New strain of COVID-19 wreaks havoc on UK economy; GBP Recovers; UK economic data remains unchanged.
The governor of the Bank of England, Andrew Bailey, recently said that the latest spike in the number of people infected with COVID-19 has put the British economy in a tailspin and slowed the country’s recovery.
“It’s a very difficult period at the moment and there’s no question that it’s likely to delay the trajectory,” he said during an online speech, adding that he expected unemployment to be higher than the current 4.9%, or 6.5%.
Regarding the possibility of setting interest rates below zero, he said that such a move could harm the banking system, as it would complicate banks’ efforts to recover and harm lending to other companies.
Bailey expects economic activity to be muted until vaccines are widespread enough to justify lifting some restrictions.
The coronavirus crisis in England continues to escalate due to the spread of a new strain of COVID-19. Since the start of the pandemic, 3,118,518 cases of coronavirus and 81,960 deaths have been reported, making the UK the fifth worst affected country in the world. The new strain is said to be more contagious, although vaccines still appear to be effective against it. To prevent its spread, the UK government decided to impose a nationwide lockdown until the end of March.
According to England’s chief medical officer, Chris Whitty, the country is entering the most challenging phase of the pandemic as hospitals are overwhelmed and bodies pile up.
“We are now at the worst point of this epidemic for the UK. We will have a vaccine in the future, but the numbers are higher at the moment than at the previous peak – by some distance,” Whitty said.
The UK is expected to meet its target of vaccinating 13 million people by mid-February.
Markets learned this week that like-for-like retail sales rose less than expected to 4.8% (y/y) in December, down from 7.9% in November. Analysts had expected it to be at 7.9%. This is the worst annual change in 25 years.
“Physical non-food stores, including all non-essential retail outlets, saw sales fall by a quarter compared to 2019,” said the chief executive of the British Retail Consortium. “Christmas offered little respite to these retailers as many stores were forced to close during the peak trading period.”
So far this week, sterling has gained 0.24% against the US dollar, recovering from the previous week’s losses and regaining lost ground earlier in the week.
The pound’s losses earlier in the week were attributed to expectations of negative cash rates, just after Monetary Policy Committee member Silvana Tenreyro said further cuts would continue to provide economic stimulus.
“GBP will have to brace itself for another wave of negative headlines,” said an analyst at ING. “GBP will be vulnerable to negative rates during the lock-in and EUR/GBP risks 0.91.”
The bank is currently split on the feasibility of introducing negative cash rates, although Tenreyro said at this point the conclusion of such a discussion seems obvious.
“Once the Bank is satisfied that negative rates are feasible, the MPC will face a separate decision as to whether they are the optimal tool to use to meet the inflation target under the circumstances at the time,” she said.
The general weakness of the pound since the beginning of the year is related to the current situation regarding the coronavirus. As we mentioned earlier, the country is now facing its worst moment since the start of the pandemic and has yet to begin a massive rollout of vaccines.
The main economic indicators have not changed since our last report.
November’s inflation figures were well below the Bank of England’s inflation target, which currently stands at 2%. The consumer price index was below expectations, falling 0.3 percent year-on-year after rising 0.7 percent in the previous period. In monthly terms, it fell 0.1 percent, also against projections, and fell short of the previous month’s reading.
Gross domestic product rose 16.0% in the third quarter, versus expectations of 15.5%. Unemployment figures show an improving labor market at 4.9%, also against expectations of 5.1%, after 4.8% in the previous period.
On Friday, the National Statistical Office will publish data on industrial and manufacturing production.
Gross domestic product data will also be released on Friday.
Trade balance data will also be published on Friday.