BoE predicts a 4 per cent contraction for Q1
Pound Sterling (GBP) slipped against its key currency competitors last week due to continued impacts of lockdown restrictions and the US dollar (USD) largely benefiting from rising bond yields.
However, broad-based expectations amongst economists is that the UK is poised to soon recover gains against the US dollar (USD) and euro (EUR) ahead of the gradual reopening of non-essential businesses next month.
The general consensus is that the British pound (GBP) is in a prime position to soar against its currency rivals, as UK coronavirus cases continue to fall and vaccines are administered at a rapid rate.
Last week it was confirmed that over 20 million people in the UK had received their first dose of the coronavirus vaccine as well as revelations that all UK adults could receive their first dose by June.
The UK economic outlook continues to remain positive despite financial difficulties being faced amid the UK’s third national lockdown.
UK retail Sales data declines sharply
Unsurprisingly, retail sales during January declined drastically as UK Prime Minister, Boris Johnson, announced the UK’s third set of lockdown restrictions. Data revealed that UK retail sales fell by 8% in January compared to the previous month, which is far from the decline experienced at the start of the coronavirus pandemic at 22%.
At the time, the news appeared to have little impact on the British pound to euro (GBP/EUR) exchange rate, as Sterling continued to be buoyed by vaccine progressions. The currency pairing begins the new trading week at EUR 1.16, with expectations that the exchange rate could soon head towards EUR 1.17.
Last week’s comments during the budget from UK Chancellor, Rishi Sunak, was welcomed amongst businesses, as it was confirmed that the furlough scheme would be extended to the end of September as well as further financial support for self-employed individuals.
Meanwhile, sentiment towards the euro (EUR) remains mostly unchanged due to a rise in COVID-19 cases across the EU, which has seen several member states re-impose coronavirus restrictions, including Greece and Italy.
However, the euro (EUR) is managing to hold steady against the US dollar (USD) as fiscal stimulus talks restart in the United States, with the aim for Biden’s USD 1.9 trillion package to be signed off by 14th March.
At the time of writing, the euro to US dollar (EUR/USD) exchange rate is recovering from last week’s slip at USD 1.19. Meanwhile, the British pound to US dollar (GBP/USD) exchange rate continues to hover around the USD 1.38 mark.
It was largely anticipated last year that Britain would experience a double-dip recession due to England’s continued lockdown restrictions and UK debt hitting record levels as government borrowing continued to soar.
However, with the UK on course to experience a sharp recovery, it’s now thought that a double-dip recession could be avoided.
UK on track to see a sharp economic recovery
The Bank of England (BoE) has stated that the UK will likely to a sharp economic rebound once non-essential businesses begin to reopen from next month. Highlighting that the British public are desperate to get out and spend their money following months of lockdown restrictions, the reopening of the hospitality industry will likely provide a significant boost.
Despite the positive economic outlook, it is likely that the UK economy will see a significant contraction for Q1 of 2021 as a result of lockdown, with the BoE predicting a fall of 4%.
Just before the UK’s second lockdown in November, a Reuters poll, declared that the UK would see a double-dip recession as a result of lockdown restrictions and the prediction that there would be a collapse in UK-EU Brexit trade negotiations.
While some parts of the economy remain open the second time around, a large majority of the UK’s service industry – which is a significant contributor to economic growth – had been forced to close for most of November.
The closure of businesses caused economists to re-evaluate economic contractions for the fourth quarter, as concerns for the future of the UK economy continued to grow.
According to the Office for Budget Responsibility (OBR), the UK borrowed GBP 215BN in the first seven months of the 2020/21 financial year, which took public sector debt to an unprecedented high of GBP 2.08TN, now standing at GBP 2.1 trillion.
Chancellor Rishi Sunak has previously stated that borrowing was the responsible thing to do, but that public finances will have to be put on a sustainable path over time.
During last week’s budget the Chancellor noted that whilst the UK’s economic outlook is promising, he also stated that COVID-19 will continue to have a profound effect in the long-term, particularly as the UK looks to pay off its mounting levels of debt.
