The never-ending lockdown in the United Kingdom is an extreme measure to fight against the pandemic. Pictet Wealth Management, one of the most respected investment names in the industry, has just cut the 2021 GDP growth for the United Kingdom to 5.5%. The main reason – the new virus variant.
When the United Kingdom first warned the world about the new variant and renewed lockdown, the vaccination efforts increased exponentially. After a spat with the European Union on vaccine deliveries, it seems that all parties are ready to cooperate for the common goal – defeating the pandemic as soon as possible.
However, the new lockdown triggers a downgrade on the Q1 and Q2 economic expectations. More precisely, the growth projections are likely to be much worse than expected. Furthermore, the more the lockdown is prolonged, the deeper the hole the economy must dig its way out of.
The British Pound Ahead of the Bank of England’s Decision
Besides the NFP report on Friday, which matters for the FX market in general, the Bank of England’s decision on Thursday will be closely monitored by GBP traders. The recent downgrade in economic projections comes at the end of a stagnant trend in productivity in the United Kingdom. The fiscal support from the U.K. government is meant to keep businesses afloat in the short term but may harm productivity in the long run.
Markets and the GBP trade in expectations of vaccination efforts to be enough to crush the pandemic. That may be correct and hopefully so, but the economic performance in the meantime may have a tremendous impact for the years ahead. One thing we should all keep in mind is that the COVID-19 pandemic so far masks the effects of Brexit. Once the pandemic is behind, we may see the true impact of the Brexit phenomenon on the British economy.
Moving forward, just like in other developed economies, the high savings are expected to decline once the economy reopens. The plan is to reach a critical mass vaccination point by the summer and then, with the gradual economic reopening to see a rise in consumer spending. However, things do not happen overnight, and the planning implies that everything goes smooth, without delays or anything unexpected.
The sooner the United Kingdom reaches herd immunity, the faster its economic recovery will start. The economic healing is equally important as crushing the pandemic is.