BoE sees light at the end of the tunnel for UK economy

Governor of the Bank of England (BoE) Andrew Bailey, stated this morning that there was ‘light at the end of the tunnel’ for the UK economy as a result of declining COVID-19 cases and rapid vaccine rollouts. Though his speech was largely positive, he also had some cautionary words regarding the UK’s economic future.

Speaking of the financial effects of the coronavirus pandemic, Governor Bailey hailed it as a ‘traumatic experience’, stating that the UK economy was unlikely to return to a pre-pandemic pattern.

Whilst he declared that future economic changes were uncertain, it was noted that the UK economy would need to adapt to individuals buying more online and that working from home could become the new normal.

During the BoE’s February report, it was stated that UK unemployment would peak to 7.5% this year. Following Chancellor Rishi Sunak’s decision to extend the furlough scheme, however, this figure will likely be closer to 6.6%.

Mr Bailey was slightly more reserved than the BoE’s chief economist, Andy Haldane, who recently referred to the UK economy as a ‘coiled up spring’, ready to release its financial energy.

Renewed optimism in the UK economy is helping the British pound (GBP) to recover recent losses against its currency competitors. the British pound to euro (GBP/EUR) exchange rate is trading around EUR 1.16, while the British pound to US dollar (GBP/USD) exchange rate remains around USD 1.38.

The euro is also gaining ground against the US dollar, having fell to a 3-month low last week. The euro to US dollar (EUR/USD) exchange rate is currently trading at USD 1.18, though vaccine sentiment continues to weigh on the single currency.

Brexit continues to weigh on UK trade

Since the start of 2021, Brexit has caused disorder amongst UK ports as cross-border trading continues to be plagued by red tape. A number of UK ports have already stated that they are not ready for new customs rules set to be introduced in July.

This week’s release of gross domestic product (GDP) data is likely to reveal a steep decline in monthly output, given lockdown restrictions teamed with post-Brexit trading confusions.

Economists predict that January’s GDP could see a contraction of 5%, which would also give an indication as to Brexit’s impact on cross-border trading.

Data obtained by the BBC revealed that lorry traffic from Dover was considerably lower in January, indicating a reduction in shipments between the UK and EU. Dramatic declines have also been seen in imports from the UK to EU countries such as France, Germany and Italy.

UK imports to France are thought to have decreased by 20% since the start of January and around 30% in Germany. Istat data also shows that ‘made in Italy’ exports have fallen by 38% in the UK and UK imports to Italy have declined by up to 70% since January as a result of Red tape.

Italian politician, Paolo de Castro stated “Brexit is turning out to be a tragedy, not only for us, but above all for the British, who are realising it more and more every day.”

Whilst UK manufacturing appears not to have been so hard hit, it was revealed that car production fell by 8% between December to January. However, Chancellor Rishi Sunak’s comments were welcomed by the manufacturing sector during last week’s budget, as he outlined the continuation of financial support as the UK economy makes its recovery from COVID-19.

UK economy improving at a faster rate than previously expected

Currency analysts from HSBC Bank stated last year that they expected the British pound (GBP) to decline in 2021, regardless of whether the UK and the EU achieved a Brexit deal.

According to HSBC’s Head of European FX Research, Dominic Bunning, GBP remained exposed to further downside at the start of 2021 due to the economic impact of the coronavirus and the fact that trade between the two countries would fundamentally change.

A month into 2021, Brexit appeared to no longer be a primary driver for the British pound (GBP), instead focussing on the UK’s successful coronavirus vaccination programme, with over 20 million people now having received their first dose. Rapid vaccinations have become the most significant reason for improvement in the UK’s economic outlook, as the nation prepares to reopen non-essential businesses next month.

The anticipated surge in public spending, caused the Office for Budget Responsibility recently to declare that the UK could return to pre-pandemic levels from the middle of 2022, which is six months earlier than originally anticipated.

Whilst the BoE recognise that COVID-19 will continue to weigh on the UK economy in the long term, their largely positive view undoubtedly provides hope for the future.