The pound is under pressure, after the release of disappointing retail sales on Friday. UK retail sales fell 0.1% month-on-month in June, which is better than the market’s expected -0.3% reading and May’s -0.8% number. Core retail sales rose 0.4% said the ONS, beating expectations for -0.4%.

The numbers show that sales were down 5.8% in the year to June, a number that is lower than the market’s expected -5.3%.

While core retail sales were slightly higher, spending fell sharply. The data supports the belief that the Bank of England will go for a 25-basis point hike in August. This move will disappoint markets which have already priced in a 50bp hike and could weaken the pound. With rising inflation, UK consumers will continue to struggle.

UK retail sales in detail

UK retail sales dropped for the second month in a row and analysts say this is a sign that the economy is slowing. Retail sales are seen as a measure of the UK’s economic health which relies on consumer spending. So, Friday’s retail sales data suggests that consumption is weakening and further weakness for the currency lies ahead, particularly against the Dollar.

While food sales volumes rose by 3.1% due to the extra bank holiday for Queen Elizabeth’s jubilee celebrations, retail sales overall declined. As Paul Dales, Chief UK Economist at Capital Economics said, people were “stocking up on sausages rolls, cakes and alcohol for Jubilee street parties." However, he warned that “the surge in inflation and resulting big fall in real household disposable incomes means that a recession is now inevitable.”

Retails sales: What the economists said

The British Retail Consortium, a lobby group, said that UK consumers will face “hard days ahead.” Its chief executive, Helen Dickinson, highlighted the damage of inflation on consumer confidence. As she said, “Discretionary spending and particularly bigger purchases were put off as consumers become increasingly concerned about the future. As a result, furniture sales and white goods were particularly hard hit, while food sales held up a little better.” This is then the most difficult period since the pandemic started as retailers face higher costs and weaker demand.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Households are continuing to spend more on goods, but are getting less in return.” Tombs said that the retail sales will probably rise in the third quarter of the year as the threshold for national insurance contributions and cost of living payments increase. Similarly, household’s real disposable incomes will also increase in the third quarter, which will push retail sales higher. However, disposable incomes could fall in the fourth quarter, as any support from the government will not make up for the impact on real disposable incomes which will be further affected by October’s 65% rise in the energy price cap.

The pound will likely remain under pressure for as long as market sentiment towards the UK economic outlook remains challenged.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

 

The pound has fallen against the US dollar after the release of disappointing UK data. While domestic data will continue to influence the British currency this week, the key events will be the monetary policies from the Fed and the Bank of England on Wednesday and Thursday, respectively.

Among other news, on Monday, UK Foreign Secretary Lizz Truss, will deliver a statement on the Northern Ireland (NI) Protocol in the House of Commons. The CBI has warned the government that its intention to override the Northern Ireland protocol has forced companies to consider whether to invest in Britain and is slowing down the economy.

Weak UK data

According to the Office for National Statistics (ONS) report released on Monday, the Gross Domestic Product (GDP) has slipped to -0.3% against the market expectation of 0.2%. Also, the annual Manufacturing Production figure has fallen to 0.5 vs. 1.8% expected. Industrial Production data has risen to 0.7% from the estimates of 0.5% on annual basis.

Poor UK GDP

The GBP/USD currency pair dropped after the negative UK April GDP number. On the news about the contraction of the UK economy, Finance Minister Rishi Sunak said that other countries were facing similar issues: “Countries around the world are seeing slowing growth, and the UK is not immune from these challenges.” He reassured people that “we’re fully focused on growing the economy to address the cost of living in the longer term, while supporting families and businesses with the immediate pressures they’re facing.”

UK economy shrank by 0.3% in April

GDP fell by 0.3% in April, with services, production and construction all decreasing in April. The reduction in NHS Test and Trace activity has impacted negatively on the economy, while factories suffered with supply chain issues. The ONS explained: “Services fell by 0.3% in April 2022 and these were the main contributors to April’s fall in GDP, reflecting a large decrease (5.6%) in human health and social work, where there was a significant reduction in NHS Test and Trace activity. Production fell by 0.6% in April 2022, driven by a fall in manufacturing of 1.0% on the month, as businesses continue to report the impact of price increases and supply chain shortages. Construction also fell by 0.4% in April 2022, following strong growth in March 2022 when there was significant repair and maintenance activity following the storms experienced in the latter half of February 2022.”

The UK economy is now only 0.9% larger than two years before the first Covid-19 lockdown in spring 2020.

What the economists said about April’s contraction

Paul Dales of Capital Economics has said that the 0.3% m/m fall in real GDP in April might not have been as weak as it looks, but it will increase the chance of the economy slipping into a recession. KPMG has also warned that the fall in output will continue and could put the economy on the brink of recession. Yael Selfin, chief economist at KPMG UK, said: “The overall outlook remains downbeat as the squeeze on consumer income is expected to weaken demand, and external headwinds intensify due to the deteriorating outlook among the UK’s main trading partners. The rest of Q2 could see an additional fall in GDP owing to the weakening momentum and the impact of the extended bank holiday.”

Bank of England Thursday announcement

The Bank of England will announce its monetary policy on Thursday and markets expect the Central Bank to raise interest rates further as rising prices put more pressure on the UK economy. Rising oil and commodity prices have pushed inflation to a 40-year high of 9%. Inflation is anticipated to continue to rise and reach a two-digit figure.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The pound has plummeted and has hit its lowest level against the US dollar since September 2020. The release of disappointing economic data, including weak retail sales in March and the cost-of-living crisis which has affected consumer spending are some of the reasons behind the sharp drop. Additionally, markets have already priced in interest rate hikes by the Fed which is offering support to the US dollar.

CBI’s industrial trends survey of UK factories

On Monday, the Confederation of British Industry’s (CBI) first quarterly industrial trends report since the war in Ukraine started, highlighted the pressures on UK factories from rising costs. UK manufacturers raised prices in order to cover surging raw material and energy costs, and a further acceleration is expected, according to the CBI. Average costs grew at the fastest rate since July 1975 and firms increased domestic prices at the fastest pace since October 1979, which will feed through to consumers.

UK manufacturing confidence was hit after the war in Ukraine and rising inflation. Both business sentiment and export optimism fell in April, as both commodity prices and uncertainty increased.

Companies reported that productivity and new orders slowed over the last quarter, and new orders are expected to continue to drop in the next quarter.

Anna Leach, CBI deputy chief economist, said that manufacturing orders and output have continued to grow, but the war in Ukraine has made things more difficult, especially following the pandemic, as costs have risen and concerns about the availability of raw materials have grown. She noted that is not surprising that sentiment has weakened in the last three months with manufacturers cutting back their investment plans.

UK economy slowing down

UK retail sales disappointed markets while UK consumer confidence fell to lows last seen during the time of the financial crisis in 2008. The potential slowing of economic activity weakened the pound and markets are beginning to realise that they have aggressively priced in too many rate hikes for 2022. Some analysts believe that investors should remain cautious about the pound as the Bank of England will be unable to keep pace with the aggressive tightening cycle priced in by the currency market. 

S&P Global's PMI data for April also showed a further slowing in growth rates as inflation surged.

Derek Halpenny, Head of Research, Global Markets, at MUF said: "Downside risks for the pound are building with a host of specific negative developments providing reason for GBP sentiment to worsen over the coming days and weeks.”

Economists at MUFG Bank, also noted that the GBP remains vulnerable due to the economic slowdown and unfavourable financial market conditions. They noted that the policy divergence between the BoE and Fed will be sharper in the coming months. As more economic data demonstrates that the UK economy is experiencing a slowdown, they expect the BoE to become more cautious about further rate hikes this year. On the other hand, the Fed is more determined to proceed to further rate hikes this year, as the US economy is less vulnerable.

 

 

They warned that the pound will remain more sensitive than the US dollar due to concerns about gloomy global financial conditions following aggressive policy tightening.

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GBP/USD recovered some of its earlier losses as investors tried to assess the latest data releases from the UK. The pound’s reaction to the UK data was muted. The ONS reported that the UK GDP grew by 1% in Q4, compared to the market expectation of 1.1%, and Industrial Production expanded by 0.4% on a yearly basis. The larger than estimated traded deficit did not impress markets and did not provide any momentum to the GBP/USD pair.

The pound’s recovery was the result of a weaker US dollar as retreating US Treasury bond yields stopped any gains for the greenback and helped the pound rise. Market participants now look forward to the US release of the Preliminary University of Michigan US Consumer Sentiment Index. The release, along with market sentiment and US bond yields will be the main drivers for the GBP/USD currency pair.  

UK GDP report

Despite the disruption caused by the Omicron variant in December, the UK economy continued to grow in the final quarter of 2021. The UK GDP report published by the UK's Office for National Statistics (ONS) revealed that the UK economy grew by 1% on a quarterly basis in the fourth quarter. This reading came in slightly lower than the market expectation of 1.1% but failed to trigger a market reaction.

The ONS said: “The largest contributors to this quarterly increase were from human health and social work activities driven by increased GP visits at the start of the quarter, and a large increase in coronavirus (COVID-19) testing and tracing activities and the extension of the vaccination programme.”

Darren Morgan, director of Economic Statistics at the ONS, said GDP fell back slightly in December but “grew robustly across the fourth quarter as a whole with the NHS (National Health Service), couriers and employment agencies all helping to support the economy.”

UK posts the fastest growth in the G7 in 2021

The UK economy grew 7.5% in 2021, the fastest since the 1940s, after it recovered from the pandemic. It is the fastest growth since the second world war, despite the disruption caused by Omicron in December. It is ahead of the US (5.7% growth), France (+7%), Germany (+2.7%), and Italy (+6.5%) as well as the EU (+5.2%), and possibly Canada and Japan who have not released their 2021 GDP data. But, the UK is recovering from a lower base, since its economy contracted 9.4% in 2020, much lower than other G7 members.

A resilient economy

Chancellor of the Exchequer, Rishi Sunak praised the government’s support for helping the economy say strong and grow. He said: “Thanks to our £400bn package of support and making the right calls at the right time, the economy has been remarkably resilient; with the UK seeing the fastest growth in the G7 last year and GDP remaining at pre-pandemic levels in December. I’m proud of the resolve the whole country has demonstrated, and proud of our incredible vaccine programme which has allowed the economy to stay open. We’re continuing to help the economy rebuild through our Plan for Jobs, boost for business investment and support for households with the cost of living.”

 

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If strong domestic data confirm expectations that the UK economy is growing, then the pound could rise higher. According to a recent UK business activity survey, the August Bank holiday weekend is expected to push business revenue higher as more consumers flock to the shops.

Sterling will remain volatile due to global developments and concerns about the spread of the new Covid variant, but UK economic growth and Bank of England policy will also be key drivers of the currency. The release of better-than-expected economic data will offer much needed support to the economy and the pound.

Pound sentiment suppressed due to labour market concerns

Concerns that a labour shortage could impact on the UK’s economic recovery have been expressed in the quarterly survey from the Confederation of British Industry (CBI). A quarterly survey conducted by the CBI from July 29 to Aug. 16, showed that optimism was at minus 17% this month, down from May’s 47% as companies struggled to bounce back after the pandemic. Charlotte Dendy principal economist for the CBI, said on Thursday that “Firms in sectors such as hotels, restaurants and travel do not expect this strength to persist into the next quarter, reflecting the pressure that consumer services firms continue to face.” Labour shortages could weigh on businesses’ investment plans for the next 12 months.

For services businesses, there are added costs and higher wages after the pandemic that they need to resolve, while Brexit has made it more difficult to access talent from the EU. An index tracing the outlook for costs showed that it has reached the higher in two years and is starting to filter through to the prices, with average selling prices rising at the fastest rate since 2019.

Bank of England interest rate hike

The Bank of England is expected to raise interest rates in 2022, but analysts say that for the pound to rise higher in a sustained manner it will take an earlier hike, or more than one interest rate rises after 2022. Markets are hopeful that the economy will expand, and the labour market improve in order to see any substantial shift higher in the pound’s performance.

Short-term pound volatility

Federal Reserve Chair Jerome Powell's speech to the Jackson Hole economic conference on Friday will possibly offer few new hints about ending its quantitative easing programme. If it does show any clear indication that it intends to proceed with tapering the $120 billion in monthly purchases of Treasuries and mortgage-backed securities, then this will have a negative impact on global economic growth, but it will be supportive of the Dollar. If the Fed indicates that they are not yet ready to proceed to reduce its massive asset purchases, as the delta variant continues to spread rapidly igniting further fears of an economic slowdown, then the US dollar will fall. As Goldman Sachs economists have said earlier this week, Powell will be cautious not to lock in a specific date for starting the taper and he would keep the possibility for starting in November open.

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A weak US dollar and rising hopes for a trade deal between the European Union and Britain helped Sterling rise on Tuesday afternoon.

Analysts are now saying that the pound could rise further in the event of a post-Brexit trade deal. This, of course, is something we have seen every time that there was any positive news pointing to a breakthrough to the negotiations. Sterling fell immediately after the UK referendum vote to leave the EU in June 2016, as political uncertainty hurt the pound. Since then, Sterling has been volatile every time news was released regarding Brexit and has fallen on news of a stalemate in the negotiations or disappointing updates from both sides. As we are nearing the end of the Brexit transition period, and the possibility of an agreement appears more certain, the pound will most possibly react positively and rise.

A possible agreement by mid-November will support the pound

Optimism regarding the trade talks has risen recently after the EU’s negotiating team and Michel Barnier the EU’s chief Brexit negotiator said that they will resume talks in London until Wednesday 28 October and many reports have noted that an agreement could be reached by Saturday, 31st October 31.

Any time from now until the middle of November, when a possible deal might be reached, Sterling could strengthen as long as the two sides ensure that a no deal scenario is not in the cards.

By reaching an agreement, both sides will provide certainty to businesses and investors, eliminating uncertainty, restoring sentiment and offering relief to the pound.

USD weakness to support the pound

For many analysts, the pound might rise, but this might not be a sharp rise and it will only be the result of a depreciation of the USD. At the same time, they predict that a strategic buying of Sterling in anticipation of a deal being reached might be possible, but this will be short-term.

According to Pound Sterling Live, Rabobank see potential for the GBP/EUR exchange rate to rise if a Brexit deal is announced, but such a rise will be limited.  Jane Foley, Senior FX Strategist at Rabobank said: "We don’t expect that relief at the end of the Brexit process will be sufficient to divert attention away from a poor set of UK fundamentals," she adds.

"If we are wrong on the market’s assigned relative probabilities, then Sterling will move more or less than we expect. Given the better mood music of recent weeks, risks appear skewed in favour of a smaller move,” Paul Robson, Head of G10 FX Strategy EMEA at Natwest Markets said. But they also highlighted the issues lying ahead, including that of companies having to adjust to the new realities after Brexit and the potential disruptions in various sectors, including the auto industry that were recently highlighted by the automobile sector.

Potential threats ahead

Economists are emphasising the fact that Brexit will not only disrupt various industries and create uncertainty about the future of businesses, but it will add to the UK’s existing problems. The economy is currently hit by Covid-19, government finances are deteriorating, and lockdown restrictions are hurting the economy further. With a weak economy and limited investment flows, the pound might have a rocky road ahead, with or without a Brexit trade deal.

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The British pound is higher against the Dollar and lower against the euro on Friday, after the release of disappointing data showing that the UK economy contracted more than expected.

The UK GDP monthly release came at -20.4%% MoM in April vs. -18.4% expected, revealing that the economy contracted more-than-expected in April. This is the biggest month-on-month drop in GDP ever recorded and 10 times larger than the sharpest fall before Covid-19. The figures show that the GDP fell by 10.4% in the three months to April as a whole.

The Gross Domestic Product is released by the Office for National Statistics and is a measure of the total value of all goods and services produced by the UK. It is a broad measure of the UK economic activity and, in general, positive news such as a rising trend in economic activity can have positive impact on the pound, while a drop in numbers can be negative. 

The ONS reported that “April 2020 has experienced sharper falls than March as the negative impacts of social distancing and ‘lockdown’ have led to a significant fall in consumer demand and business and factory closures, as well as supply chain disruptions.”

 

Biggest monthly fall in UK history

According to the Office for National Statistics, the UK posted the biggest monthly fall in GDP in UK history this past April. The drop represented a 24.5% decline from April 2019, as lockdowns due to Covid-19 hit the economy. 

This week the Organisation for Economic Cooperation and Development (OECD) said that the UK economy would experience the worst damage from Covid-19 compared to any other developed nation. It predicted that GDP would contract by 11.5% in 2020 or 14% if there was a second lockdown due to the return of the virus.

Anneliese Dodds, Labour’s shadow chancellor, said that the OECD forecast was “deeply worrying” and that this was due to the government’s “failure to get on top of the health crisis, delay going into lockdown and chaotic mismanagement of the exit from lockdown.” 

Rishi Sunak, said the UK economy was similar “with many other economies around the world” and that the government’s intention was to “support people, jobs and businesses through this crisis – and this is what we’ve done.”

 

The OECD explained that “The failure to conclude a trade deal with the European Union by the end of 2020 or put in place alternative arrangements would have a strongly negative effect on trade and jobs.” A no deal Brexit would “significantly damage the UK’s potentially fragile recovery from its deepest recession in almost a century,” credit ratings agency Moody’s warned.

Laurence Boone, the OECD’s chief economist, said the world economy was “walking a tightrope” and that the possibility of a second outbreak could lead to another lockdown and recession. She said: “These scenarios are by no means exhaustive, but they help frame the field of possibilities and sharpen policies to walk such uncharted grounds. Both scenarios are sobering, as economic activity does not and cannot return to normal under these circumstances. By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments.” 

 

With the latest GDP figures, it has been confirmed that the slump in economic activity has been severe. The pound fell against the euro but was not shocked as the disappointing numbers were expected. As Sunak highlighted, the UK is not alone in experiencing the economic contraction due to the lockdown, as global economies are deeply hurt.

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The pound was lifted after the release of Markit's preliminary Purchasing Managers' Indexes for May which bounced from April's figures. However, the data is far from positive for many economists as Britain’s economy continued to shrink, suffering its worst contraction for the month of May. According to CBI chief economist Alpesh Paleja, May has been a “pretty awful” month for businesses.

Thursday’s release of data from IHS Markit’s PMI surveys, shows that both the manufacturing and service sectors have been shrinking as the lockdown continues, with signs that the pace of the decline is slowly easing.

The UK Composite Output Index for May was 28.9, up from 13.8 in April, the UK flash manufacturing PMI (May) 40.6, up from 32.9 and the UK services flash PMI (May) 27.8, up from 12.3. While the contraction is slower, still the readings are below 50, which indicates a slow in activity.

Chris Williamson, chief business economist at IHS Markit, explained today’s numbers:

“The UK economy remains firmly locked in an unprecedented downturn, with business activity and employment continuing to slump at alarming rates in May. Although the pace of decline has eased since April’s record collapse, May saw the second largest monthly falls in output and jobs seen over the survey’s 22-year history, the rates of decline continuing to far exceed anything seen previously. Travel and tourism firms, hotels, restaurants and producers of consumer goods such as clothing were again the hardest hit, reflecting virus containment measures, but this remains a shockingly broad-based downturn with very few companies left unscathed by the COVID-19 pandemic.”

Businesses have suffered

With businesses shut during the lockdown, activity has been low, with cancellations of orders and a drop in demand. New employment to UK firms was also low, resembling the record lows of April.

The slowdown shows the stark reality of the coronavirus impact on the economy, which is slightly different than economists’ optimism and expectations of a quick bounce back.

For Neil Birrell, Chief Investment Officer at Premier Miton, the recovery will happen, but is still far away: “The PMI data in from the UK and Europe suggests that the outlook is improving. That is to be expected, as the surveys are taken mid-month and economies were more open than they were in mid-April. But with UK Composite PMI at 28.9, albeit up from 13.8 in April, and the Eurozone Composite PMI reading at 30.5 the outlook is still grim. Markets may well take this as a sign that the nadir has been reached, although recovery is some time off.”

Similarly, Duncan Brock, Group Director at CIPS, believes that a second wave of Covid-19 infections could slowdown recovery. He said that the easing of the lockdown does not signal a clear way towards improvement in the manufacturing and services sectors. He added: “This month saw another steep fall in overall business activity, surpassing for the third time the rates of decline seen during the global financial crisis in 2009. No new orders, premises shut down and furloughed staff unable to return to work were at the heart of the desolation as business struggled to continue with two hands tied behind their back.” Additionally, if job cuts continue and “purse strings will be drawn tightly shut and spending severely curtailed, putting further pressure on the UK economy and ensuring any recovery is many years into the future.”

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With the coronavirus continuing to affect the UK economy and the issue of securing a Brexit trade deal persisting, the British Pound is forecast to struggle, with investors’ growing increasingly anxious.

While worries about the coronavirus pandemic overshadowed Brexit temporarily, political concerns return as the government has highlighted its reluctance for a Brexit extension.

Brexit: No extension

With the transition period due to end on 31 December and with only three rounds of trade talks remaining, the UK would need to negotiate a trade deal by December 2020, especially when the government says that an extension would only "prolong the delay and uncertainty" around Brexit.

David Frost, the UK's chief negotiator and Michel Barnier, the European Commission's chief negotiator, after their Wednesday meeting via video conference, agreed on three weeks of talks beginning on 20 April, 11 May and 1 June. In a joint statement, they recognised that their work has helped to "identify all major areas of divergence and convergence", but further negotiations were needed "to make real, tangible progress in the negotiations by June."

But the UK government has clarified that no extension would be asked from the EU, despite recent calls by International Monetary Fund Managing Director Kristalina Georgieva to extend the period for negotiations and not "add to uncertainty" as a result of the coronavirus.

However, the prime minister's official spokesman said: “We will not ask to extend the transition period, and if the EU asks we will say 'no.' Extending the transition would simply prolong the negotiations, prolong business uncertainty and delay the moment of control of our borders. It would also keep us bound by EU legislation at a point when we need legislative and economic flexibility to manage the U.K. response to the coronavirus pandemic.”

David Frost has also similarly clarified the government’s intentions: “Extending would simply prolong negotiations, create even more uncertainty, leave us liable to pay more to the EU in future, and keep us bound by evolving EU laws at a time when we need to control our own affairs. In short, it is not in the UK's interest to extend."

The Prime Minister’s confidence in striking a satisfactory trade deal by the end of the year has been criticised by the opposition, with Liberal Democrat Sir Ed Davey saying that the refusal to extend the transition was "deeply irresponsible."

Concerns have also been voiced by the financial world. Economists and strategists have warned about the risks for the pound and have noted that uncertainty typically has driven investors to sell the pound against every other currency. Analyst at Thomson Reuters Richard Pace noted: “GBP dealers should fear July 1, when it will be too late to extend the Brexit transition past Dec. 31, 2020, and GBP would rightly suffer. The UK government has been vehement about not asking for an extension, and the UK parliament won't be able to force one this time, since Prime Minister Boris Johnson's huge Conservative majority will back his decision."

“Tough Times” for UK economy

It is not only the current uncertainty with Brexit, but also the coronavirus’ effects that will deeply hurt the pound and the economy. Chancellor Rishi Sunak has said that the coronavirus will have "serious implications" for the UK economy, as the Office for Budget Responsibility (OBR) is expecting that the virus will shrink the economy by 35% by June. Sunak said that the government needed to be honest and that the OBR’s figures suggest that the UK is facing “tough times, and there will be more to come.”

While the government is "not just going to stand by" and will try to protect “millions of jobs, businesses, self-employed people, charities, and households," the effects of the lockdown cannot be minimised.

Robert Chote, the chairman of the OBR, said that a three-month lockdown followed by another three months of partial restrictions would see the economy declining sharply, a drop that would be the biggest "in living memory."

The International Monetary Fund has also warned that the virus would cause the UK economy to shrink by 6.5% in 2020, and the global economy to contract by 3%.

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