The US Dollar is ending the week on a slightly stronger note with modest
gains against major currencies. European and US equities are treading water
at time of writing.
It has been another day of extremely weak data releases for the UK, with government borrowing and retail sales figures for April highlighting the national lockdown’s damage to the UK economy. The value of retail sales collapsed 18.1% mom in April – the first full month of national lockdown, in line with expectations. This was the largest monthly contraction on record, with the pick-up in online shopping failing to offset the collapse in
spending on the High Street.
The government ran a record-high £62bn deficit in April, as a result of both weak fiscal revenues and a surge in government spending (including a furlough schemed which cost £14bn) to keep the UK economy alive. To put this in context this was a larger deficit than predicted back in March for the entire 2020-2021 fiscal year (which ends in April). The Office for Budget Responsibility is forecasting that borrowing for the fiscal year could reach £298bn, more than five times the estimate at the time of the March Budget.
Funding this deficit has not proved an issue so far thanks to strong market demand for UK gilts and the Bank of England’s vast asset-purchasing program. However, the optics of a double-digit budget deficit-to-GDP ratio remain problematic for Prime Minister Johnson’s Conservative Party government and the consensus forecast is that spending cuts and/or tax hikes will be required in the medium-term.
