The success of the vaccination program and the reopening of the economy bode well for the post-pandemic recovery in the UK. The country is enjoying momentum that will need to be sustained in the face of longer-term political and economic challenges that will be influenced by Brexit and relations with its major trading partners.
Europe’s most successful vaccination program has turned the UK’s economic outlook upside down this year. In 2020, the country experienced the worst death rates and Covid-19 contamination in Europe and its economy contracted by nearly 10%. More than half of the British population is now vaccinated with at least a first dose, surpassing Germany’s 32%, France’s 26% and Switzerland’s 23%.
A few weeks after coming out of its third lockdown, the UK plans to fully reopen its economy in June. The Bank of England (BoE) now expects the UK economy to grow 7.25% in 2021, with unemployment peaking at 5.4%, compared to its previous forecast. by almost 8%. UK household spending fell by more than 10% last year, leaving around £ 200bn in the pockets of consumers. If this spending were now realized, it would create the biggest spending boom in Britain in more than three decades.
As a result, the BoE estimates that the UK will return to pre-pandemic economic levels at the end of 2019 this year. This is a quarter earlier than previous estimates and a faster recovery than expected GDP growth for the European Union, which is 4.0% for 2021. Of course, it should be remembered that an economic reopening can only provide a single boost to growth. High-frequency data, which measures an average of indicators including mobility, business activity and export and import data, shows the UK economy is recovering faster than its EU neighbors ( see graphic, attached page 2).
The upward revision of the BoE’s forecast is the first step in adjusting its monetary policy, increasing the likelihood of higher borrowing costs by mid-2023, from the current historically low level of 0.1%. In line with market expectations, the BoE also reduced its bond purchases by GBP 1 billion, to GBP 3.4 billion per week. The central bank is still committed to buying GBP 150 billion of bonds during the year 2021, while keeping rates low.
Even though this is the fastest recovery since 1945, following the biggest slowdown since 1709, BoE Governor Andrew Bailey stressed that it nevertheless represents nearly two years of economic growth lost.
In the longer term, the UK faces a growing budget deficit as tax revenues fell during the pandemic, along with declining economic growth, and the government stepped in to support the economy. As a percentage of gross domestic product (GDP), UK government borrowing reached 16.5% in 2020, the third highest rate among advanced economies, behind the US and Canada, according to Monetary Fund forecasts international. The UK’s Office for Budget Responsibility projects the country’s deficit to reach £ 355 billion for 2020/21, or 17% of GDP, “? A peacetime record?” according to his March statements.
Since the transitional trade agreements ended on January 1, 2021, trade flows have slowed. Data for February, the latest available, shows the UK exported goods worth £ 11.9 billion to the EU and imported £ 16.6 billion. By comparison, the UK exported goods worth £ 14.8 billion in February 2019, ahead of Brexit and the 2020 transition period, and imported goods worth £ 23, £ 4 billion.
Many of the Brexit issues have been specific or regional. Problems remain in sectors such as dairy and fish exports, as well as delays in trade between Britain and Northern Ireland, which shares the country’s only land border with the EU. The possible costs or benefits of the divergence between UK and EU standards after Brexit will only become clear when the pandemic has passed.
At the same time, tensions continue. The latest disagreements over access to the fishing grounds surrounding Jersey, a British Crown dependency 22 kilometers from the French coast. Last week, the British and French governments both dispatched military vessels to settle a dispute over access to fishing rights. The friction, which coincided with the biggest election in the UK since the legislative elections in December 2019, exploded in one day, after a demonstration by French fishing boats.
The results of the EU referendum more than five years ago have reignited political debate on fuller independence for Scotland or Wales and discussions on the future of Northern Ireland.
In last week’s UK elections for the Scottish Parliament, the Welsh Assembly, 143 English councils, a series of city mayors and a Member of Parliament from Westminster, around 50 million people were eligible to vote. The Conservative government strengthened its parliamentary majority, winning a seat previously held by Labor.
In the Scottish Parliament in Edinburgh, the Scottish National Party (SNP) won 64 seats, a majority seat. However, if we include the eight seats of the Greens, the supporters of independence have a majority of 15 seats in this chamber which has 129. While the SNP claims a mandate for a second referendum on independence , both sides in the debate agreed that the pandemic is the priority for now. Therefore, another independence referendum does not pose an immediate political risk, but the pressure for a vote will intensify throughout 2022.
Outlook for UK assets
The strength of the recovery in the UK is a direct result of the rapid roll-out of the vaccination campaign. The momentum identified last week by the BoE’s outlook now hinges on political support and the vision of a revived economy, based on resuming trade relations with its closest markets and the rest of the world. In the medium and long term, the risk to economic dynamics includes the threat of even deeper political upheaval.
Political risks will trickle down to currency markets, with any instability translating into weakness of the British Pound against the Dollar and the Euro. Given its stock market focused on “value” stocks, we favor UK equities, which should benefit from improving global trade. and that sectors such as banking and energy are catching up with the cyclical rebound.