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The Sun Never Sets on the UK Economy

GBP Falters as Uncertainty Thrashes European Markets
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September 20, 2017 By: , No Comments

The UK economy appears to be looking up. The Bank of England (BOE) is forecasting rather upbeat sentiment about the British economy, and this is being bolstered by the Centre for Economics and Business Research (CEBR). GDP growth forecasts for the current year and 2018 have been upgraded, and this bodes well for the GBP and Britain. On Monday, September 18, 2017, the upgrade was made for the UK economy, and this bodes well given the uptick in manufacturing that has taken place. UK consumers have been under tremendous pressure since the Brexit referendum, as real wages decline, and inflationary pressures take root.

 

1.6% Projected Growth Rate in 2017

The CEBR anticipates 2017 growth of 1.6%, and 2018 growth of 1.4%. These are both up from the 1.3% and the 1.2% figures respectively. The Bank of England has been hinting at raising interest rates in recent weeks. The UK economy continues to show signs of improvement, and there is strength in the UK manufacturing sector. A weaker GBP bodes well for UK exports, given that the cost to foreign buyers is significantly less. However, UK consumers are feeling the pinch with higher import costs at supermarkets, automobile dealerships, and for homebuilding. The current data is not ironclad. The risks posed by a Brexit remain, and there is no blueprint for the UK’s divorce from the EU.

 

Economic Growth and Rising Inflation Pressuring BOE to Act

 

Pricing of BOE

 

If the UK raises interest rates, this will be the first time in more than 10 years that the BOE has done so. Currently, the bank rate in the United Kingdom is 0.25%. At its last meeting on Thursday, 14 September 2017 the Bank of England voted by margin of 7:2 to retain interest rates at the current level. However, a gradual withdrawal of quantitative easing (monetary stimulus) is forthcoming. The BOE governor indicated that there is significant uncertainty to the UK economy, notably with the spending patterns of businesses, and households vis-à-vis the Brexit withdrawal process. The BOE will be adopting a gradual process of interest rate hikes, when appropriate. However, if inflationary pressures persist, and economic growth continues the Bank of England will act by raising rates.

 

The Doves Go Hawkish

Such is the sentiment within the Bank of England monetary policy committee, that even one of the leading doves – Gertjan Vlieghe – is leaning towards a rate hike. To date, the GBP has performed admirably, given the upbeat sentiment. Markets anticipate the Bank of England to increase interest rates by February 2018, and the GBP is hovering around the 1.35 level against the USD. It is likely to remain there for the duration of 2017. During Q1 and Q2 of 2017, the UK economy was beset by slow consumer spending growth. The problem, according to various think tanks is that uncertainty around the Brexit saga has caused a contraction in spending activity. Employees have been reluctant to band together and push for higher wages, fearing job losses. As a result, we are seeing low real wage growth, or negative growth, and rising prices caused by a weak GBP. Spending on big-ticket items like vehicles, homes, vacations etc. has slowed.

If Brexit secretary David Davis can forge a favourable deal with his EU counterpart, it will bode well for the UK economy. Currently, there are differing opinions as to the precise nature of Britain’s future political and economic partnerships with the UK. There are several important elements to consider in the UK economy, notably the German elections, the public finances release for August 2017, and Prime Minister Theresa May’s speech on Friday where she will outline her vision for a Brexit. The speech will be brought cost from Florence, and the Prime Minister will indicate the UK’s perspective in the matter. These events will shape market dynamics heading into October 2017.

What effect do you think BOE sentiment will have on the UK economy? Will the GBP rally continue?

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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 spreadbettingreview.co.uk.

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