The Great British Vaccine Trade Is Here to Stay
(Bloomberg Opinion) -- It’s a mighty slow burn but the pound keeps edging up against the euro, and there are plenty of sound economic reasons why that should persist.
The speed of the vaccine rollout in the U.K. is undoubtedly impressive, with more than 7 million shots administered, and its potential release of the domestic economy from repeated lockdowns could be just as seismic. No wonder the European Union seems increasingly troubled by its own comparatively dismal vaccine performance. There’s still a long way to go, and the U.K.’s decision to space out its doses is untested, but this wasn’t the way things were meant to turn out post-Brexit (at least in Europe’s view).
Admittedly the U.K. is coming from a darker place than its continental cousins, both in terms of deaths and the economy. The country stumbled into a deep hole during the first pandemic wave last spring, when output was hammered and retail sales fell harder than in most industrialized nations. Britain’s gross domestic product probably fell nearly 10% last year. But the scope for bouncing back is considerable, even if the country’s borders were kept shut to try to contain any other new Covid variants.
The flipside of last year’s consumer retrenchment is about 150 billion pounds ($206 billion) of household savings that are just sitting there. Given the chance, the British consumer could roar back.
Deutsche Bank AG analysts reckon ongoing travel restrictions could create another domestic tourism boom. The third quarter of 2020 saw an extremely rare event as Britain’s long-entrenched current account deficit in tourism — meaning U.K. travellers usually spend more abroad than foreigners spend on trips to Britain — actually turned positive. Staycations may be the only practical option for holidaymakers this summer, further boosting the domestic economy and the current account balance with it.
Neatly, there’s another 150 billion-pound war chest — sitting at the Bank of England — ready to be deployed on further emergency government bond buying. More fiscal spending has also been lined up by Chancellor of the Exchequer Rishi Sunak, including extensions to pandemic support schemes.
With the national lockdown still in place, one mustn’t get carried away. With a steep dip to 38.8, well below the 50 growth line, the January services sector purchasing-managers survey still looks bleak. But Dan Hanson of Bloomberg Economics expects a first-quarter GDP drop of 4.5% to be more than reversed by a 6% gain in the spring. This could be revised higher if the current vaccine pace is maintained or hastened — and the single-dose regime works — allowing the domestic economy to reopen early.
As ever in the U.K. economy, consumer sentiment will be the determining factor: Can retail sales prevail against the twin headwinds of the pandemic and Brexit?
As for the pound versus the euro, any currency pair is a beauty contest and three main factors drive valuations: relative economic growth, interest rate differentials and current account balances. On the first factor, the euro area economy weathered the 2020 crisis rather better but 2021 is shaping up differently. Europe’s slow start to vaccine distribution may be a major handbrake on a strong recovery. Gaining access to supply will be crucial.
On the second factor, the Bank of England has so far wisely resisted dipping into negative territory, leaving clear blue water between it and the European Central Bank. On the third, Europe has a big current account surplus and Britain a deficit, but any change in the balance — from domestic tourism, for instance — would support the pound.
The EU did agree a 750 billion-euro pandemic fund last summer, but it won’t start being distributed until later this year and may well prove inadequate. The ECB’s 2021 growth estimate of 3.9% looks optimistic.
Sterling is still fundamentally cheap versus a fully valued euro after five long years of British political turmoil. Securing a Brexit trade deal may have been more of a damage limitation exercise for Boris Johnson but it’s hard to evaluate the economic effect with shuttered economies on both sides of the channel. Still, an earlier lockdown release courtesy of widespread inoculation should give the U.K. a head start in 2021, especially if that stays the BOE’s hand on negative interest rates. A positive rate differential would further fuel sterling’s gains.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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