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Will the GBP Weaken Further and Drag the UK Economy Down?

Brexit Backlash
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August 28, 2016 By: , No Comments

Inflation Set to Bite as Britons Face Brexit Backlash

The never-ending series of questions about the economic implications of a Brexit continue to plague the minds of economists and analysts the world over. What will become of the United Kingdom after it leaves the European Union is anyone’s guess, but short-term prospects appear solid. Brexiteers are waving their flags and high-fiving one another for a job well done. This perspective appears validated by the recent bullish performance of the stock market and the short-term recovery in the GBP/USD pair. Retail sales and consumer sentiment remained positive and this is helping to drive economic growth in United Kingdom. Nobody knows quite what the long-term effects of a Brexit will be on the UK economy, but economists have a grim prognosis.

 

Look to FX Markets for the Answers

Currency markets are giving the strongest possible indication of where we are headed in the post-Brexit era. If one were to look at the performance of the FTSE 100 index or even the unemployment data for July, that would paint a skewed picture of where we are at. Back on Thursday, 23 June 2016, the GBP/USD pair was trading around $1.48 and it plunged to $1.31 at the close of the polls.

 
Since then, it hit a 31-year low. The recovery has been lukewarm and the GBP/USD pair is now trading in a tight range between 1.30 and 1.32. We’ve already seen the shock resignation of Prime Minister David Cameron and his replacement with Prime Minister Theresa May. When she will invoke Article 50 of the Lisbon Treaty is anyone’s guess, but indications point to sometime in 2017.
The currency markets are precisely the arena where the requisite data can be found. The GBP/EUR is trading at 1.18, and overall, the sterling is down approximately 15% from where it was a year ago. The skittish nature of the forex markets does not always allow for a reliable yardstick in terms of gauging market performance. Billions upon billions of dollars are traded in currencies, shorting some and going long and others. The GBP has been impacted by the sentiment of currency traders the world over and this is precisely why FX data needs to be carefully scrutinised.

 

UK Assets Worth Less Now

Without getting into the weeds too much, the assets in the UK economy are worth less today than they were previously. This goes for assets across the board including bank deposits, property valuations, corporate assets and government debt. Comparatively, UK assets are valued less than comparable assets around the world. We do know that the FTSE 100 index is performing strongly, but this is only because the bulk of earnings are generated outside of the United Kingdom.

 
To the typical British household, the macroeconomic data may not make much sense, but it’s important. British holidaymakers are feeling the pinch when they travel abroad and their pounds simply don’t stretch as far as they used to. Britons are paying more for imports than ever before, notably consumables, fuel, food and construction materials. According to official data, imports account for 30% of GDP, and if the GBP weakens the Brexit decision will directly impact every single household in Britain. This happens when prices rise faster than wages or salaries rise. Exports are likely to gain traction with a weak GBP, and that suits the UK economy fine. Real incomes were increasing in the UK between 2009 in 2014, but this latest hiccup will set that back and undo much of the positive work that the UK economy has laboured through.

 
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Brett Chatz

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.

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