OBR warns of severe downturn for UK economy

It is no secret that the UK economy has significantly contracted in the wake of the Covid-19 pandemic. The country’s GDP fell by a staggering 20.4% in April, and even with a slight gain in May, the economy was 24.5% smaller than before the meltdown in March.

British GDP forecast to fall sharply

What can we expect in the second half of the year? The extent of the severity of the downturn was presented in stark terms by the Office for Budget Responsibility (OBR) earlier this week. The OBR presented three possible scenarios for GDP in 2020. The central case forecasts that GDP will fall by 12.4% this year, with unemployment hitting 11.9%. In the best scenario, GDP will decline by 10.6% and unemployment would climb to 9.7%. Finally, in the worst scenario, GDP would plunge by 14.3% and the unemployment rate would reach 11.9%. In its report, the OBR wrote that “the UK is on track to record the largest decline in annual GDP for 300 years, with output falling by more than 10% in 2020 in all three scenarios”. Sobering words, indeed.

The OBR forecast that the economy would expand by 8.7% in 2021, but would remain below pre-Covid levels until 2024. The OBR report also revised upwards cost of dealing with the Covid crisis. In May, the OBR said that the government would need to borrow £298 billion this year, but has now revised the estimate to £322 billion. With the government breaking records for monthly borrowing, the OBR noted that the government will have to tackle the country’s enormous debt and growing budget deficits. This, of course, is not good news for the British pound, as a sharp deterioration in economic conditions will make the currency less attractive to investors.

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GBP/USD Technical

GBP is almost unchanged on Friday. Currently, the pair is trading at 1.2542, down 0.09% on the day. GBP/USD posted small gains in the Asian session but has dipped lower in European trade

• 1.2508 is the first level of support, protecting the symbolic 1.25 level. Immediately below is the 20-day MA at 1.2498. If the pair breaks below this line, it would be a bearish signal. Below, there is support at 1.2461.
• 1.2613 is the next line of resistance, followed by resistance at 1.2671.

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