More QE From the Bank of England to Support the UK Economy in 2021

If there is one thing traders notice at the start of the new trading year, it is the lack of Brexit headlines. One of the most challenging negotiations in history ended with both parties compromising over something.

On the one hand, the European Union lost one of its oldest allies and friends – not to mention a huge market and a powerful economy. On the other hand, the United Kingdom lost access to the largest single market in the world. Nowadays, to travel to the European Union, one needs a visa. Also, to import something from a European country, one needs to pay customs duties. Oh well.

Despite everything, though, life goes on. The challenges for the Bank of England and the UK economy are just starting. 2020 has been a difficult year for every country due to the coronavirus pandemic. The UK suffered even more because of the Brexit messy divorce. As such, the virus left a huge hole in the UK output. The economy is projected to recover in 2021 and 2022, but it all depends on how the virus is contained and how the vaccination efforts are going.

Policy Support Remain Crucial

The UK media is already full of stories about businesses having a tough time after Brexit. For example, businesses that used to export to the European Union now require their counterparty, the European client, to fill some extra forms for the export to be underway. Why would a customer from Europe do that, when it could simply turn back to the British company and import from a European Union competitor? British quality – would be an answer. But if it was quality and not the price we were after, then why almost all products are made in China? The cost, hence, the final price, prevails.

Without stimulus, the British economy cannot stand on its own two feet. The Bank of England is expected to announce another round of quantitative easing this year, and maybe even to move the interest rate in negative territory.

In the second quarter of the previous year, the UK’s GDP contracted a whopping 19.8% – one of the worst declines in the world. It did bounce back in the following quarter, growing by 15.5%, but overall output remained well below (attention!) the end of 2019 level by about 10%.

In other words, there is a huge gap to fill, and without more stimulus from the Bank of England, the UK will have a hard time reaching pre-pandemic growth. The more accommodative the policy remains, the better.