Sterling rose on Tuesday (02/02/2021) for the first time since last spring, after the GDP report showed that the eurozone GDP shrank by 0.7% in the last quarter of 2020 and will probably keep shrinking in the current quarter. While this is not as bad as it was expected, fears of a eurozone double-dip recession have risen. Following the news, the euro fell to a nine-month low against the pound. The euro has also dropped to a seven-week low against the US dollar.

For many economists, the EU’s inability to secure a quick vaccine rollout, the prolonged lockdowns and the prospect of further ones will continue to impact on the euro. Additionally, concerns about a double-dip recession are also weighing on the euro. Due to the slow vaccine rollout and the EU’s poor vaccine strategy, commission president Ursula von der Leyen has drawn criticism and had to respond by claiming that the UK’s vaccination programme had compromised on “safety and efficacy” safeguards to get a head start. She said that “Some countries started to vaccinate a little before Europe, it is true. But they resorted to emergency, 24-hour marketing authorisation procedures.” Von der Leyen has also been criticised by Jean-Claude Juncker, but she said that she should be judged in 2024 when her term ends.

Europe’s slow vaccine rollout could affect economic recovery

The slow start to Europe’s Covid-19 vaccination programme could affect its recovery, according to economists. Sam Miley, economist at the Centre for Economics and Business Research said: “The downtick in economic output in Q4 reflects the widespread reimplementation of Covid-19 contain measures across the continent, though does mask varying degrees of restriction severity across member states. This downward pressure on economic output looks set to continue in early 2021 due to the clampdown on new, more virulent strains of coronavirus, while subdued economic activity could continue for an even more protracted period in light of the eurozone’s relatively slower rollout of vaccinations.”

Other economists are also warning that the eurozone is possibly in a double-dip recession now. Christoph Weil, economist at Commerzbank, explained that eurozone GDP will continue to shrink in the January-March quarter, after the 0.7% decline recorded in October-December. “In the first quarter of 2021, the decline is likely to be somewhat steeper. However, there will not be a slump like the one in the first half of 2020. Instead, a noticeable recovery is likely to set in again from the spring.”

Global Chief Strategist at HSBC Global Asset Management, Joseph Little, said:  “The negative Q4 GDP print is confirmation of what investors already knew – a double dip recession in Europe at the end of 2020, with that weakness continuing through Q1. The live question for investors is what the delays in vaccine distribution and virus trends means for the growth outlook as we go through the year. We think the picture should improve through the summer, and that facilitates a ‘catch-up’ phase of growth for Europe in H2.”

UK vaccine rollout

Sterling rose due to optimism about the UK’s vaccination rollout and a wider positive risk sentiment.

The government is expected to vaccinate 15 million with the first dose of the vaccine by the middle of February so all who are clinically vulnerable have some level of resistance against the Covid-19 virus. If the vaccine programme goes as scheduled this, together with the strict lockdown measures will eventually allow the UK government to relax some of the restrictions. This will also help boost the currency. JP Morgan said: "We generally remain supportive of the stronger Sterling view given the impressive vaccine roll out the UK has implemented. Of course, short-term virus worries remain a headwind, particularly as UK lockdowns look set to stay for a significant amount of time.”

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The British Pound dropped, losing all the recent gains after global stock markets fell.  Analysts, however, hope that the vaccine rollout will help offer some support, thus limiting the pound’s losses. 

As mentioned in our previous article on the pound, the British currency is influenced by wider market trends and sentiment, which has recently become more obvious, once the Brexit negotiations were completed. This is going to become the default scenario in 2021, which will see the pound rising against major currencies when markets are going up, and, on the other hand, see it falling when global markets are underperforming.

On Wednesday, the pound reversed its gains after global markets fell and investor “risk off” sentiment drove equity and commodity markets to fall, and the dollar to strengthen. There was no obvious reason behind the decline and analysts believe that a fall in stock markets is expected, as more traders close their trades. In a report from Reuters, it was noted that traders were making leveraged trades taking profits to cover losses from other trades, leading to significant falls in overcrowded trades. Additionally, increased trading volume in certain sectors of the market created volatility.

Slow vaccine rollout disappoints

Markets appear to have been too optimistic about a quick economic recovery based on the prospect of vaccinating billions of people. According to CNBC, “a sluggish rollout of the Covid vaccines  threatens Wall Street’s rosy outlook.” In the UK, the pharmaceutical giant AstraZeneca continued on Thursday its dispute with the European Commission, after telling the bloc last week there would be a 60% shortfall in supplies due to production problems. The dispute could trigger a UK-EU trade war amid frustration at the speed of the vaccine rollout in Europe.

In an interview with Euronews, German MEP Peter Liese said that it was unfair the way European citizens were treated by the UK pharmaceutical company:

"For five weeks now the BioNTech vaccine that is only produced in Europe, that has been developed with the aid of the German state and European Union money, is shipped to the United Kingdom. So people in the United Kingdom are vaccinated with a very good vaccine that is produced in Europe, supported by European money. If there is anyone thinking that European citizens would accept that we give this high-quality vaccine to the UK and would accept to be treated as second class by UK based company. I think the only consequence can be to immediately stop the export of the BioNTech vaccine and then we are in the middle of a trade war. So, the company and the UK better think twice.

In relation to the demand for more vaccines, Barbara Rockefeller of Rockefeller Treasury Services Inc. noted that “We were all so enamoured of the blazingly fast development of vaccines that we neglected to consider production bottlenecks—and were misled by company and government announcements alike that the stuff could be produced on demand. It seems we really do have a global shortage of vaccines that will persist for many months.”

If the vaccine rollout continues smoothly and more vaccines become widely available, then the pound will rally. However, the lack of vaccines and a possible trade war between the UK and the EU could threaten the British currency.

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Pound Falls after Weak UK Data

Sterling has fallen after the release of weak UK data, and is trading lower against both the dollar and the euro. The fall comes after yesterday’s gains when the pound reached the highest level since spring 2008.

UK retail sales in 2020 post record fall

Despite expectations for a 1.2% gain, retail sales volumes in the UK rose by just 0.3% in December from January, according to data from the Office for National Statistics released on Friday. Clothing sales rose 21.5% after a 19.6% drop in November. In 2020, retail sales fell by 1.9% when compared with 2019, due to the coronavirus lockdowns. On the other hand, online and mail order sales rose 32% in 2020. Clothing stores, petrol stations and department stores recorded significant falls in sales volumes when compared to 2019.

Jonathan Athow, deputy national statistician for Economic Statistics, said: “December’s retail sales increased slightly, driven by an improved month for clothing sales, as the easing of some lockdown measures for parts of the month meant more stores were able to open. Food store sales this month were subdued as retailers reported lockdowns and restrictions on the sale of non-essential items impacted on footfall. Retail sales for 2020 saw their largest annual fall in history as the impact of the pandemic took its toll. Clothing retailers fared particularly badly, with a record annual fall of over 25%, while movement restrictions led to a record year-on-year decline for fuel sales.”

Ian Geddes, head of retail at Deloitte, noted that retail showed resilience as “Strong performance in grocery and record-breaking online sales for non-food meant that Christmas 2020 was the most digital ever.” He also added: “For now, pent-up demand is likely to see shoppers out in force once restrictions lift, as we saw in summer at the end of the first lockdown. Crucially, the reopening of the high street will this time coincide with the ongoing vaccine rollout, which should boost consumer confidence and see them return to stores once more.”

Paul Dales, chief UK economist at Capital Economics, also commented: “The tiny rise in retail sales in December shows that it wasn’t a very merry Christmas for retailers. And January’s lockdown means it won’t have been a happy start to the new year either. But at least retailers are more immune to lockdowns than many other consumer-facing businesses. The upshot is that retail sales added almost nothing to GDP in December and January’s lockdown means sales will probably drop back again this month. Admittedly, they won’t fall as far as non-retail consumer spending. According to daily data of electronic card payments, so far this month consumption has declined from being slightly above its pre-pandemic level in December to about 35% below. We suspect that GDP may fall by around 2% m/m in January. But hopefully that will be the last decline.”

Government Borrowing

The release of separate data showed that the UK’s borrowing rose in December to the highest level and it marked the third-highest borrowing in any month since 1993 when records started. The ONS said that public sector net borrowing was £34.1bn in December 2020, £28.2bn more than in December 2019.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that it is possible that total borrowing could be close to the OBR’s £393.5bn forecast. He explained that December’s high borrowing “reflected a 26.1% year-over-year jump in central government expenditure, mostly related to the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme. Tax receipts were only down 1.2% year-over-year, thanks to growth in corporation taxes and stability in income tax receipts. However, borrowing will fall once the support schemes expire at the end of April –– and next year we could see sharp tax rises, to get the public finances back on track, Tombs predicts. Public borrowing will fall sharply from about 20% of GDP this year to between 8% and 10% in 2021/22, if the government stops the furlough and self-employment income support schemes in the spring, and healthcare spending declines. We doubt that the Chancellor will go a step further in the Budget on March 3 and push through large immediate tax rises or non-health spending cuts.” He noted that fiscal policy will tighten, and taxes are expected to rise significantly in 2022.

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Sterling climbed against the dollar on Monday after the EU and UK announced that they will “go the extra mile” and continue with Brexit negotiations. 

After last week, when the pound fell due to concerns over a no-deal Brexit, this week the pound rose reversing some of its losses. The Prime Minister Boris Johnson and European Commission president Ursula von der Leyen agreed during a “constructive” call on Sunday to “go the extra mile” in order to secure a trade deal for the UK. With no deadline for negotiations, British officials have said that negotiations could continue until Christmas. 

What do analysts say?

Whatever happens to the pound is going to have an impact on Thursday’s Bank of England meeting which is expected to remain on hold. Analysts believe that if markets are worried and the pound falls on the prospect of a no deal, then the BoE might increase its QE purchases within a short period of time. Nonetheless, pound volatility as we near the end of 2020 is to be expected. 

Goldman Sachs has predicted that the pound will rise if there is progress towards a deal or a no-deal Brexit is avoided. Barclays analysts explained that there will be risks to the pound until an agreement is reached. As the Financial Times reported, some analysts have changed their mind, quoting Gregory Perdon, co-chief investment officer at Arbuthnot Latham, who had “second thoughts” about the pound rising, but he reiterated his hopes for a deal as  “both parties are probably better off economically with a deal.” “Let’s hope rationality wins in this instance,” he added. 

Others more pessimistic, have warned that the pound’s gains might be short-lived, as both the UK and EU have failed to reach a deal repeatedly in the past.

Talking to Reuters, Junichi Ishikawa, senior foreign exchange strategist at IG Securities said: “This is a temporary move higher in the pound, but it is still not clear that a no-deal scenario can be avoided.”

Whether there is a deal or no deal, some investors feel that the pound could still move sharply.

What’s next?

The UK left the European Union on 31 January 2020, but the ongoing negotiations between the UK and EU officials are focussing on securing and negotiating a deal about the rules that will determine and define the kind of relationship the two parties will have post-Brexit. Michel Barnier has commented that Boris Johnson has made a mistake for hoping to negotiate an agreement within only 11 months.

The two sides have until 31 December 2020 to agree a trade deal and, if there is a deal, border checks and taxes will be introduced. The transition period ends on 31 December, and tariffs and quotas will be introduced in the event of a no deal.

A joint UK-EU statement stated that “despite the fact that deadlines have been missed over and over we think it is responsible at this point to go the extra mile."

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Sterling rose after renewed hopes that a Brexit deal is still possible, as the UK Prime Minister Boris Johnson is heading to Brussels for a meeting with the President of the European Commission, Ursula von der Leyen. Heightened volatility is expected as the meeting could take place any time this week or over the weekend, with any rumours possibly to move the currency.

On Monday, the GBP suffered losses after news that the negotiations reached a stalemate, and the PM stated that he was willing to walk away. But, later, on Monday, as it was announced that Johnson would be travelling to Brussels for a face-to-face meeting with von der Leyen, the pound regained some of its losses. News about the meeting is not yet clear and markets expect the two to either meet on Wednesday or possibly Friday. On Thursday, a meeting of European Council EU leaders will also take place, and many predict that the meeting with von der Leyen could even take place in the weekend, to allow EU leaders to approve of a new mandate for the EU Commission President before the meeting.

With confidence dwindling and the possibility of a deal becoming more and more distant, markets will remain sensitive to any Brexit updates. While everyone was expecting Johnson and von der Leyen to discuss over the phone, the announcement of a physical meeting caught markets by surprise. At the current moment everyone hopes that a breakthrough could be reached by an intensification of negotiations at a more personal and political level.

What to expect for Sterling in 2021?

A lot depends on a positive Brexit outcome. The currency is also correlated with global business and economy, so any general positive upswings will also boost the pound. According to economists at Oxford Economics, global economy will expand and the UK will benefit from the trend, especially after being so badly impacted by the pandemic.

However, if both sides fail to reach an agreement, the Pound could fall below parity, as many believe there is much more downside risk than upside. There is a real risk to the outlook of the UK economy and the pound if a no deal outcome ensues, but, at the same time, there are multiple scenarios possible: a deal or no deal, as well as a so-called cooperative no deal and an uncooperative no deal. An uncooperative no-deal Brexit will be more disruptive than a cooperative no-deal Brexit, in which the EU and the UK will be able to cooperate on a number of pressing emergency issues.

The UK government announced on Monday 7th Dec. that they will remove those elements that the EU openly disagrees with in the possibility of a trade deal, including the law-breaking clauses of the Brexit Bill. However, the clauses might return if a trade deal is not agreed, which will point towards a hard, uncooperative no deal Brexit. In this scenario, the pound will fall to the lower end.

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While investors have been preparing for a Brexit deal as early as next week, official briefings on Thursday and Friday are expected to cause volatility. On Thursday, the pound fell as global markets turned cautious after a “media report that EU leaders will demand the European Commission publish its plans for what will happen if there is no deal,” Reuters reported.

On Thursday, EU leaders will address outstanding issues like fisheries and “level playing field” provisions as they meet via a video call. Executive Vice President of the European Commission Valdis Dombrovskis said: "We're in the final push. There are still important elements to be resolved, substantial work to do. We've seen many deadlines come and go but there's one we'll not be able to move - Jan 1. We're now in the last moments."

Bloomberg News reported that a new trade agreement between the UK and Canada, could come as early as Thursday: “Reports that the UK and Canada are very close to reaching a post-Brexit trade deal are undoubtedly good news for both economies, but with time dangerously running out on a EU-UK trade deal, sterling is struggling to react positively to the news.”

Thursday and Friday to create pound volatility

The Sun newspaper’s Nick Gutteridge said that France will be determined to retain its access to UK waters post-Brexit and if it does not move on fisheries this could create more anxiety for markets. The UK is said to expect a final push from various leaders in the summit as they put more pressure on the UK for more concessions. Thursday’s summit might have a negative impact on the pound as markets reconsider the possibility of a deal.

On Friday, EU Chief Brexit negotiator Michel Barnier will brief European representatives of the EU's 27 member states, and markets will be closely watched for any signs of a deal. UK Chief Negotiator David Frost had told Prime Minister Boris Johnson on Tuesday that a deal was possible as early as next week.

How the pound will react?

“Observers still expect a deal early next week or in the first week of December. Market participants are similarly not that concerned over the risk of No Deal Brexit at this point in time,” wrote MUFG strategist Lee Hardman. “There is likely to be a much larger pound move to the downside if both sides fail to reach a deal (-5% to -10%), while we expect a modest move to the upside for the pound if a deal is finalized (+1% to +4%),” he said.

Analysts at UBS noted that there will be a "meaningful bounce" in the Pound if a deal is signed: "The latest news flow points to an agreement being struck just in time for ratification by the EU Parliament. Given markets - and hedge funds specifically - are relatively under-positioned for such an outcome, we’d expect a meaningful bounce for GBP on even a confirmed ‘skinny deal’ outcome." But a positive outcome also means good news for the pound and the UK economy which they tend to benefit if the global economy is doing well. The UBS analyst stated: "This is intuitive given the degree of openness of the UK economy and bodes well for a recovery in global growth into 2021. Naturally, the link has weakened since the 2016 referendum, but cheap valuations offer some hope of at least a partial snap-back in compensation. And the UK economy stands to benefit more than most in 2021 as it was hit particularly hard by this year’s pandemic.”

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Sterling extended earlier gains after a report that the UK and the European Union could agree on a trade and security deal some time next week. Optimism regarding striking an agreement has given the pound fresh impetus, despite that time is running out.

Economists believe that Sterling could strengthen more by mid-2021 if a free trade agreement is reached, as officials are expecting news of some form of progress as early as Monday. British and European parliaments will still need to confirm the terms of the agreement before the transition period ends on 31 December. At the moment, investors remain hopeful, but the possibility of the talks stalling as major differences cannot be bridged is strong, and in such a scenario the pound would likely fall.

Newspaper reports suggest a trade deal is possible

During the week, various newspaper reports have suggested that a trade deal is "just days away" with the Telegraph saying that Ireland believes there are "landing zones" for an agreement and that France has accepted the restrictions to its fishing rights in UK waters after the transition period ends. The newspaper also reported that "the trade agreement could be announced as early as Monday, sources in Brussels suggested – but only if both sides made compromises on issues such as fishing and subsidy law." On Tuesday, the Sun newspaper said a deal could be expected next Tuesday, as the UK Chief Negotiator David Frost said to the Prime Minister Boris Johnson to prepare for a trade deal on Tuesday, news that have helped lift the pound.

Despite positive but unofficial reports in British newspapers, both the EU and UK have not offered a definite answer about the status of the negotiations which means the possibility of a no deal is still a valid outcome with some analysts remaining very cautious. At the same time, the markets seem to have made peace with a possible no-deal scenario, so any news of a deal, no matter what that deal is, will lift the pound. However, a possible deal will only mean temporary and limited gains for the pound according to some analysts, while for others, a considerable rise should be expected.

Brexiteers feel stuck as no deal impossible

The UK is now trapped and will be unable to benefit from Brexit, said former Brexit Party MEP Ben Habib. Habib, who attacked the PM saying that a no deal Brexit was not possible, said in an interview to Express.co.uk, that "We are already stuck, to some extent, in the gravitational pull of the European Union.” For hard Brexiteer Habib, a no deal Brexit would allow the UK to completely cut its ties to the European Union, but, unfortunately, this is not possible anymore. As he said, "We have a deal of some description from which we simply cannot escape."

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Sterling rose after a Bloomberg article yesterday (28 October) reported that a Brexit deal was closer into view as talks progressed. Both sides were participating in an intensive round of negotiations in London, and, on Thursday, the talks will move to Brussels. If more progress is made by 3rd of November, the UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen will then have to negotiate a final agreement.

Today, though markets remain nervous ahead of the US GDP and ECB meeting as the escalating Covid-19 pandemic has triggered renewed fears of a double dip downturn. With a second lockdown in France and new restrictions about to be imposed in Germany, investors are on edge.

Pound rises on Brexit progress

European Union and UK negotiators managed to resolve “some of the biggest disagreements that have long bedevilled the Brexit talks, raising hopes that a deal could be reached by early November, according to people familiar with the discussions,” Bloomberg noted.

According to the article, sources said that the deadlock has been broken after seven months of negotiations, but traders will still need to see more solid evidence to be convinced of any progress. The sources reported that both sides are working on “the text of an agreement on the level competitive playing field and are close to finalizing a joint document covering state aid.” They have also “moved closer to deciding essential aspects of how any accord will be enforced,” the sources added.

The news pushed the pound higher against the Euro and the majority of its G10 peers. While markets remain cautious, some economists believe that there are positive signs for reaching a trade deal.

The Brexit news should offer support to a pound that has been very sensitive to Covid-19 developments, at a time where lockdowns are devastating economies. In the event of a second wave the pound will definitely remain sensitive and could weaken, and analysts say that positive Brexit news might not be enough to support the pound in the current volatile environment. In this respect the upside potential for the pound is seen to be limited, as many more issues remain to be resolved regarding the Brexit talks, despite recent news.

Despite the recent doom and gloom, there are potential business opportunities to be had with Brexit, “from fishermen to airlines and insurers,” according to an article.

Risks to the pound

Sterling has been sensitive to Covid-19 updates and Brexit news, and it will remain so. According to Pound Sterling Live, “An obvious risk for those watching Sterling exchange rates is that negative Brexit news - which would most likely be a stalemate on fishing - combines with 'risk off' market conditions to trigger substantial declines in value.” But the stimulus support from Central Banks might be enough to support world economies and protect from unexpected currency declines seen in the aftermath of the first wave of Covid-19.

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Sterling rose to an eight-month high due to dollar weakness and after Federal Reserve Chairman Jerome Powell said on Thursday that the Fed will tolerate inflation above 2.0%. This gave investors hope that the Fed will not try and control economic growth, something that could hurt the US dollar in the near future. On the other hand, on Friday, after Bank of England Governor Andrew Bailey’s speech, the pound remained unmoved. Both Bailey and Powell gave their speeches at the Jackson Hole central bank symposium which was held online this year rather than at the usual ski resort in Wyoming.

Fed’s decision marks a significant shift in monetary policy

The Federal Reserve has approved a significant change in the way it sets its interest rates by abandoning the usual practice of raising them to control higher inflation, something that will leave US borrowing costs extremely low. By signalling that it wants inflation to rise moderately above its 2% target, the Fed confirmed that inflation targeting in a world of lower interest rates is a thing of the past.

Andrew Bailey’s speech

On Friday, the Governor of the BoE delivered his keynote address to fellow central bankers online and not from the actual ski resort in the Grand Tetons where the conference was traditionally organised since 1982.

In his speech, Bailey said that central banks have a lot of strength to use quantitative easing to manage crises, such as Covid-19. As he noted characteristically, “Go big (and fast) or go home.”

The Bank of England governor did not provide details over short-term policy or on the UK economic situation, but he did reassure the financial community that the Bank will be able to deal with future crises: “We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid. But, hindsight is a wonderful thing when you have it.”

He also said that the Bank won’t seek to restrict monetary policy until there is significant economic progress: “The committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. This important step is intended to ensure monetary conditions do not tighten prematurely when there are some initial signs of an economic recovery.”

According to Bailey, QE will be “more long-lived” and that the Bank has the power to fight recessions. In regard to Jerome Powell’s comments from yesterday, Bailey said that these suggest that flexibility can be useful for monetary policy and that a different exchange rate environment could justify different approaches.

The Bank of England increased quantitative easing by £745 billion in June, and in March it cut its main interest rate to a record low 0.1%. A paper with the Bank’s conclusions will be published alongside Bailey’s speech.

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Sterling has rallied after better than expected forecasts from the Bank of England. The Bank noted that the economic standstill in the period between April and June was “less severe” than anticipated. While the UK economy has considerably shrunk this year due to the Coronavirus, it is now on a path to recovery, slowly picking up again.

Bank of England Monetary Policy Meeting

In its Thursday morning meeting, the Bank decided to keep UK borrowing costs at record lows, interest rates at just 0.1%, and its quantitative easing programme at £745bn.

According to its forecasts, UK recovery will take longer but the slump will be less severe. The Bank said that “the fall in output in Q2 is expected to have been less severe than was assumed in the illustrative scenario in the May Report. In that scenario, it was assumed that restrictions would be gradually unwound between early June and late September, but they were lifted earlier.” In terms of recovery, this will take time:

“In the MPC’s central projection, GDP continues to recover beyond the near term, as social distancing eases and consumer spending picks up further. Business investment also recovers, but somewhat more slowly. Unemployment declines gradually from the beginning of 2021 onwards. Activity is supported by the substantial fiscal and monetary policy actions in place. Nonetheless, the recovery in demand takes time as health concerns drag on activity. GDP is not projected to exceed its level in 2019 Q4 until the end of 2021, in part reflecting persistently weaker supply capacity. Given the scale of the movements in output, as well as the inherent uncertainty over the factors determining the outlook, the evolution of the balance between demand and supply is hard to assess.”

Labour market and employment

The Bank also warned that unemployment will rise sharply by the end of the year. The Bank’s monetary policy committee said:

“Employment appears to have fallen since the Covid-19 outbreak, although this has been very significantly mitigated by the extensive take-up of support from temporary government schemes. Surveys indicate that many workers have already returned to work from furlough, but considerable uncertainty remains about the prospects for employment after those support schemes unwind. In the near term, the unemployment rate is projected to rise materially, to around 7½% by the end of the year, consistent with a material degree of spare capacity.”

The unemployment rate is currently 3.9%, and the government’s furlough scheme is helping employers to keep their staff.

The Monetary Policy Committee highlighted the threat of unemployment, which will remain high next year too. The Bank’s economists said that the “Labour market slack persists over the first half of the forecast period, as unemployment is judged likely to decline only gradually after peaking in Q4. The gradual decline in part reflects an expectation that hiring will pick up relatively slowly, consistent with uncertainty affecting companies’ demand for labour. In addition, the MPC judges that there is likely to be some reduction in the efficiency with which people can find jobs. That tends to happen as unemployment rises, as some people take time to find new jobs, and their skills erode. Moreover, in the present conjuncture, the dispersed effects of Covid-19 on economic activity across sectors are judged to be likely to result in a greater degree of mismatch than usual, given differences between the sectors from which workers have been made unemployed and the sectors in which firms are posting vacancies.”

Speaking at a press conference on Thursday to discuss the Bank’s Monetary Report, Bank of England governor Andrew Bailey said that the forecast that unemployment might almost double to 7.5% is a “very bad story.” But he also said that it will eventually fall back to 4.5% by the end of 2022.

Negative Interest Rates?

The Bank of England said that it is currently considering the possibility of imposing negative interest rates in the UK, as other banks including in Japan and the Eurozone, have done. This means that banks will be charged for leaving money with the central bank, so they are forced to lend them. The Bank is currently deciding whether this will impact on the financial system, economic confidence and bank profits, as well as savers. According to the Bank, “the effectiveness of a negative policy rate will depend, in part, on the structure of the financial system and how the policy transmits through banks to the interest rates facing households and companies. It will also depend on the financial and economic conditions at the time.”

 

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