Abu Dhabi, UAEWednesday 21 August 2019

New year reveals UK showing signs of Brexit strain

Data shows, economy has effectively ground to a halt, primarily due to mounting concerns about Britain's impending divorce from the EU

UK Houses of Parliament. Looming UK/EU divorce is taking its toll on British economy. AFP
UK Houses of Parliament. Looming UK/EU divorce is taking its toll on British economy. AFP

The first week of the new year brought a slew of bleak reports for the UK economy, highlighting the scale of the challenges to come as Britain prepares to leave the European Union.

Data Friday showed the housing market had its worst 12 months since 2013 last year, consumers remained reticent about borrowing and a gauge of services, the largest part of the economy, stayed sluggish. The latter report, combined with measures of construction and manufacturing, indicates growth may have slowed to 0.1 per cent in the final quarter of last year, according to IHS Markit.

“The economy effectively has ground to a halt, primarily due to mounting concerns about Brexit,” said Samuel Tombs, an economist at Pantheon Macroeconomics. “Recent indicators point to softness in retail spending. What’s more, the official data have begun to mirror the weakness of the PMIs.” He predicts growth slowed to just 0.2 per cent in the fourth quarter.

Fears the nation may crash out of the EU without a deal are increasing as Parliament prepares to vote on Prime Minister Theresa May’s widely opposed Brexit deal in less than two weeks, according to Bloomberg.

With Britain due to leave the EU on March 29, with or without an agreement, Mrs May is running out of time to resolve the divisions in her Conservative Party. The government has stepped up its planning for a no-deal exit, while Markit said manufacturers are aggressively stockpiling as they brace for a potentially disruptive departure.

The pound largely held its ground above $1.26 over the Christmas period, apart from a “flash-crash” dip to a 20-month low driven by the yen on Thursday, Reuters said. Following market turbulence earlier in December when opposition to the withdrawal agreement led to ministerial resignations and a failed leadership challenge against May, any signals of support could allow for some recovery in sterling, said Thu Lan Nguyen, strategist at Commerzbank.


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The currency did bounce back on Friday, trading up 0.6 per cent against the dollar to $1.2722, but still close to the bottom of its long-term range.

Versus the euro, it also rose 0.6 per cent to 89.66 pence.

"Economic data is unlikely to help GBP much these days. Sterling is chiefly driven by Brexit uncertainty," ING FX strategist Petr Krpata said.

That uncertainty also poses a challenge for officials at the Bank of England, who will publish new forecasts on growth and inflation in February as they announce their decision on interest rates. Markets have priced out any increase in the next 12 months, even as BOE governor Mark Carney warned that a disorderly exit from the EU may force the bank to raise rates to contain inflation.

A disorderly Brexit would put the BOE in crisis-fighting mode - the pound would fall, fanning inflation, while new trade barriers would put the brakes on growth, analysts believe.

Policymakers have insisted domestic inflationary pressures are building and that they could stay on a path to normalising monetary policy even if a deal is signed in time. The services PMI published Friday showed that wages are increasing, pushing up costs for firms.

The BOE will still have a tricky trade-off between supporting growth and fighting inflation. Economists in a Bloomberg survey are forecasting growth of just 1.3 per cent overall for 2018, and only a slight recovery to 1.5 per cent this year.

Mr Carney may face questions about the potential impact of Britain’s new trading relationship with the EU when he takes part in an online forum about the future of money on January 9. The event comes in the wake of criticism that post-Brexit economic scenarios published by the central bank late last year overstated the risks of a no-deal departure.

Updated: January 5, 2019 05:24 PM