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Are fears of a UK economic meltdown realistic?

UK Economy and Brexit
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May 18, 2016 By: , No Comments

The Financial Year That May Be Ahead for the UK

2016 did not get off to the auspicious start that economists had hoped for. In fact, barely a week into the New Year, the Chinese stock market – the Shenzhen composite index and the Shanghai composite index – had suffered two crashes on 4 January and 7 January respectively. The domino effect helped to drive a global selloff of epic proportions, erasing trillions of dollars from equities markets. The sentiment has not been helped to any degree by ongoing weakness in crude oil prices, a GDP growth rate of 6.5% in China projected for 2016, a slowdown in emerging market economies and now a tapering off of the US economy too. All in all, the stage has been set for a potentially destabilizing period when the June 23 referendum on a Brexit takes place. Alarmists have been cautioning of a global economic meltdown for quite some time, and while the US economy is contracting, there are plenty of positives on the horizon. For example, crude oil prices are improving and stabilizing, the Chinese economy is on target to achieve a 6.5% GDP for 2016, and dollar weakness is helping dollar-denominated commodities to improve. Of course, the whipsaw effects of shocks to the global stock markets, commodities markets and currency markets are always relevant. Anticipating market movements is much like reading tea leaves – there is simply too much conjecture and not enough substance regardless of the analysis that takes place.

A Word from the Chancellor

Recently, Britain’s Chancellor of the Exchequer shared his dire opinion of the state of the UK economy in the lead up to a Brexit vote. That his comments were hardly positive were evident to all in attendance. Chief among his fears, and those who share his opinions, are that household finances and the property market in the United Kingdom will come under tremendous pressure if Britain decides to exit from the European Union. The British exit, known as a Brexit is nothing new and has been swirling about in the tabloids and mainstream news for quite some time. But now that a vote is imminent, there are growing concerns that the UK public may in fact vote to exit from the EU. Some of the most important concerns for the Brexiteers include the UK’s sovereignty, the billions of pounds in annual payments to Brussels, the pressures on the UK healthcare system, the open border policy and terroristic threats etc. Those in favour of a strong cultural identity for the UK and strong borders are vehemently against the greater EU policies. In fact, this sentiment is easily seen in spread betting data at the leading trading sites which indicate a pretty even balance between those wanting to leave the EU and those wanting to remain.

The Perils of a Brexit

The UK economy is likely to be impacted on two fronts, housing and household disposable income. For those who already own homes, or have mortgages, the housing effect would be catastrophic. For starters, the housing market would likely crash as prices would come down owing to a weak GBP. Additionally, interest rates would have to rise, meaning that people who have mortgages will be paying in substantially more money to cover the cost of the properties every month in interest repayments. And with house valuations declining, it would become a sellers’ market. The other concern is related to the purchasing power of households. It’s a double-edged sword in this case because lower house prices would typically allow for greater homeownership, but increased interest rates would make it far too expensive for people to afford it. Credit lines will invariably dry up and it will become increasingly difficult for banks and credit facilities to extend credit in times of a contractionary economy. This is all likely to occur if the UK decides to leave the EU – the anathema known as a Brexit.

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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