The latest release of the UK inflation figures has failed to provide a boost to the pound. Despite the recent Brexit optimism, the pound did not rise further after the latest inflation figures which came in line with expectations.

The GBP did not react to the news that inflation fell to 0.5% during May as it was expected. Sterling’s upside is also considered to be limited as traders are expected to remain cautious ahead of the latest monetary policy update by the Bank of England on Thursday. The BoE is expected to keep rates at 0.1% and increase its quantitative easing programme by £100bn.

UK CPI

According to the Office for National Statistics, the UK consumer price inflation eased for the fourth consecutive month in May, coming at an annual rate of 0.5%, meeting expectations. Inflation has fallen after a record fall in fuel prices which dragged the UK's inflation rate down. This was due to the lockdown as May was the second full month of the coronavirus lockdown restrictions. This was the lowest annual rate recorded since the Brexit referendum vote in June 2016.

Economists said that this will inevitably add to the discussions of whether the Bank of England will likely take Bank rates into negative territory.

ONS deputy national statistician Jonathan Athow said: “The growth in consumer prices again slowed to the lowest annual rate in four years. The cost of games and toys fell back from last month’s rises, while there was a continued drop in prices at the pump in May, following the huge crude price falls seen in recent months. Outside these areas, we are seeing few significant changes to the prices in the shops.”

Rising prices for food and non-alcoholic drinks helped offset the pressure from the falling oil and petrol prices in May.

What economists say

Economist James Smith explained that the UK inflation will stay below 1% this year:

“The other argument that is often made in favour of inflation returning, is that governments and central banks are pumping vast amounts of cash into the system. But this is unlikely to lead to higher prices, at least in the short/medium-term. In the case of the government, its spending has so far been solely aimed at keeping firms and consumers afloat, rather than trying to stimulate demand (which by definition, is constrained by the ongoing lockdown measures). The bottom line is that inflationary pressures are likely to remain fairly muted for the time being. This, in turn, will keep the pressure on the Bank of England to maintain its current degree of stimulus, and we expect a further £150 billion of QE to be unveiled this week.”

Chief UK economist at Capital Economics, Paul Dales, also said that "May's further fall in inflation is probably only the beginnings of a prolonged period of very soft price pressure." This he clarified, will drive MPC members to ask for more stimulus to boost the economy on the BoE’s policy meeting on Thursday.

For many businesses and consumers, the year ahead appears to be a very tough one, with more pressure on households. Businesses and employers have been hurt, and there is generally pessimism about the status of the UK economy due to the coronavirus and a possible second wave of Covid-19 cases.

If you are a business 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 transfer your funds safely, pay employees and maximise the value of your money.

The pound has regained its momentum since yesterday, after the positive news of new US Federal Reserve stimulus and the latest post-Brexit trade talks between the EU and the UK.

Sterling rose after Prime Minister Boris Johnson said yesterday that there is a "very good chance" a trade deal will be made with the EU. Both Johnson and the EU Commission President Ursula von Der Leyen agreed that there will not be an extension to the Brexit transition period, which will end on 31 December 2020. The pressure is now on both sides to agree on a post-Brexit trade deal, so the UK does not leave the bloc without a deal. If the UK leaves the bloc without a deal, then Britain will revert to World Trade Organisation terms, which will mean that the UK would have to pay high tariffs and quotas at a time when the country’s economy is dealing with the Covid-19 pandemic.

Fresh Momentum injected into the negotiations

According to Reuters, the hour-long video call on Monday between Johnson and the EU Commission’s von Der Leyen, “has injected fresh momentum” into the negotiations, as “people on both sides with knowledge of the conversation,” attested. The “EU inferred from Johnson’s contributions that he is willing to soften his position and European officials told him they are ready to do the same.” After the call, Johnson said: “I don’t think we are actually that far apart -- what we need to see now is a bit of oomph in the negotiations. The faster we can do this the better: we see no reason why you shouldn’t get that done in July.”

Obstacles Remain

Johnson’s latest communication with the EU comes after three months of trade talks which have ended in deadlock. However, things might not be completely resolved just yet, as EU Council President Charles Michel warned that the EU will not “buy a pig in a poke” as it was not in any hurry to reach an agreement. He said: “We won’t just speed up. We have to remain focused on content and consequences.” While the UK has been pushing to speed up the discussions, the EU wants to make reasonable steps, with the next discussions to resume on 29 June. Johnson explained that he is against the talks “going on until the autumn, winter, as perhaps some in Brussels would like.”

Both sides have failed to reach an agreement on a free-trade deal as well as find common ground when it comes to certain EU standards and demands regarding fishing rights and security which the UK believes are binding it to EU rules. Also, the UK continues to refuse to accept the power of the European Court of Justice to settle any disagreements between the two sides.

Pound Remains Unpredictable

With Brexit negotiations in the background, Paul Meggyesi, Head of FX Research at JP Morgan noted that the pound’s trajectory would remain unpredictable. He said: “GBP is liable to become ever-more idiosyncratic as the UK nears the business end of the entire Brexit process, the last six months of the transition period, with still a trade deal to be negotiated. This puts GBP at the mercy of unpredictable Brexit news flows, and investors should be prepared for potentially quite violent swings in GBP as the market tries to benchmark probabilities of the potential outcomes and eventually moves from valuing GBP on a probability-weighted basis to pricing a central scenario and then the eventual outcome itself.”

If you are sending money abroad and are worried about the pound’s volatility, 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 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.

On Wednesday (03/06/20), the Euro was up against the US dollar, marking its seventh consecutive day and the “longest winning streak since December 2013.” The euro’s surge is the result of investors moving away from the US dollar as well as news that the European Commission will be helping the Eurozone economy with a 750 billion euro ($826.5 billion) fund to ease the damage from the pandemic.

The Euro had a roller coaster ride the last few years. Recently, due to slower economic growth, the Euro has dropped, but there have been signs of increase as the Covid-19 pandemic hit financial markets and investors turned towards the safety of government bonds. But soon it fell again, as investors turned to safe-haven assets such as the US dollar. Since mid-March, the euro has been at its highest after the significant decrease of new coronavirus cases in the EU.

With the continued uncertainty due to the coronavirus pandemic and the ongoing Brexit negotiations, the Euro will remain sensitive. But let’s see what the main drivers of the euro in the coming months are.

Key Drivers of the Euro

Apart from the coronavirus pandemic and Brexit updates, the Euro is sensitive to releases of macroeconomic data including GDP, unemployment rates, manufacturing and services output and consumer price indices which measure the Eurozone economy’s health. Significant events such as meetings of the European Central Bank (ECB) and updates regarding policy on interest rates and fiscal stimulus, can also impact on the single currency. For example, low interest rates are unattractive to investors.

If the US Dollar rises, as the US economy strengthens and interest rates are increased by the Federal Reserve, then this will weigh on the Euro. There are also dangers from weaker global growth and a slowing of the EU member states’ economies, especially the German economy.

Last but not least, if the Chinese economy slows and China’s trade is reduced, then there will be less demand for European imports.

European Commission forecast for the Eurozone economy

In its Spring 2020 Economic Forecast, the European Commission reported that the coronavirus pandemic will have “very severe socio-economic consequences” for the global and EU economies. It has forecast that “the euro area economy will contract by a record 7¾% in 2020 and grow by 6¼% in 2021. The EU economy is forecast to contract by 7½% in 2020 and grow by around 6% in 2021. Growth projections for the EU and euro area have been revised down by around nine percentage points compared to the Autumn 2019 Economic Forecast.”

Paolo Gentiloni, European Commissioner for the Economy, said: “Europe is experiencing an economic shock without precedent since the Great Depression. Both the depth of the recession and the strength of recovery will be uneven, conditioned by the speed at which lockdowns can be lifted, the importance of services like tourism in each economy and by each country's financial resources. Such divergence poses a threat to the single market and the euro area - yet it can be mitigated through decisive, joint European action. We must rise to this challenge.”

Economists’ Predictions in the near- and long-term

According to Citibank, “Second waves of crisis, trade wars and the ECB’s future reaction will likely keep EUR soft near term and upside capped medium term despite a lot of bad news in the price.”

In the long-term, analysts at CIBC expect the Euro to rise: “While euro sentiment remains compromised by the lack of political coherence, we’ve seen the ECB taking action by expanding its balance sheet. However, that move has been dwarfed by the additional supply of USD currently being injected into the market, which remains supportive for the EUR/USD pair.” They added that positive fund flows as a result of the Eurozone current account surplus will benefit the euro, despite political uncertainty.

Natixis Research expects Eurozone inflation to return in 2021 due to the “decline in productivity and the increase in unit production costs due to the new health standards taken because of the coronavirus pandemic.” In turn, the increase in inflation will lead to a rise in long-term interest rates which will support the euro.

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The British Pound has fallen against its major peers as investors believe that the trade negotiations between the EU and UK will collapse and result in a no deal Brexit.

David Frost, the UK's chief negotiator, said to Parliament’s Brexit committee that the EU needed to change its position in order to reach an agreement that suits both sides. He told committee chairman Hilary Benn: “It’s their call.”

He also reminded MPs that the government did not intend to extend the transition period. As a result, the pound dropped, with the chances of a soft Brexit now looking increasingly slim. Frost said that Prime Minister Boris Johnson will be meeting in June with leaders in Brussels to try and push trade negotiations along.

Reiterating the rhetoric of hard Brexiters, Frost said that the EU was still grappling with the issue of Brexit: "The EU is still coming to terms with the fact that there's a large country in Europe that doesn't want to be part of the EU's structure in some way, or to work on EU norms, or to relate to the EU as the reference point of its activity.” However, as a Financial Times article put it, it is Brexiters who “still do not understand Europe,” arguing that the UK is “owed” privileged access and that Europeans are treating them “beastly.”

Pound to react to no-deal Brexit

Erik Norland, Executive Director and Senior Economist of CME Group, said that the pound fell against both the Euro and the US Dollar as the two sides reached an impasse regarding the “lack of progress on issues ranging from fishing rights to business-competition regulations." Norland highlighted the pound’s volatility in regards to Brexit:

"Since the referendum, GBP has tended to rally when it looked like a deal was close (+21% versus USD into early 2018 as then Prime Minister Theresa May held negotiations) and tended to sell off when Brexit appears to be headed towards the “no-deal” scenario (-16% when May’s deal was repeatedly defeated)."

He clarified that as we move into the next round of negotiations, GBP options markets are more tilted to the downside. He added: "Moreover, most of the recent spikes in both implied volatility and risk reversal have been motivated by concerns over the progress of Brexit negotiations. The one exception occurred during an incipient dollar-funding crisis in mid-March. After the U.S. Federal Reserve stepped in, that issued was resolved quickly.”

Brexit

As economists attest, the British currency’s volatility will continue and is expected to remain reactive to Brexit headlines, especially through June when the deadline for the UK and the EU to agree to extend the Brexit talks is due. The markets will react favourably to an extension, while the possibility of an impasse and no extension to the December transition deadline will lead to a drop in the pound.

The pound is also expected to react to next week’s final round of negotiations.

As we move closer to Brexit deadlines and Brexit-related news, the pound will continue to be sensitive. If you are worried about currency exchange and the value of the pound when transferring your hard-earned money overseas, get in touch with Universal Partners and their dedicated foreign exchange specialists. You can discuss your currency needs, get the best exchange rates and navigate the uncertainty that lies ahead. Do not let Brexit impact your currency transfers, maximise your currency potential with UPFX.

The uncertainty caused by the coronavirus pandemic has certainly affected exchange rates and increased currency volatility. However, the US Dollar is a safe-haven currency, like CHF and JPY, which means traders have turned towards the USD during the crisis, causing it to move higher. In the short term the outlook for the USD appears to be positive. In the long term, though, the currency is seen as dropping, according to recent analyses. But let’s see more closely what is happening to the USD.

Short-term outlook

For many economists, the buying of safe-haven currencies due to the coronavirus will continue in the coming weeks and will strengthen the dollar. Already, the greenback has been steadily rising through 2020, but rose even higher, outperforming its major peers as global governments struggled to contain the virus, enforcing strict lockdown measures that have unavoidably hurt their economies.

Eventually though, in the longer term, the dollar will decline, according to Georgette Boele, senior FX strategist at Dutch investment bank ABN AMRO. Referring to the dollar’s outperformance, Boele said: "Do we expect this trend to continue? In the near-term (up to 3 months) yes, on the longer-term no.” The dollar will possibly rise higher, the Dutch bank predicts, because traders are overoptimistic about how quickly global economies will recover. Once it is realised how badly global markets have been hit, another wave of selling riskier assets and buying “safer” ones such as the USD will be triggered. As Boele explains: "There is an enormous gap between the economic reality and what analysts forecast, on the one hand, and the optimism among investors for the second half of this year, on the other. This should support the U.S. Dollar as most liquid safe haven currency.”

For Boele, the Dollar will find support in the short term if there is a second wave of coronavirus cases, as investors turn again to safe havens.

Additionally, in terms of Sino-American tensions, any increase of anxiety regarding geopolitics will favour the USD.

While the dollar will not be falling any time soon, it is possible that with the easing of the lockdown measures and the risk of a global recession being averted, the greenback might experience downside pressure. 

Long-term outlook

This is why, as Boele asserts: "After macro and earnings disappointments in the next few months, later this year investors could start to look forward to a strong and durable recovery in 2021. Therefore, over the medium term, investors will shy away from safe haven currencies such as the US dollar and Japanese yen and be open for alternatives.”

As economic conditions improve, the dollar could possibly lose momentum. The US Federal Reserve’s QE programme which has increased dollar supply to respond to the coronavirus pandemic will also add to the dollar’s potential woes. Boele said: "Because of the unlimited QE by the Fed, there is already some more confidence in financial markets. As soon as safe haven demand fades, the Dollar will decline. The QE is simply too large for the Dollar to ignore.”

How UPFX can help

If you are selling or buying dollars and are concerned with transferring your hard-earned money, then you can reach out to Universal Partners FX. Their dedicated foreign exchange currency specialists can offer valuable insights into the markets and tailor their services to your specific needs, protecting your funds from unpredictable currency movements. If you want to discuss your FX needs or make a transfer, please get in touch with Universal Partners FX.

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.”

If you are sending money abroad and are worried about currency volatility due to the current economic conditions, please get in touch with Universal Partners FX. UPFX’s dedicated foreign exchange specialists can help you access bank-beating exchange rates and transfer your funds fast and securely.

Brexit has been instrumental in the pound’s trajectory, responsible for its collapse and slow recovery. The coronavirus pandemic comes to add more pressure to the pound due to the lockdown measures and the ensuing adverse economic effects.

In the short term, as the UK grapples with the threat of Brexit and the coronavirus, the outlook looks extremely negative. But, how will the pound fair in the long term?

What’s happening now?

Sterling has been hit by Brexit and the coronavirus crisis, with the latter making its effects on the British currency very clear in mid-March, when the GBP plunged to levels not seen in 35 years with anxious traders turning towards safe havens such as the greenback. Until the pandemic is over, analysts predict that the pound will continue to be weak. At the moment, Sterling will remain reactive to headlines concerning the pandemic which has triggered the deepest decline in economic activity since 1929.

Indeed, things have changed a lot since last December when traders felt optimistic about Boris Johnson’s decisive victory in the general election, with many expecting significant progress in the Brexit talks and positive economic data.

Now, with the transition period due to expire at the end of the year and the government saying that it will not ask for an extension, the reality looks different, with the possibility of leaving without a deal posing a real threat to the pound’s future. This means that the UK could fall into a recession as economists have warned.

Short-term predictions

Georgette Boele, Senior FX Strategist at ABN AMRO has said: "In the near-term we expect another wave of risk-off in financial markets as markets are in our opinion too optimistic currently on the speed and strength of economic recovery." Boele added: “There is an enormous gap between the economic reality and what analysts forecast, on the one hand, and the optimism among investors for the second half of this year, on the other. This should support the U.S. Dollar as most liquid safe haven currency."

Long-term predictions

Following Brexit, the forecast for the pound has been dire.  As Brexit troubles are not over yet, and as the coronavirus continues to inject fear in investors, the long-term outlook for the pound is definitely bearish.

Since the June Brexit referendum, consumers have underpinned Britain’s economic expansion as businesses stopped investing. Despite the fall in the pound, consumer spending has grown since the vote, and with many businesses now closed due to the coronavirus, understandably, there are concerns for an economy so reliant on consumption.

With the economy hurt due to lockdown restrictions and a lack of exit strategy, the pound will be under pressure for the long term.

GBP: Investors turn bearish

In the Financial Times article “Investors turn bearish on the pound,” Philip Georgiadis writes that investors are anticipating further falls for the pound and have “increased their bets against the UK pound to the highest level of the year, raising the spectre of a new bout of volatility for the currency.” According to the article, “fund managers and other companies betting in the futures market have turned bearish as concerns over Brexit rise in parallel with the damage the coronavirus pandemic is causing the UK economy.”

Similarly pessimistic is Rabobank which says: “Additionally, insofar as no real progress was made on the last round of post-Brexit talks between the UK and the EU and given that the summer deadline for any request for an extension to the transition phase is looming, it is difficult to be optimistic on GBP.”

Analysts at Danske Bank also find that in the coming months the pound will remain under pressure as “Time spent fighting the coronavirus by both the UK and the EU means less time to negotiate a deal before the end of the year, increasing the risk of a big trade shock by 1 January 2021.”

While overly optimistic valuations might fall to meet reality and as such drive the pound lower, there is also the possibility of the British currency strengthening as the global outlook improves. Sterling’s weakness due to global uncertainty could be reversed as nations successfully fight the virus and recover.

What is certain, is that there are no certainties and the pound could easily come under pressure as optimism withers.

How UPFX can help

If you have a Sterling transfer, wish to better understand the market outlook or want to discuss your FX needs with a foreign exchange currency specialist, please get in touch with Universal Partners FX.

With UPFX you can save money on your international currency transfers, access competitive exchange rates and a dedicated customer service.

The UK economy has shrunk sharply in the first quarter of 2020, according to the Office for National Statistics (ONS). Sterling fell initially, but then stabilised after the British government extended its furlough scheme until the end of October.

GDP

GDP fell 2.0% fall in the three months to March after there was no growth in the three months to February. Particularly, March was a terrible month for the economy, as the GDP dropped by 5.8%, marking the worst performance since the ONS started calculating monthly data back in 1997.

While the UK economy before the Covid-19 lockdown was not faring well, contracting by 0.2% in February, as the coronavirus pandemic started, in March, however, it suffered dramatically. The drop in the first three months is considered to be the biggest quarterly drop in activity since 2008 after the collapse of the Lehman Brothers and the beginning of the global financial crisis.

Yesterday, chancellor Rishi Sunak warned that the UK recession was “already happening”, and that things will not improve in the near future. Last week, the Bank of England forecast that the UK economy might contract by 25% in the April-June quarter, which could be the deepest recession in three centuries.

Decline in Services, Manufacturing and Construction

The ONS reported that in March, with the beginning of the lockdown, the GDP contracted by 5.8% with the services sector shrinking by 6.2% during March, manufacturing output dropping by 4.6% during the month and construction contracting by 5.9%.

The Office for National Statistics explains that there is a close connection between the lockdown measures and the drop in economic activity:

In response to the coronavirus (COVID-19) pandemic, public health restrictions and social distancing measures have been put in place in the UK, leading to a widespread disruption to economic activity. These measures have impacted upon the spending behaviours of consumers as well as how businesses and their employees operate. It has also affected the provision of services provided by government, including health and education.

Services output decreased by 1.9% in Quarter 1 (January to March) 2020, the largest quarterly fall since records began. Production output fell by 2.1% in Quarter 1 2020, driven by declines in manufacturing. Construction output decreased by 2.6% in the first quarter.

According to Jonathan Athow, deputy national statistician for economic statistics, in March, the coronavirus pandemic hit the economy hard, with certain industries such as services and construction declining sharply and others, such as IT support and pharmaceuticals seeing growth.

Key points from the release:

The release reflects the dire effects of the coronavirus pandemic and the economic disruption to various sectors. March was the worst month as education fell by 4.0% due to school closures, wholesale and retail trade and repair of motor vehicles and motorcycles by 10.7%, food and beverage service activities by 7.3% and accommodation by 14.6%. The travelling sector was also hit falling by 23.6% while transport equipment-making declined by 20.5%.

What economists say:

Talking on Sky News, Sunak said that the government was positive and could “emerge stronger” on the other side. He said: “In common with pretty much every other economy around the world we’re facing severe impact from the coronavirus. You’re seeing that in the numbers. That’s why we’ve taken the unprecedented action that we have to support people’s jobs, their incomes and livelihoods at this time, and support businesses, so we can get through this period of severe disruption and emerge stronger on the other side.”

However, Tej Parikh, chief economist at the Institute of Directors, fears that Britain will not “emerge stronger” from the lockdown as he believes that UK firms will remain under pressure:

While countless companies have made adjustments with admirable speed, many will find it difficult to operate at anything like normal capacity under social distancing rules. The furlough scheme has undoubtedly staved off redundancies, and the new flexibility provides businesses a better chance of rebooting.

The Treasury will need to continue innovating to kickstart any recovery. The Government’s loan scheme provided ready cash, but now leaves many firms saddled with debt. Unless this is managed well, it will drag on business investment for long after the lockdown ends.

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.

British businesses conducting international trade and transferring their funds cross border regularly are increasingly worried about Brexit and the UK’s future relationship with the EU. Boris Johnson has been warned that the current trade talks are failing and that he needs to press the European commission president, Ursula von der Leyen, and EU governments to focus their attention on the negotiations in order to reach an agreement with the British government.

The prime minister has returned to Downing Street on Monday, and he needs to act fast in order to rescue the negotiations before 31 December when the UK will leave the single market and customs union. Both the British government and the EU have agreed that they need to see progress by June, while the UK government has said that there is a possibility to leave the EU without a deal.

The two sides will be meeting again on 30 April. The UK’s chief negotiator David Frost has rejected an extension of the transition period as the government is confident that it can agree on a free-trade deal.

The prospect of no-deal Brexit

However, the prospect of leaving the EU without a deal has become even more real as there are only two rounds of video-conference talks left, while senior figures from both sides agree that delivering a deal is now highly unlikely. An EU official has also noted the added problems of having to communicate online: “You don’t see all the faces of the people around the table; you don’t see the body language, you cannot have discussion in the margins. But having said that, this is how we are working now; we need to make the best of it.”

Last week’s talks have not been progressing successfully either, as there was disagreement between the EU’s chief negotiator, Michel Barnier, and his British counterpart, David Frost. Barnier pointed out that UK officials failed to engage and instead “listened politely” to the EU’s proposals. As he said: “I regret it, and this worries me.” According to the UK, despite their commitments to maintain high standards, the EU rejected proposals regarding the removal of certain trade barriers. Additionally, the UK disagrees with the central role that the European court of justice will play in dispute settlements.

In regards to the issue of Northern Ireland, there are concerns whether the UK will implement the Northern Ireland protocol  in the withdrawal agreement in order to avoid a hard border in Ireland and maintain checks on goods travelling from Britain to Northern Ireland. An EU official said: “You need to have customs checks on goods arriving in Northern Ireland, veterinary controls, a VAT system needs to be put in place.”

UK government not seeking an extension

The UK government has warned EU leaders that they need to change their position if there is going to be a post-Brexit trade deal. The PM believes that there will not be an agreement unless the EU recognises the UK as “an independent state.”

Michael Gove, Cabinet Office minister, has also told MPs that the government will not seek an extension to the transition period, which ends on December 31. He said that extending the period will only force Britain to make a financial contribution to the EU budget which “could be spent on our NHS.” He added that the EU has failed to recognise the UK’s unique status and instead has treated Britain “like the Ukraine,” as if it were a country seeking closer relations with the bloc.

 

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