United Kingdom Recovery
The United Kingdom’s early rollout of the COVID vaccines won early acclaim both from abroad and within the country, which had been widely criticised previously for its handling of the pandemic. While the rollout had started strong, the steam seems to be running out just as other countries picking up, due to a ‘major shortage’ of vaccines. With this in mind, we start our semi-regular look at the recovery of various countries the UK’s current progress, which barriers it faces, and provide an outlook for the country, which will indicate the direction of the FTSE, the UK’s major index.
Herd Immunity Requirements
Estimates published by academics in the JAMA Network suggest that the herd immunity threshold for SARS-CoV-2 (COVID-19) would be in the range of 50-67% (in the absence of any interventions).
Initial modelling in a study (which is yet to be peer reviewed) out of the University of East Anglia suggests that in order to achieve herd immunity, 69% of the population must be vaccinated with the Pfizer jab. If using the Oxford-AstraZeneca vaccine, that number goes up to 93%. These initial numbers deviate from research published above indicating the extremely early stages that the rollout of these vaccines is in, and the need for further research to be done in order to properly assess what the most effective vaccination rate would be to gain herd immunity. In particular, once consideration of the new strains of coronavirus are put in, the modelling from the University of East Anglia suggests that even if the whole population was vaccinated with the Oxford-AstraZeneca jab, the R-value, which represents how contagious a disease is, fails to even drop under 1.
The UK currently has 3 approved vaccinations.
Interestingly, the previously mentioned study prefers the AstraZeneca, despite it having the lowest reported efficacy of the three vaccines – which is a potential result of the vaccine being developed and partially produced in the UK. The AstraZeneca is also noteworthy for being suspended in a number of European nations due to a potential (but unfounded) link to blood-clotting, which has proven fatal to some. If this link is proven, it would deprive the UK of its favoured vaccine.
The UK currently has a vaccination rate of 36.5 vaccine doses per 100 people, outpacing its European and American peers that have vaccinated 8.2 doses per 100 and 29.7 doses per 100, respectively. Compared to other European nations however, the rate of full vaccinations is less impressive, as the UK has focused on getting the first dose out as fast as possible, with the first does to follow 12 weeks after – which is outside the 4-to-6-week recommended window.
Diving deeper, vaccination rates are more fragmented across regions of the UK. In particular, only 67% of people aged 60+ have received their first vaccine dose in Northern Ireland compared to England where 89% of people 60+ have received their first dose.
Jan to Mid-February: Government targeting top priority groups.
- Care home residents and care home workers
- People aged 80+ and frontline health and social care workers.
- Ages 70-74, clinically extremely vulnerable people
- Ages 75-79
End of February onwards: Remaining priority groups
- Ages 65-69
- Aged 16-64 with underlying health conditions.
- Aged 60-64
- Aged 55-59
- Aged 50-54
The UK has however hit a major roadblock due to a lack of COVID vaccines, asking the National Health Service (NHS) to not accept any new vaccination bookings for the entire month of April – which puts its reopening timeline under serious threat.
While it varies between the various constituent countries in the UK, England, which is more populous than Scotland, Wales and Northern Ireland combined, will end its ‘stay at home’ policy by the 29th of March, though it will encourage people to stay local if possible. Outdoor sport facilities will be allowed to open, while small-scale weddings will be allowed to be held.
All schools are planned to be open by mid-late April, while shops, hospitality venues, gyms and spas and public venues will also open in mid-April. Members of the same household will be allowed to take a holiday throughout the UK, provided that the household stays in self-contained accommodation.
By May, two households or six people can meet indoors, while hospitality venues can seat people indoors, and indoor entertainment such as theatres, cinemas and museums will open, while hotels, hostels and B&Bs can reopen.
By 21 June, all legal limits on social contact are planned to be removed, and nightclubs will also be allowed to reopen.
How Reactive is the UK Government to New Cases of COVID?
Commentary: Lockdowns have generally been implemented following clear uptrends in daily cases with 14-day averages on balance increasing with each consecutive lockdown announced.
1st National Lockdown (March 23) – 14-day average: 811
2nd National Lockdown (October 31) – 14-day average: 21,726
3rd National Lockdown (January 4) – 14-day average: 49,740
2021 lockdown expected to ease in the first weeks of March where the nation hopes that they have successfully vaccinated the four most vulnerable groups identified above in the vaccination rollout section.
Historically, the UK has eased restrictions based on 5 tests being met; these are listed below:
- Making sure the NHS can cope – i.e. if the hospitals can cope with admissions.
- A sustained and consistent fall in daily deaths (observable down trend).
- Rate of infection decreasing to manageable levels (around 1,500 cases a day).
- Ensuring supply of tests and PPE can meet future demand – 200,000 tests/day.
- Being confident any adjustments would not risk another peak that would overwhelm the NHS.
Lagged November data (ex-precious metal) posts an increase in the UK’s trade deficit, widening by £0.6bn to £1.5bn, and exports were up 3.9% on October numbers to £50.3bn and imports were up 4.9% to £51.8bn. However, given the lagged nature of this data, the full impact of the no-deal Brexit is no yet fully observable.
Brexit/EU Deal Provisions
In terms of the trade, there will broadly be no tariffs or limits on the amount that can be traded between the UK and the EU. However, some new checks will be introduced at borders, such as safety checks and customs declarations. New trade restriction involves restrictions on certain UK animal food products (including on uncooked meats, which has already seen British truck drivers have their lunches confiscated upon arriving in the EU).
Businesses offering services such as banking, architecture and accounting will lose their automatic right of access to EU markets and will face some new restrictions. There will no longer any automatic recognition of professional qualifications for people such as doctors, chefs, and architects.
UK Major Trading Partners
The UK’s top 5 trading partners are the US, Germany, China, the Netherlands, and France, and they account for 46% of the UK’s total trade in goods (excluding unspecified goods).
The number of goods imported from non-EU countries in 2Q20 sat at 47.3% (up 1.7% on pcp) showing a relative balance between EU and non-EU trade partners.
Monetary and Fiscal Policy Outlook
The interest rate is expected to remain steady at 0.1% for the year, according to a Bank of England release from tonight – which remains a tailwind for equity markets, which might also be helped more from ongoing speculation of rates going into negative territory.
Fiscal outlook remains the same with unemployment benefits (furlough) extended to end-April and fiscal stimulus to drive a COVID recovery.
While the BoE is increasingly positive on the economic outlook of the UK, it has confirmed that it will keep its current quantitative easing measures in place, stating that current measures are still needed given the fragile nature of the economic recovery. The BoE is likely to formally bring negative rates into its toolkit by reducing its estimate of lower bound, though they have flagged that this is unlikely to occur in the current calendar year. Given this, it is implied that the BoE’s asset purchase program will be the key tool for stimulating the economy, with current QE measures totalling £895bn.
However, there are concerns related to the negative rates – whilst this will push equity markets up from a macroeconomic level, banks will be more reluctant to extend capital due to a shrinking net interest margin (NIM).
Risks to the UK’s Equity Market
The key risk remains the waning fiscal stimulus, in particular with regard to the unemployment assistance, in the form of a furlough program, that has been extended to the end of April. It is expected that unemployment figures will jump following the expiration of the unemployment support program, with the Bank of England predicting an increase in the unemployment rate from 5% to a peak of 7.7% between April and June, with even a small chance of it hitting 10%.
GDP will also be decrease in the first quarter of the year due to lockdown, which would act as a serious risk to the FTSE in the short term.
The rapidly rebounding economy could trigger a rise in inflation and amidst record debt levels this could lead to the Bank of England raising interest rates which would have a negative impact on the markets.
There have been bearish announcements in recent days, with the UK not able to source enough vaccines to take on any new vaccinations in April, and that was even before the EU threatened to halt EU-produced vaccines from reaching the UK due to a dispute about the two-way trade of vaccines. With the potential for a significant portion of its population to remain unvaccinated for longer, there is the potential for restrictions to remain in place for longer – which would in turn continue to impact GDP and the earnings of companies with revenue exposed to the UK.