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The coronavirus pandemic, which started in China in December 2019 has spread. At the time of writing, the number of cases in the UK has passed 19,500, whilst the death toll sits at 1,228. The government has taken action to protect the public and the UK economy has come to a standstill.

In order to under the effect of coronavirus on the Pound, it is important to understand its impact on the UK economy and what action the Bank of England and the UK government are taking to cushion the blow of the impact of the virus on the economy.

What’s the coronavirus impact on the economy?

The British government has put the UK on lock down. Schools are closed, people must work from home, businesses in the service sector, which accounts for around 80% of UK economic activity have been temporarily closed, as have non-essential manufacturers. These measures that the government has put into place to protect people from the virus have strangled the economy, causing demand for goods and services to evaporate, as people stay in their homes. The demand shock is causing the UK economy to grind to a halt.

Data is starting to show the initial impact of the coronavirus outbreak on the UK economy. Business activity crashed at a record pace in March, putting the UK on track for a record recession. The IHS Markit purchasing managers index (PMI) for March plunged to a record low of 37.1, down from 53 in February. The figure 50 separates expansion from contraction. This data was compiled before the lock down meaning that the statistics are going to get a lot worse before they improve.

With demand at a standstill companies are looking to rein in costs quickly in an attempt to stay afloat. In just 9 days to Wednesday 25th March, according to the government ‘s Department of Work and Pensions Secretary, 477,000 people made clams for the UK’s main benefit, universal credit. This was sufficient to lift the jobless rate to an estimated 5.3%, the highest level since September 2015.

Investment firm Normura forecast that the unemployment rate will shoot up to 8% in the second quarter, up from 3.9% in January. This would mean that an additional 1.4 million people will be out of work, taking the total to 2.75 million. When people lose their job or fear losing their job, consumer confidence falls, and they tighten their purse strings. This is bad news for the economy, especially as it so dependent on households’ spending

Normura, in line with other investment banks, predicts that the UK GDP will plunge -13.5% in the second quarter of this year. To put this figure into perspective, it is over 6 times greater that the biggest quarterly fall during the financial crisis. However, economists are also in agreement that the economy should bounce back in the second half of the year, thanks in part to steps taken bu the Bank of England and the British government.

In conclusion the economic hit from coronavirus is expected to be vast and a deep recession is expected. However, recovery in the second half of the year is also forecast.

UK Economic plans against coronavirus

Both the Bank of England and the UK government have stepped up, announcing unprecedented levels of monetary and fiscal stimulus. The BoE has slashed interest rates to the lowest level in its 325-year history at 0.1%. The central bank has also ramped up money printing operations to ensure that plenty of credit can reach banks and businesses to keep them afloat. Currently the quantitative easing scheme has been expanded to £645 billion. The central bank said that it is prepared to do more if needed.

Meanwhile the Chancellor of the Exchequer, Rishi Sunak, announced the government’s bailout for the economy in stages, starting with the Budget on 11th March and followed by more measures to cushion the economic blow of the coronavirus outbreak on the UK economy. Rishi Sunak has announced a series of unprecedented and open-ended measures to support workers and businesses impacted by the coronavirus outbreak. These measures include:

  • The government will cover up to 80% of wages for companies to keep workers on, up to a maximum of £2,500.
  • The government will cover up to 80% of self-employed previous workers’ previous income, up to £2,500.
  • VAT bill can be deferred to the next quarter.
  • Housing benefits will get a £1 billion boost.
  • Homeowners can take a three-month mortgage holiday, this has also been extended to buy to let mortgages. There is a three month ban on evicting renters.
  • A £30 billion fiscal stimulus boost from the Budget.
  • Government backed loans to the tune of £330 billion, to aid struggling companies. This equates to around 15% of GDP. The Treasury has confirmed that it is willing to boost this by as much as needed.
  • The retail sector was already struggling ahead of the coronavirus outbreak owing to lingering Brexit uncertainty. With shops now temporarily closing, fears are growing that many retailers won’t survive without government support. In order to support this struggling sector, the government announced a £20 billion package for businesses, including a 12-month business rates holiday for firms in retail, leisure and hospitality sectors. The government also announces £25,000 grants for smaller companies.

These announcements are aimed at seeing the UK through an extraordinarily tough period. However, the measures also mean that the UK will borrow at least £200 billion, minimum this year. UK net debt will also breach the £2 trillion level.

How does coronavirus affect the Pound?

The Pound was hovering around $1.30 at the start of the year. When the coronavirus outbreak escalated in the UK, GBP/USD plunged to 35 year low of US$1.1411 in the space of 10 days.

Against the Euro, the Pound was trading at €1.1650 at the beginning of March. However, the Pound plunged to an 11 year low of €1.0614 in the space of 2 weeks as investors attempted to price in the impact of the virus on the UK economy.

The Pound lost ground as investors fretted that initial action taken by the BoE and the Treasury was insufficient.

The Pound rebounded against both the Euro and the US Dollar over the past week as the government pledged more measures to support the economy and as the BoE announced that it stands ready to do more. Usually such a dovish stance from a central bank would weigh on a currency. However, on this occasion it is bringing confidence to market participants. The authorities are saying that they will do whatever it takes to keep the UK afloat.

Pound will want to see the coronavirus numbers improve before buyers return to sterling in a meaningful way. Signs that the lock down is coming to an end will and that consumers are still prepared to spend will help. This could take a few weeks. Until then volatility in the Pound will remain high.

Conclusion

The measures implemented by the government to protect the public from coronavirus have caused the UK economy to almost grind to a halt. The BoE and the UK Government has taken unprecedented steps to shore up the UK economy from the hit that coronavirus will bring. These measures have helped the Pound pick up off a 35 year low versus the US Dollar.

Volatility in the pair is set to continue. Pound investors will be looking for improved coronavirus figures before the Pound advances further. The peak in the UK is still expected to be around 2 weeks away.