The UK’s successful vaccination programme has fuelled speculation of a rapid recovery. However, barriers to post- Brexit trade and a slow easing of lockdown restrictions pose serious risks. It is premature to suggest UK underperfomance is over

After a wobbly start to fighting the Covid crisis – epitomised by the much-derided Track and Trace system – a successful vaccination programme and plummeting infection rates have now raised expectations that the UK will be among the first developed states to recover.

 

Chart Source: Bloomberg, Macrobond and Variant Perception

Markets have progressively priced in this scenario, with the gilt curve steepening, cable rallying and equities inching higher. However, the UK is not out of the woods yet, and myriad risks remain.

Chief among these risks is the post-Brexit transition. The disruption to supply chains and logistics as a result of the pandemic has been compounded by the raft of new regulatory and administration procedures for shipping goods between the UK and the EU. Trade data published last week showed a hefty 40% drop in UK exports to the EU in January. UK imports from the EU have also dropped sharply, but not as severely.

Chart Source: Bloomberg, Macrobond and Variant Perception

Related to this, the UK is still without an agreement on trade with the EU in services and, importantly, the issue of regulatory equivalence in financial services has not been resolved. The EU has made it clear that it wants to bolster the local financial services sector and shift the euro clearing business to the single market. The tussle over equivalence has been made worse by disagreements over the Northern Ireland protocol and the distribution of Covid vaccines.

Chart Source: Bloomberg, Macrobond and Variant Perception

 

Brexit issues aside, the UK economy is also at risk from delayed reopening. Having imposed national restrictions later than many on the continent, and having suffered a more severe economic contraction than many of its peers, the UK government has become much more conservative when it comes to reversing current lockdown restrictions.

Chart Source: Bloomberg, Macrobond and Variant Perception

Our UK leading indicator is already pointing to sustained economic weakness, even though some global sectors – such as manufacturing – have been recovering despite national lockdown measures. The longer that the UK’s lockdown is enforced, the greater the risk of hysteresis effects bedding in and compromising the recovery.

Chart Source: Bloomberg, Macrobond and Variant Perception