Post-Brexit Reality Unlikely to Result in a UK Recession
Moody’s Gives Tentative Thumbs up to Recovery in the UK
Global credit ratings agency, Moody’s believes that the UK economy will gradually slow, but will not slip into a recession. In 2008/9 the annual GDP growth in the UK plunged dramatically towards -5% growth. By 2010, that figure was back in positive territory and approaching 2.5% annual GDP growth. A period of stabilisation ensued between 2010 and 2014 during which time gradual growth in the UK economy took place. Since 2014 however, UK annual GDP growth has been declining year on year. From over 2.5% in 2014, to an expected rate of growth of 1.5% in 2016, and 1.2% next year.
Financial markets were 100% bearish on the UK economy following the shock referendum on Thursday, June 23, 2016. However, the FTSE 100 index and stock prices across indices in the UK have rallied in the aftermath. The general consensus now is that post-Brexit blues will be far less impactful on the UK economy than perceived. Contrary to popular opinion, a weak GBP is conducive to strong economic growth in the United Kingdom. While imports will certainly be more expensive for the UK, and this will affect things like fuel, imported construction materials and overseas travel, the export market in the UK will flourish.
Performance of UK Indices and the GBP/USD Pair
Additionally, the FTSE 100 index which is 75% based on overseas-generated revenues has been hitting its straps. Prior to the Brexit referendum, the key level for the FTSE 100 index was 6000, while today the FTSE 100 index is trading at 6,864.11, up 9.96% for the year-to-date and 9.37% over the past 1 year. This is hardly what the doomsday economists were predicting when the UK announced its decision to divorce the European Union. We have already seen a massive quantitative easing stimulus injected into the UK economy with the additional £60 billion government bond purchases and £10 billion corporate bond purchases. That raises monetary stimulus to £435 billion.
However, there is likely to be a great deal of uncertainty about consumer expenditure and business investment in the UK economy. There is tremendous caution at this time, and the lower bank rate at 0.25% is designed to expedite borrowing and investment spending. With the inclusion of fiscal policy stimulus in the UK – tax reductions or investment spending – the UK economy can arrest any further declines and actually help to propel greater European growth too. Additionally, the widespread fear of plunging house prices and consumption is unlikely to take place. What we are seeing is a limited impact on the UK economy well into the foreseeable future. The GBP/USD currency pair is trading at 1.3146, up 0.80% or $0.0104. The pair has staged a strong recovery over the past 3 days when it was trading at 1.2880 on 15 August and has now increased by $0.03.
The Big Problem is with the US Economy and Fed Rate Hikes
However, Moody’s is of the opinion that a Fed rate hike any time before the final meeting of the FOMC on December 14, 2016 could have a disastrous impact on the US economy. As it is, Wall Street indices are at all-time highs, and there is nowhere for them to go but down. With bond prices at record levels and yields at negligible levels, there is an increasing urgency to invest in safe-haven assets such as gold shares, trust, ETFs and physical bullion. Additionally, a rate hike would strengthen the USD, which would decrease demand for dollars-denominated commodities and throw emerging market economies into a tailspin. Currency markets would be severely impacted by a stronger USD, given the precarious balance of the global economy. If capital flight from emerging markets takes place with a US rate hike, this will suck out all investment prospects and lead to greatly devalued domestic currencies and excessive debt burdens.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.