UK Prepares for economic recovery
Whilst it was anticipated that Q1 of 2021 would be a difficult period for the UK economy, it seems as though Q2 will prove to be much more prosperous as a result of businesses reopening from 12th April.
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.
Having recently entered into Q2, BAML’s predictions seem to largely 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 forecast that UK Gross Domestic Product (GDP) could contract by up to 3% during Q1, though the actual figure is yet to be revealed.
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.
Though Q1 has been difficult for the UK, outlook for the remainder of 2021 is becoming increasingly optimistic with daily coronavirus infections continuing to fall. The forecast for unemployment has already seen an improvement, with predictions that it will peak at 6.5% later this year.
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 last December, placing intense pressure on the NHS.
The extended lockdown restrictions have undoubtedly harmed UK economic recovery, but the UK’s vaccination programme and the anticipation of increased public spending next week has provided a boost for the British pound (GBP).
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. These restrictions have undoubtedly placed further strain on the aviation industry, though the Prime Minister is looking to resume travel abroad from 17th May under the new ‘traffic light system’, which will allow travel to low risk ‘green’ countries.
Unemployment predicted to rise after end of furlough
Chancellor Rishi Sunak’s furlough scheme, which was due to expire at the end of April has been extended to the end of September. Whilst the continued financial support will help struggling businesses, it’s thought that unemployment could spike once the scheme winds up. Although, with the outlook for the UK economy becoming more optimistic, the Bank of England (BoE) has stated that unemployment will be less severe than initially anticipated.
In relation to the furlough extension, Confederation of British Industry (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 would be available.
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 dips following slowed vaccination programme
The British pound (GBP) edged higher against the US dollar (USD) and euro (EUR) ahead of the UK economy’s reopening next week. At the start of the new trading week, however, Sterling dipped against its currency rivals as the UK’s vaccination programme continues to undergo delays due to supply issues.
Pound Sterling (GBP) made a material recovery against the resurgent US dollar (USD) last week which helped to drive the UK currency higher against other trading currency rivals such as the euro (EUR) and the Australian dollar (AUD).
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.