UK’s post-Brexit economy surging ahead of Freedom Day

• Has Britain finally freed itself from EU shackles?
• Chief Financial Officers (CFOs) perceptions change amid strong UK economic recovery
• UK stocks slip as economic fears outweigh “Freedom Day” confirmation
• Britain’s retail sales sector posts the strongest quarter on record
• British pound to US dollar (GBP/USD) exchange rate and British pound to Australian dollar (GBP/AUD) currency pair under pressure

The UK’s post-Brexit economy is bouncing back, with recent indicators showing a surge in economic activity in Q2 2021.

Financial experts have noted that second-quarter activity in most advanced economies has accelerated, with coronavirus lockdown easing driving demand higher.

Indicators of economic activity have hit new highs in the UK, US and other well-developed nations, with economists citing progressive coronavirus vaccine rollouts as the catalyst for global recovery.

The Euro 2020 football tournament also encouraged increased spending in Europe, albeit one financial market analyst said that hopes of the Euro 2020 being the prelude for solid growth in the UK ahead of the July 19th reopening date were naive.

When asked whether Euro 2020 would have a significant impact on UK economic recovery, market and finance analyst David Buik claimed it would be relatively insignificant compared to the economic effects of COVID lockdowns, likening the tournament to a “small beer”.

Nonetheless, a new Deloitte Chief Financial Officer (CFO) survey published on July 12th that gauges attitudes to valuations, risk and financing revealed that UK financial chiefs expectations for revenue have risen to their highest levels since 2015.

UK CFOs focus shifts to growth for H2 2021

According to the latest Deloitte CFO Survey, more than 50% of finance bosses surveyed have seen a full recovery in demand or expect demand to return to pre-pandemic levels by year-end.

These expectations are being fuelled by consumer spending in Britain, which is set to surge over the coming months after UK Prime Minister Boris Johnson lifts all legal limitations on social contact.

The reopening of the UK economy has triggered a shift in CFOs expectations of growth and uncertainty, which has fallen below average. As a result, British firms are now moving away from defensive strategies that helped them survive the economic downturn and placing a greater emphasis on growth by acquisition.

Economists expect the COVID-19 pandemic to reshape the UK economy, with years of expansion expected to be compressed into a few months. However, CFOs see this as an opportunity to spur productivity onto a higher growth trajectory to help drive company revenue.

Cost reduction was a top priority for corporate firms last year, but 71% of CFOs have raised expectations for technology and digital assets investments.

The Deloitte survey also revealed  76% of CFOs forecast rises in hiring over the next 12 months to help accelerate business performance.

Business perceptions about risks are also changing, with Brexit no longer featuring at the top of the risk list.

According to the Deloitte survey, the effects of the coronavirus pandemic, higher inflation, prospects of monetary tightening and climate change rank top on the list of worries for CFOs.

Finance officers are reportedly less concerned about the impact of Brexit and economic weakness in the Euro area due to the progressive rollout of coronavirus vaccines.

Although 78% of CFOs have reported recruitment difficulties or skills shortages, expectations for an increase in corporate revenues have risen to their highest level in over six years.

More than 40% of British financial chiefs have said demand for their businesses’ services and goods had already returned to pre-pandemic levels, with UK corporates rushing to strike deals as the economy reopens.

While demand is also driving raw material prices higher and increasing operational costs, eight in ten CFOs surveyed believe that productivity will strengthen as Britain emerges from the COVID-19 pandemic and people regain their freedoms.

To help British businesses capitalise on this, UK Prime Minister Boris Johnson is being urged to seize post-Brexit opportunities and reshape regulatory reforms “to offer the hope of a more comprehensive recovery than after the global financial crisis.”

Although CFOs foresee a spending boom and expect solid growth in H2 2021, significant risks to the UK economy remain, and investor’s nerves are being tested – evident by recent stock market performance.

FTSE 100 erases almost all of its gains

A massive sell-off has linked to concerns over global economic recovery, which has seen London’s FTSE 100 Index slide at the start of the week.

Although confirmation that the Bank of England (BoE) ended the ban on dividend payments prevented the Footsie from falling into red territory on Tuesday, investors are jittery about rising inflation and the potential consequences of the final unlocking of the UK economy.

The FTSE 100 has failed to extend Monday’s advances or capitalise on the momentum in the UK banking sector, with the blue-chip index currently up by 7.85 points or 0.11% at 7,133.12.

Next week’s speech from British Prime Minister Boris Johnson on relaunching the UK’s post-pandemic economy could offer UK stocks a boost over the coming days, but fears that removing COVID restrictions could trigger a resurgence in cases is weighing.

If the Prime Minister strikes an optimistic tone, this could reassure investors about the UK’s economic prospects.

Mr Johnson is expected to announce a repeal bill, regional corporation taxes and a legal limit on the size of the state following a year of unprecedented government spending to support the economy and livelihoods through the coronavirus pandemic.

It seems that Freedom Day won’t be solely about ending legal limitations on social contact but reversing government debt and rebooting economic growth.

The Bank of England (BoE) has already scrapped its ban on dividends paid by UK banks and lenders, claiming that its latest stress tests show that these financial firms can cope with the effects of COVID-19.

BoE Governor Andrew Bailey stated that Britain’s leading vaccine campaign has improved the overall outlook for the British economy and allowed the central bank to take a step back. He added that while headwinds may emerge, they will be manageable.

Bank shares rallied in the wake of the announcement, with NatWest, Lloyds Bank, Barclays and HSBC among some of the biggest risers on the FTSE 100.

However, central bank policymakers are still facing tough decisions in autumn with the furlough scheme, stamp duty holiday and other support schemes tapering to a close.

Recent data has also shown that Britain’s wealth gap has ballooned during the COVID crisis, with high-income earners gaining GBP 50K on average.

A leading think tank, the Resolution Foundation, said house price growth and increased savings had “turbocharged” the gap between the richest and poorest people in Britain, with those in the wealthiest bracket reaping the benefits of coronavirus lockdowns.

The Resolution Foundation has urged the UK government to reconsider withdrawing the GBP 20 a week increase to Universal Credit come September due to the latest findings.

The Bank of England could also be forced to take further action as they cannot ignore the dominant role wealth is beginning to play in Britain.

Concerns over wages, employment and the economy also weigh heavily on the British pound (GBP), which is trading on a softer note on Tuesday.

Pound Sterling wavers amid cautious trade

A combination of cautious trade and concerns over the fourth and final unlocking of the UK economy is weighing on pound Sterling (GBP) exchange rates today.

The British pound (GBP) rallied on Monday after newly appointed Health Secretary Sajid Javid reassured financial markets about the last stage of the COVID roadmap going ahead as planned.

However, the UK Prime Minister’s more cautious tone appears to have limited upside potential in GBP exchange rates.

At the time of writing, the British pound to US dollar (GBP/USD) exchange rate is trading 0.5% lower at USD 1.3815, while the British pound to euro (GBP/EUR) exchange rate is flat at EUR 1.17.

GBP/EUR appears to be benefitting from record UK retail sales growth, with new figures from the British Retail Consortium (BRC) and KPMG revealing that the Euro 2020 tournament boosted consumer spending in Q2 2021.

UK retail sales post the strongest quarter on record in June

According to the latest data, UK retail sales jumped by 28.4% in Q2 2021 compared to the same quarter the previous year and by 10.4% during the same period in 2019.

Online non-food sales also rose by 31.4% in June, suggesting that the shift to digital triggered by the coronavirus crisis is here to stay.

However, brick and mortar shops face further challenges following the July 19th reopening. Some consumers may be reluctant to return to stores due to the change in mask-wearing and social distancing rules.

Helen Dickinson, chief executive of the British Retail Consortium, said: “Consumer comfort with the next stage of the roadmap will be key to the ongoing success of retail.”

As financial markets are forward-thinking by nature, growth data will also be vital to recovery in pound Sterling (GBP) exchange rates post-Freedom Day.

The Australian dollar (AUD) posted outsized gains today following the release of stronger-than-expected Chinese data, confirming that economic developments remain important drivers of moves in currencies.

On Monday, the British pound to Australian dollar (GBP/AUD) exchange rate tested a new one-year high of AUD 1.861, as concerns over the slow vaccine rollout in Australia and the spiking caseloads weighed on the “Aussie” dollar.

Although there are growing concerns over a possible lockdown extension in Sydney, AU, data showing that Chinese imports surged in June has dragged GBP/AUD 0.15% lower to AUD 1.853 at the time of publication.

According to the latest data, China’s imports grew by 36.7% year-on-year – beating preliminary estimates for growth of 29.5%.

While Australia’s slow covid vaccine rollout remains a cause for concern, the data has offered a potential boost to AU business and consumer confidence.

However, the sharp jump in US CPI figures could dampen risk appetite and reduce some of the Australian dollar’s (AUD) appeal in currency markets.