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Can the UK economy sustain itself without the European Union?

GBP Falters as Uncertainty Thrashes European Markets
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February 17, 2016 By: , No Comments

Britain’s membership of the EU runs deeper than most observers realise

The 29-member bloc that makes up the European Union faces of firestorm from the United Kingdom over its upcoming Brexit referendum. A British exit from the European Union could prove disastrous to both entities, given the precarious state of the global world order. Presently, Prime Minister David Cameron is locked in negotiations to try and hammer out an agreement with European Union leaders this week. Cameron is hoping to get EU leaders to cotton on to his proposals which would be favourable to the UK. The referendum on whether or not Britain should remain part of the European Union will be held in June 2016. With a massive migrant problem now impacting on scores of EU member states, Britain is seeking some sort of guarantees from the EU for those who abuse the system.

One such measure that has been proposed is the emergency benefit break rule. According to the terms of this piece of legislation, member countries in the EU would be able to make an application to Brussels, Belgium to halt migrants in the European Union from gaining access to in-work benefits. The notion of a Brexit has gained tremendous political clout among certain sectors in the United Kingdom, and this follows hot on the heels of similar initiatives in Greece with talk of a Grexit. French banking giant, Societe Generale estimated that the UK economy could suffer declines in GDP in the region of 0.5% – 1% per annum until 2030. This news sent shudders down the spines of UK lawmakers and economists, given that the historical growth rate of the UK stands at approximately 2% per annum.

Deutsche Bank Cautions UK Banks on the risks of a Brexit

UK banks run a tremendous risk if a Brexit comes to pass. It is the uncertainty and volatility of this political hot potato which will translate into economic hardship for the United Kingdom. Besides which, there is a complex regulatory minefield to navigate through after the UK disentangles itself from the European Union. UK banks – like the banks of all countries – are aligned with the performance of the UK economy. Additionally, the performance of banks is also closely associated with the exchange rate of the GBP. If the GBP weakens as a result of the British exit from the European Union, this will adversely impact banks. An economic downturn in the United Kingdom will invariably lead to credit losses for UK banks too. The other concern relates to legal, regulatory and financial services from the UK to the EU. The implications are unknown, and the costs could be dire.

How is the UK economy performing?

The Bank of England has been targeting an inflation rate of 2%, much like the Federal Reserve Bank and the European Central Bank. However, this figure has proven elusive in recent times owing to the deflationary effects of historically low crude oil prices on the global economy. In January 2016, the inflation rate in the UK hit a 12-month high figure despite petrol prices falling. The CPI for January increased by 0.3%, owing to reduced declines in petrol prices and food prices from 1 year ago. In fact, the UK has been so far away from its inflation target of 2%, that it recorded a 0% inflation rate in 2015. For the duration of 2016, the Bank of England (BOE) is anticipating an inflation rate of less than 1%.

During the course of January 2016, the price of North Sea oil plunged to a12-year low and is essentially trading at 50% of its value from a year ago. That the Bank of England decided against raising interest rates recently is testament to the real concerns that the BOE governor, Mark Carney has about UK economic prospects. The broader global economy is teetering, and the MSCI all countries world index recently moved into bear market territory with 20% declines. According to the Office for National Statistics (ONS), the cost of lubricants and fuel declined by just 7.3% in January 2016 when compared to January 2015. As long as inflation remains low, it is unlikely that the Bank of England will hike interest rates any time soon. In fact forecasters estimate that the next interest-rate hike will take place in 2020 in the UK, on the proviso that the global economic balance remains as unstable as it is.

The current interest-rate in the United Kingdom is 0.50%, and it has been that way for approximately 7 years. If and when the Bank of England decides to act, it would likely not be before the end of 2016 in any event. Food prices in the United Kingdom have fallen at a decreased rate year-on-year in December/January 2015/16 over December/January 2014/15. The actual figures posted were 0.6% for December/January (15/16) as opposed to a 1% decline a year earlier. Alcohol prices posted strong gains of 5.2% in the December/January period with spirits spiking by 7.5%.

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