Analysts have warned that the pound is expected to underperform over the summer against major currencies as the economy slows down, recession fears and uncertainty continue, and the Bank of England pauses its interest rate hike cycle.

Global economic fears

Global leaders at the World Economic Forum in Davos have voiced similar concerns over a possible global recession and the escalation of the war in Ukraine. The war in Ukraine has exacerbated global economic uncertainty and has created “a major setback” to the global economy, as Gita Gopinath, first deputy managing director of the International Monetary Fund said.

High inflation is now a major concern for leading central banks who are forced to raise interest rates, while China’s economy is slowing due to the Covid-19 lockdowns. Multiple global shocks are hitting the world as major economies are starting to recover. The cost-of-living crisis is also a major concern along with the food crisis.

George Soros and WW3

Last night, veteran philanthropist George Soros has warned that Russia’s invasion of Ukraine could be the “beginning of the third world war” that could herald the end of civilisation. In his attack on Vladimir Putin and China’s Xi Jinping at the World Economic Forum in Davos, Soros explained that closed societies and autocratic regimes were gaining traction and that the global economy is heading for a depression. Soros said: “The invasion may have been the beginning of the third world war and our civilisation may not survive it. The invasion of Ukraine didn’t come out of the blue. The world has been increasingly engaged in a struggle between two systems of governance that are diametrically opposed to each other: open society and closed society.”

The 91-year-old former hedge fund owner who is hated by the hard right in the US explained that “repressive regimes are now in the ascendant and open societies are under siege. Today China and Russia present the greatest threat to open society.”

He praised Europe for responding to the war in Ukraine “with greater speed, unity and vigour than ever before in its history.” He added: “But Europe’s dependence on Russian fossil fuels remains excessive, due largely to the mercantilist policies pursued by former chancellor Angela Merkel. She had made special deals with Russia for the supply of gas and made China Germany’s largest export market. That made Germany the best performing economy in Europe but now there is a heavy price to pay. Germany’s economy needs to be reoriented. And that will take a long time.”

Kissinger’s warning

The 98-year-old former secretary of state Henry Kissinger has also expressed his opinion about Putin in Davos. However, for him Ukraine needs to cede territory to make peace with Russia. Speaking via video link to the World Economic Forum in Davos, on Monday, Kissinger said that by alienating Putin, Europe would face dire long-term consequences. He said: “Negotiations need to begin in the next two months before it creates upheavals and tensions that will not be easily overcome,” and that “Pursuing the war beyond that point would not be about the freedom of Ukraine, but a new war against Russia itself.” Kissinger was soon criticised for his statements as many said that his suggestions were unrealistic.

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 fell after the release of disappointing UK preliminary Manufacturing and Services PMIs. The UK Manufacturing PMI dropped to 54.6 in May, while the Services PMI came at 51.8 in May. As a result, the pound to US dollar exchange rate dropped sharply.

PMIs

According to the S&P Global / CIPS PMI survey, growth in the UK private sector dropped to its weakest since the winter of 2021 lockdown, as the cost-of-living crisis hit customer demand in May. The seasonally adjusted S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) dropped to 54.6 in May versus 55.1 that was expected and 55.8 – April’s final reading. The preliminary UK Services Business Activity Index for May tumbled to 15-month lows, at 51.8 versus April’s final reading of 58.9 and 57.3 that was expected.

According to the survey, business expectations also fell to the lowest for two years in May due to the weakening global economic outlook and gloomy projections for consumer spending. The service sector showed the sharpest drop in business optimism.

Chris Williamson, Chief Business Economist at S&P Global, commented on the survey

“The UK PMI survey data signal a severe slowing in the rate of economic growth in May, with forward-looking indicators hinting that worse is to come. Meanwhile, the inflation picture has worsened as the rate of increase of companies' costs hit yet another all-time high. The survey data therefore point to the economy almost grinding to a halt as inflationary pressure rises to unprecedented levels.”

He said that rising prices, supply chain issues, labour shortages and increasingly gloomy prospects have added to rising concerns with companies reporting price resistance from customers. There are some signs that the rate of inflation could soon reach a peak, while a slowing in demand could help pull prices down in coming months. He highlighted that “the latest data indicate a heightened risk of the economy falling into recession as the Bank of England fights to control inflation. The survey data therefore point to the economy almost grinding to a halt as inflationary pressure rises to unprecedented levels.”

Inflation, recession, and Brexit concerns to influence the pound

JP Morgan analysts fear that the pound will remain “trapped in a stagflationary vortex” as inflation rises and growth slows down to "a borderline recession". Because double-digit inflation and zero growth are toxic to the pound, they said that they were cutting their GBP forecasts once again this month.

Their forecasts have also been cut as they believe that any potential deterioration in the trade relations between the EU and the UK as a result of possible changes to the Northern Ireland Protocol by the UK, will also add to a decline in the UK’s trade imbalances this year. They highlighted that the recent rallies by both the euro and the pound against the US dollar could be short-lived.

Economists at MUFG bank have also warned that legislation on the Brexit protocol will escalate in the coming weeks and any unilateral action by the UK could usher us into a new period of heightened uncertainty that will start to weigh on the pound.

 

 

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 recovered against the US dollar and is higher against the euro. The recovery is due to a weakness in the US dollar, after a positive shift in risk sentiment, with news of Shanghai reopening, which have weakened the safe-haven US dollar. Analysts have noted that any further boost to the GBP/USD might be unlikely, as US Treasury yields continue to rise.

Additionally, the difference between the Fed and BoE’s monetary policy will possibly keep the pound under pressure, at least in the near term.

In the coming week, traders will turn their focus on UK inflation data, while headlines regarding market sentiment and Brexit will also provide direction.

Gas supplies to Europe

The euro has fallen against the pound and the US dollar as rising gas prices could push the Eurozone economy into recession later in 2022 and deter the European Central Bank from raising interest rates. The currency market is expecting less interest rates now as stagflation fears have risen. Russia’s squeeze in gas supplies to Europe and a surge in European gas prices have added to concerns. Natural gas prices surged in Europe on Thursday after it was revealed that Russia was sanctioning energy companies. Russia listed 31 companies which are banned from conducting transactions and entering Russian ports. Gas transit to Europe via Ukraine has also been restricted.

The gas supply disruptions through Ukraine and then to Germany have pushed growth expectations lower.

With lower rate hike expectations, the euro has weakened and any boost it may get from a more positive ECB rhetoric could be short-lived. The pound rose as a result of the euro’s weakness.  

The realisation that inflation could lead to recession, and the fall of the euro follows the Bank of England’s recession warning and the fall of the pound last week.

Eurozone recession risks

Concerns about the Eurozone economy have been voiced by various CEOs who fear the worst. Bosch CEO Stefan Hartung said: “For sure, we see a big recession in the making, but that’s exactly what we see — it’s in the making. There is still an overhanging demand because of the Covid crisis we just are about to leave. It’s still there and you see it heavily hitting us in China, but you see that in a lot of areas in the world, the demand of consumers has already even been increased in some areas.”

Eurozone investor morale has dropped in Europe to its lowest level since June 2020 following the war in Ukraine. According to the latest Sentix index of investor confidence, the index fell to a near two-year low in May (-22.6). Investors were pessimistic about the current economic situation, and the economic outlook with recession becoming visible in the euro area.

Further euro weakness

Analysts warn that the euro could fall further if Russia restricts gas supplies which is something that is increasingly possible as the Russian army has failed to make any progress in eastern Ukraine.

This could lead Russia to attack the West by limiting European gas supplies which could affect Eurozone economy and the growth outlook, while hurting market sentiment towards the euro. The war in Ukraine has tied the euro to energy supplies. For most economists, the possibility of a recession in the Eurozone has risen and the euro will be sensitive to news and developments concerning the region’s growth and potential risks.

 

With the current volatility and weak market sentiment, 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 to a new two-year low against the US dollar, and a seven-month low against the euro, as uncertainty about the UK economy and recession concerns have increased.

UK GDP shrinks in March as consumers cut spending

According to the latest data from the Office for National Statistics (ONS) released on Thursday, Britain’s economy contracted in March as spending in shops dropped sharply due to the rising cost of living, including higher energy bills. Activity fell by 0.1% with spending in shops experiencing a significant drop.

The Chancellor, Rishi Sunak, said: “The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times. Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.”

The wholesale and retail trade sectors suffered the most, while the car sector also experienced falling sales. The fastest growth was seen in human health and social work activities.

Business Investment

UK business investment fell by 0.5% in the first quarter of 2022, as companies saved capital instead of spending spending on new projects.

Martin Beck, chief economic advisor to the EY ITEM Club, said: “With the consumers feeling the pinch and the Government tightening its purse strings, the onus is on companies to step up and invest more before the super deduction ends next year. But with business investment having fallen again in Q1 2022, the year has got off to a disappointing start in that respect.”

NIESR principal economist Rory Macqueen underlined the decline in consumer confidence which resulted in the drop in retail and wholesale. As he noted, “Falling business investment in the first estimate for the first quarter is a concern: with the government’s tax ‘super-deduction’ expiring in under a year we still still see little sign of a recovery from the Covid shock.”

Pound outlook

Economists have warned that the pound will remain weak, and today’s report adds to concerns about the economic outlook. With economic growth slowing, inflation continuing to rise, and Brexit looming in the background, the pound is expected to remain under pressure.

The UK’s political uncertainty and rising inflation will keep the pound vulnerable. Gerard Lyons, chief economic strategist at Netwealth warned that “At this rate a self-made sterling crisis could be next. Having wrongly eased aggressively when growth was recovering and inflation was rising last year, the Bank now continues to hike as it forecasts a sharp slowdown and likely recession ahead.”

A lower pound might attract tourists to the UK and make UK exports more competitive. On the other hand, any boost to the pound could prove be temporary.

With the current volatility and weak market sentiment, 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 continued to trade within a stable range despite growing concerns about Brexit and the UK economic outlook.

Brexit

The Northern Ireland protocol row has returned with the UK threatening laws to disapply parts of the deal and the EU threatening to revoke the trade deal with the UK. The current threats come at the time where negotiations with the EU over the protocol are about to restart.

Late on Tuesday, the UK foreign secretary, Liz Truss, issued a lengthy tirade against the EU criticising proposals it made last October about checks on goods leaving Great Britain and entering Northern Ireland. She said the EU’s proposals will make current trading arrangements worse and lead to consumer products disappearing from shelves, while adding more pressure on businesses.

As she said, the UK “will not shy away from taking action to stabilise the situation in Northern Ireland if solutions cannot be found.”

The UK is expected to reveal legislation next week to disapply some of the protocol. The EU Brexit chief Maroš Šefčovič, issued a statement on Tuesday warning that a renegotiation of the protocol was not an option as it was a “cornerstone” of the wider withdrawal agreement. If the UK proceeds to disapply the protocol completely, the EU has promised to take action including limited sanctions on British goods such as Scottish salmon and whisky or suspension of the entire trade and cooperation deal.

Recession risk

Last week the Bank of England forecast Britain’s economy would shrink and enter a recession in 2023. Now, there is a more dire warning from the UK’s National Institute of Economic and Social Research (NIESR) institute, which has forecast that gross domestic product will fall by 0.2% in the third quarter and 0.4% in the last three months of the year, marking two consecutive quarters of contraction. “Times are difficult for the UK economy,” said NIESR’s deputy director for macroeconomics, Stephen Millard.

EY Item Club has also forecast that the UK is under threat from a potential recession. They said that UK GDP is expected to grow 4.1% in 2022, 1.9% in 2023 and 2.2% in 2024, but there is significant risk of recession with households set to experience the biggest fall in real wages since 1977.

While the EY ITEM Club’s forecast does not see the UK economy entering a recession, it has warned that there is a potential that this could happen later in 2022 if consumer spending does not meet expectations, or if October’s energy price cap review results in higher bills. Consumer spending is expected to rise 4.9% in 2022, down from the 5.1% and 5.6% expected in March and February.

While consumer spending may benefit from households spending the almost-£180bn worth of savings (8% of GDP) built up during the pandemic, there is a significant risk that consumers may cut spending as their finances come under pressure. With the rising cost of living expected to affect households at various degrees, it is hard to see how the more vulnerable households will manage with the rising costs of energy bills and higher inflation.

The risk of a recession along with the negative Brexit-related headlines, will add pressure on the British pound and limit any gains for the GBP/USD pair.

With the current volatility and weak market sentiment, 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.

 

Markets are currently on edge as fears grow that the world economy is slowing, at a time when Central Banks are determined to raise interest rates and unwind their stimulus packages. In this article, we will look at the current economic risks that the UK and the US are facing and how these could affect the British currency.

Risks that the British economy is facing

Britain’s recovery from the Covid-19 pandemic is at risk as price pressures have increased while business confidence has weakened following Russia’s invasion of Ukraine.

Business expectations are now at their lowest for almost one and a half years which indicates there will be a significant slowing in the pace of economic growth in the coming months.

Price pressures have surged due to growing energy and commodity prices after the Russian invasion. Escalating inflationary pressures and concerns related to Russia’s invasion of Ukraine have hurt business optimism and consumer spending. They have also made the situation very difficult for the Bank of England which will have to walk a tight line between protecting struggling households and avoiding recession while taming rising inflation.

Recession fears and business investment opportunities

Following the Bank of England’s latest recession warning, the risk of a possible recession is building, according to new forecasts by leading UK economic forecasting group EY Item Club.

The new EY ITEM Club Spring Forecast has pointed out that inflation, geopolitical uncertainty, skills challenges and increasing supply chain issues are continuing to add pressure on the outlook for business investment.

The EY ITEM Club expects UK growth to drop, with UK GDP to grow 4.1% in 2022 before growing 1.9% in 2023 and 2.2% in 2024. Growth is now depending on struggling households and whether they choose to start spending by saving less and borrowing more. The EY ITEM Club said that the possibility they may choose not to spend raises the risk of recession.

Martin Beck, chief economic advisor to the EY ITEM Club, explained that consumers “faced with a sustained squeeze on their finances, may cut spending in response.” Also, not all households are the same, and some are more vulnerable than others.  Lower income households, for example, will be affected by higher energy bills while any benefits increases will be outpaced by inflation this year.

Hywel Ball, EY UK Chair, highlighted the risks for businesses but said bigger companies might be able to thrive as they have cash holdings and have recovered from the pandemic. She said: “Uncertainty about the pandemic has been replaced by geopolitical uncertainty, which has also had consequences for the cost of capital goods and supply chain frictions. The temporary super-deduction tax incentive should support an investment pick-up this year, but its impact is being countered by strong headwinds. Some businesses also appear to be grappling with labour shortages and aren’t always able to access the talent needed to identify or deliver investment opportunities. At the same time, many large businesses are actually well-placed to invest, having paid down bank debt during the pandemic and built cash holdings which could can be used to fund new projects.”

Risks the US economy is facing

The main risks to the US economy are rising inflation, volatility in stock and commodity markets and the war in Ukraine. The Federal Reserve reported on Monday in a biannual update on financial stability that these risks could lead to a "sudden" disruption. The US financial system is already under pressure as treasury yields continue to rise and oil markets are in trouble, with the risk of a significant deterioration to be higher than normal.

Fed Governor and vice chair-designate Lael Brainard said in a statement accompanying the report that “households and businesses have decreased their borrowing as a percentage of gross domestic product, and currently appear to have resources to cover debt burdens, which is an important aspect of resilience in an environment of rising interest rates."

Indeed, there have been many changes recently including a more hawkish Fed that is determined to tighten monetary policy faster, rising interest rates and inflation that could become more persistent. As with other big economies, the US economy has been struggling with higher and more persistent inflation before the invasion of Ukraine, but uncertainty over the inflation outlook threatens financial conditions and economic activity.

Threats from the Covid-19 pandemic have now receded, only to be replaced by geopolitical uncertainty following the Russian invasion of Ukraine. Higher inflation could affect economic activity, asset prices, credit quality, and financial conditions more generally, the Fed report warned.

As the report said, "the effect of high inflation, rising interest rates, supply chain disruptions, and the ongoing geopolitical conflict on corporate profitability is uncertain. A significant decline in corporate profitability or an unexpectedly large increase in interest rates could curtail the ability of some firms to service their debt." In addition, hard-hit industries such as airlines could find it difficult to recover due to the rising cost of oil.

Both in the UK and the US, higher inflation exacerbated by the war in Ukraine and heightened uncertainty have created significant risks to the economy. Business sentiment is weak while consumer spending is increasingly squeezed. The gloomy economic sentiment will continue to put more pressure on risk-sensitive currencies such as the pound. As it was seen last week, following the BoE’s dovish meeting, the pound fell, with concerns about the outlook for the UK economy and a high risk of recession to continue to build.

With the current volatility and weak market sentiment, 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 recovered after falling to its lowest level in almost two years on Friday. Analysts do not expect the pound to US dollar exchange rate to stage a significant recovery after the Bank of England's grim recession warning on Thursday.

The UK economic outlook has weakened, while global investor sentiment has also deteriorated. Investors have now lowered their expectations for the number of future rate hikes at the BoE which has hurt the British currency.

Global concerns about recession

The global economic outlook is also gloomy as China’s Covid-19 lockdowns, rising inflation and the war in Ukraine are all fuelling recession fears. Mihir Kapadia, CEO of Sun Global Investments, has highlighted fears about supply chains and inflationary pressures, including higher interest rates which are affecting the financial markets. A disruption in supply chains, will hurt companies’ earnings and stocks, while higher inflation, higher interest rates and higher bond yields will undermine asset prices and consequently result in falls in stocks and bonds. As Kapadia noted, “With consumer inflation at an all-time high, along with rising energy prices, the cost-of-living crisis threatens to spill over into a larger recession in Europe and the US.”

Worries about higher interest rates are driving stocks lower, as central banks such as the US Federal Reserve are determined to fight inflation by tightening policy, which has added more pressure on markets.

Markets are also concerned due to the current geopolitical risks as Russian President Vladimir Putin celebrates the Soviet victory against the Nazis in the Second World War. Russia’s display of military strength has created concerns as the threat of nuclear conflict looms in the air.

BoE interest rate expectations

After hiking the policy rate by 25 basis points (bps) to 1%, the BoE noted that the UK economy could go into recession in 2022 with inflation rising above 10% as energy prices continue to rise.

The BoE’s gloomy outlook suggests that the policy divergence between the Fed will possibly widen further, as the Fed will hike its policy rate by 50 bps in the next couple of policy meetings.

Analysts expect further weakness for the pound, but they have noted that the British currency has been oversold and it might get a respite as it recovers for a few days. The slowing economy and the rising cost of living will not provide any support to Sterling though, analysts fear.

The Bank of England warned the UK economy would risk a prolonged recession over coming months if it continued raising interest rates to meet the market's current expectations. The market expects the Bank Rate to go to 2.5% by 2023, but the BoE warned that such a move will result in negative economic growth in 2022 and 2023. Following Thursday’s BoE meeting, the market has now been forced to lower its expectations and this have weighed on Sterling.

With inflation rising in the UK, economists explained that the extent of the economic slowdown will depend on households starting to spend their savings, and the strength of nominal wage growth.

The war in Ukraine continues and global market sentiment will remain weak, as energy and commodity costs rise driving inflation higher. The Fed’s determination to hike rates will also weigh on global growth, while China’s zero-covid approach with strict lockdowns will hurt its economy and global growth, sparking further concerns. All these worries are also pushing the pound lower.

With the current volatility and weak market sentiment, 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 British pound was weighed down by weak domestic data, which showed that the UK economy is under stress from the rising cost of living. This has forced investors to cut back their expectations on future interest rate hikes by the Bank of England. With limited economic releases from the UK, the pound could drop further against the US dollar, analysts have warned.

The US dollar has strengthened as a safe-haven currency following concerns about supply-chain issues, a coronavirus-related lockdown in Beijing and the ongoing war in Ukraine. The prospect of aggressive Fed rate hike bets and the risk-off mood have pushed the US dollar to over a two-year high. On the other hand, diminishing expectations for further tightening by the BoE have pushed the pound lower.

Bank of England (BoE) to disappoint market expectations

Economists at Scotiabank have reported that the Bank of England may disappoint markets. They noted that if yield differentials go even lower, then the pound to US dollar exchange rate could fall lower. As they said, “The spread of 2-yr Gilts vs USTs has oscillated around -1% for the past four weeks or so but looks set to mark a new pandemic low in the coming weeks that would drive additional GBP weakness.” They added: “Another leg lower in yield differentials amid a cautious BoE vs a hawkish Fed (as well as some near-term political anxiety ahead of the May 5 local elections) could fuel GBP losses.”

Economists at ING also expect the pound to remain fragile. They said that one of the central themes of this year will be whether Central Banks will proceed to further tighten their monetary policy amid a global economic slowdown. It remains to be seen whether the Bank of England will tighten its policy. They believe is too early to write off Sterling especially against the euro.

Recession risks in the UK

Economists at Deutsche Bank have warned that recession risks in the UK are growing following the cost-of-living crisis. Sanjay Raja, Senior Economist at Deutsche Bank, said that "recession warnings are burning brighter," with inflation (CPI) expected to reach 9% year-on-year in April and October this year, which is "drastically hitting spending power.”

With tax rises biting into household budgets, consumer confidence has fallen considerably, while real wages are expected to shrink by 4% in 2022.

Raja warned that "The risk of a household recession may be even greater (household consumption shrinking), given the confluence of factors plaguing consumer spending.”

Such fears have contributed to markets lowering their expectations for future Bank of England interest rate rises. This in turn has pushed the pound exchange rates lower.

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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.

If you are sending money abroad and are worried about the pound’s volatility due to the current market conditions, please get in touch with Universal Partners FX. UPFX’s dedicated foreign exchange specialists can help you access the most competitive exchange rates and make your currency transfers stress-free.

The release of the UK's GDP with a better-than-expected 0.3% growth in July, has raised chances of the UK avoiding a recession and boosted the pound. Data from the Office for National Statistics showed that all sectors of the economy grew in the month – the first of the third quarter, with manufacturing also expanding by 0.3%, and the industrial sector growing by 0.1% during the month. However, the last three months the GDP has remained flat, as Brexit uncertainty has impacted on investment.

This is why, despite Brexit recession fears having eased, the economy remains under pressure. For example, the services sector growth might be an indication that businesses are stockpiling in preparation for Brexit as its outcome continues to be unknown. Plus, as many economists indicate, it is unclear for how long growth will continue.

KPMG report  

As accountancy firm KPMG forecasted, there is a possibility of Britain falling into a recession in 2020 if it leaves the EU without a deal. According to the firm, a no-deal Brexit will negatively affect the UK’s trade and business confidence and lead to the economy shrinking by 1.5% in 2020. The accountancy giant is not the first to warn of the negative effects of Brexit on the economy, as experts have already underlined the grim economic outlook for Britain.

Forecasts by the Bank of England and the Office for Budget Responsibility, have also highlighted the negative economic consequences of a no-deal Brexit and, consequently, of losing access to the EU single market and customs union.

The possible recession will cause a rise in unemployment, a decline in consumer spending and an estimated 6 percent slide in house prices, the KPMG report added.

Yael Selfin, the  KPMG’s chief economist noted that in the case of a recession resulting from a no-deal Brexit, the decline in the pound’s exchange rate will “push up inflation to above the Bank of England’s 2 per cent target, potentially forcing the central bank to lower its key interest rate to near zero.”  With the central bank’s key rate currently standing at 0.75 per cent, interest rate cuts will possibly be no higher than 1 percentage point.

The report also said: “[The new government’s] resolve to leave the EU by 31 October has become increasingly clear . . . and the proximity of the date make the outlook for the next two years rather bipolar.” KPMG added that the pound’s 10 percent expected decline in value, will hurt even exporters as issues over borders will eliminate any positive effect the weaker currency might have. Selfin said: “The most damaging impacts could come from potential shortages of imported foodstuffs as well as medicines in the immediate term, negatively impacting households’ sentiment.”

Selfin could not be clearer when discussing the damaging effects of a no-deal on the economy: “With the Brexit debate poised on a knife-edge, the UK economy is now at a crossroads. It is difficult to think of another time when the UK has been on the verge of two economic out-turns that are so different, but the impact of a no-deal Brexit should not be underestimated. Despite headwinds such as the slowing global economy and limited domestic capacity, the UK economy now has the potential to strengthen over the next 12 months. But a no-deal Brexit could put paid to this upside, triggering the UK’s first recession for a decade.”

Government and Bank of England will be unable to stop a recession

Indeed, the outlook looks grim as the economy contracted by 0.2 percent between April and June, with investment and growth being limited. 

On Monday (9 September), the Resolution Foundation thinktank in its assessment of the UK’s readiness to respond to the next recession, said that the government and the Bank of England were unprepared and that this was a significant risk that policy makers should take seriously. As the think tank noted: “The UK’s macroeconomic policy framework has not kept pace with significant changes to our economic environment and is therefore at risk of leaving the country underprepared for the next recession. That is not a risk policymakers should take lightly.”

 In its key findings, the think tank stressed that the country was facing the biggest risk of recession since 2007, that those of lower incomes would be the most exposed to the recession and that monetary policy will be unable to provide “anything like the level of support it has previously in recessions, reflecting what appears to be a secular decline in the level of interest rates around the world.”

Importing and exporting

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