for the pound. Tax hikes or even hints of large tax hikes in the future could undermine economic recovery hopes and limit further sterling upside though.”

The direction for pound Sterling will very much be driven by tomorrow’s budget comments as well as further PMI data set to be released throughout the week.

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