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August 9, 2019

Is the UK heading towards an economic abyss?

By Jamie Crawley

The UK economy shrank in Q2, the first such occurrence since 2012, with commentators warning that worse could be to come as no-deal Brexit looms.

Pressure was added to Sterling, already reeling from Brexit fears, after the Office for National Statistics released its GDP data showing a 0.2% contraction in the UK economy.

No-deal Brexit fears ramped up

In a world where economic slowdown is widespread, the country is plagued by ongoing Brexit uncertainty, coming to a head recently when Boris Johnson’s appointment as prime minister greatly increased chances of the UK leaving the EU without a deal on October 31st.

A ramping up of no-deal preparations saw the pound fall to its lowest level against the dollar since March 2017, with a further slide to $1.20 triggered by the announcement of the GDP data in Q2.

“Sterling is already trading at its lowest levels for two years against both the US Dollar and the Euro, having fallen by 8% since May due to markets re-pricing in a hard Brexit,” says Andy Scott, associate director at financial risk advisor, JCRA.

“If the economy slips into recession, alongside the risk of a hard Brexit and a general election, Sterling will likely suffer further losses.”

No -deal Brexit and general election perfect storm for UK economy

A general election, it seems, would only add to the pound’s woes, as the possibility of a change of government would add fuel to the fire of uncertainty.

Nigel Green, founder and CEO of financial consultancy deVere Group, states: “The situation will get even more serious should a Jeremy Corbyn-led Labour government win that election.

“His high tax and low-profit policies and anti-business rhetoric would deliver a hammer blow to the already floundering UK economy.”

“Depressingly, Britain appears to be stumbling towards an economic abyss.”

Eyes will be trained on what steps the Bank of England takes in order to stave off these concerns.

Major central banks have already begun to act in response to gloomy global outlook, with the US Federal Reserve cutting its rate for the first time in a decade recently and the ECB hinting at doing the same in September.

Geoffrey Yu, head of the UK investment office at UBS, says: “As uncertainty continues to loom over the UK economy, the difficult run of data is expected to continue and the Bank of England will need to consider its next step carefully as its global peers embark on further rate cuts.”

 

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