KPMG’s latest quarterly economic report has stated that the continued coronavirus epidemic will push the UK into a deep recession. Businesses have already closed their doors and consumers are limiting themselves to the purchase of essential goods only. The report predicts that the UK will suffer a GDP drop of 2.6% this year if the government gets control of the problem in the coming weeks, but if the pandemic stretches over the summer, the UK economy could contract by 5.4% in 2020. “It is now almost certain that the UK is slipping into its first significant downturn in over a decade,” said Yael Selfin, KPMG’s UK Chief Economist.
The Bank of England made a second emergency move to cut interest rates to an all-time low of 0.1% last Thursday, with the added promise of £200bn in quantitative easing to help counter the financial turmoil. This follows an emergency 50 basis point cut earlier in March. Rishi Sunnak, the new Chancellor has introduced an unprecedented scheme, which could cost billions as the government step in to cover wages. One estimate puts the cost of the Chancellor’s promise at £4.2bn just for the first 3 months. However, with pubs, clubs and restaurants forced to close on Friday and the country forced to bring contact with others to a minimum, the UK is now on lockdown.
The European Central Bank (ECB) has also launched its own asset buying programme, the Pandemic Emergency Purchase Programme, with a €750bn spend this year. Interest rates are already at 0% in the eurozone, limiting the ECB’s monetary capability but recently appointed president, Christine Lagarde said the ECB will go further, and it will likely need to.
GBPEUR has been highly volatile with 1-2% daily movements becoming more common. The pound sunk to a new low as GBPEUR interbank market touched 1.0533 last Thursday, a level not seen since the 2008-2009 global financial crisis. Sterling has recovered a little but is still trading approximately 8% lower than one month ago and with ongoing events, volatility is likely to remain high.
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