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Economic update – First quarter 2021

16th February 2021

This report has been prepared from information available as at 10 February 2021. Further information from: Mark Berrisford-Smith, Head of Economics, Commercial Banking, HSBC UK. Tel 020 7991 8565 ; Email

Key points

 The race to vaccinate the world’s vulnerable populations against Covid-19 is now off and running. The speed with which vaccines can be rolled out, and whether new variants of the disease circumvent them, will be the key determinants of the timing and strength of economic recoveries. At present, the political imperative in advanced economies is to immunize as many people as quickly as possible, which means that a concerted effort to provide vaccines to poorer countries won’t get underway until later this year.

 The global economic revival is just about intact, although the second wave of the pandemic means that many economies, notably in Europe, are again in lockdown. But the restrictions are not as severe as those that were imposed last spring, while many businesses have adapted their offerings to the new environment. The surge in demand for manufactured goods, which helped to fuel strong growth in China in the autumn, is now waning as western consumers contemplate the re-opening of close-contact services in the spring.

 Financial markets continue to rally in anticipation of a vaccine-fuelled recovery. Commodity prices are now above where they were when the pandemic struck, and bond yields have edged up as investors anticipate higher inflation rates in the near term. Yet the roll-out of vaccines may not be as straightforward or as quick as markets expect, which could set the stage for further bouts of volatility.

 The UK has made a good start in rolling out vaccinations, and it is likely that some restrictions will be eased in March. With GDP expected to expand by around 4.5% both this year and next, the economy is projected to regain its pre-Covid level of output at the end of next year. A key driver of the recovery will be the £140 billion or so of additional bank deposits that have been built up by households during the pandemic.

 But before the revival gets underway, GDP is set to contract by nearly 3% in the first quarter, with matters made worse by the disruption encountered by businesses as they adjust to the new trading relationship with the EU, and with the operation of the Northern Ireland protocol.

 Rishi Sunak is due to present his second Budget on 3 March. He will be keen to signal how and when Covid support measures will be wound down, and how money might be raised to help pay for them. Nonetheless, the budget deficit is still likely to top £200 billion in the 2021/22 fiscal year.

 Negative interest rates in the UK are off the table for now, although a final dose of quantitative easing is expected, probably in May. Sterling has enjoyed a modest rally in recent weeks, most likely in response to the UK’s relatively fast vaccine roll-out. But in the medium term, it will continue to be pressured by the abundance of quantitative easing, compared to other major economies, and by the UK’s weak fiscal position.

Read the full update here: Economic-update-2021-Q1-.pdf