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Pound falls as lockdowns and Brexit disruption stifle UK economy

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Tom Belger
·Finance and policy reporter
·3-min read
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United States dollar bills and UK pound sterling coins.
The pound dipped against the dollar and euro on Monday. Photo: PA.

The pound dipped against the dollar and euro on Monday, amid a deteriorating outlook for the UK economy as coronavirus restrictions and Brexit stifle firms.

It came as a poll of polls suggested UK business output continued to decline in December, typically a busier season for firms in the run-up to Christmas.

COVID-19 restrictions were also less widespread than in November and at present under a tiered system of regional curbs. Economists have predicted a double-dip recession with the UK back in a strict lockdown.

Kaley Crossthwaite, partner at business advisory firm BDO, which carried out the survey said the figures reinforced “just how stark the economic impact of the pandemic has been.” BDO’s data is based on analysis of leading UK business surveys.

Another survey by the Federation of Small Businesses (FSB) suggests around 250,000 small firms expect to shut altogether this year as the pandemic ravages trade.

The UK government is reported to be considering tougher restrictions as COVID-19 hospital cases hit a fresh record high in England and the UK death toll passed 80,000 over the weekend.

The pound dipped on Monday (11 January) against the dollar. Chart: Yahoo Finance UK
The pound dipped on Monday (11 January) against the dollar. Chart: Yahoo Finance UK

It has vowed to vaccinate 15 million of the most vulnerable people by mid-February and every UK adult by autumn. Seven mass vaccination centres were due to open their doors on Monday.

Many firms face disruption not only from the lockdown but also from the overhaul of UK and EU trade rules at the start of the month as the Brexit trade deal came into full effect.

READ MORE: UK factories’ fears over Brexit trade disruption

A survey by manufacturers’ organisation Make UK suggests almost half of its members are worried about customs delays, seeing them as their biggest risk. Another 39% say the increased costs of complying with regulation are the biggest risk they face, and 14% are worried most about major customers relocating outside the UK.

Sterling was trading 0.5% lower against the dollar (GBPUSD=X) at $1.35 and 0.3% lower against the euro (GBPEUR=X) at €1.107 in early trading on Monday morning in the UK.

The pound started the year at its highest level against the dollar since 2018 in the aftermath of the UK-EU trade deal being signed. But ING analysts said in a note the UK’s third nationwide lockdown had built up expectations of fresh monetary stimulus by the Bank of England, which “offsets the positive effect” of the deal.

Watch: Why can’t the government just print more money?

“The potential for the monetary policy committee (MPC) to reduce Bank Rate below zero will be in focus this week, with MPC members Tenreyro and Broadbent set to speak on Monday and Tuesday, respectively,” wrote Pantheon Macroeconomics chief UK economist Samuel Tombs in a note.

“Investors see little chance of immediate action from the MPC, but are pricing in a 10bp decline in Bank Rate, from its current 0.10% level, by the committee’s meeting on August 5.

“The double-edged nature of taking Bank Rate below zero, however, suggests that the MPC will use its other tools instead.”