How Is the UK Economy Faring Post-Brexit?
Mixed Signals Characterise UK Economic Data Releases Post-Brexit
The Brexit saga continues, with economists carefully poring over the data and waiting for new information to become available. At the time of writing, a cautious approach has been adopted, as the lag effect of a break from the Eurozone plays out. For the broader global economy, the impact has been minimal. While the initial effect of the Brexit decision negatively impacted on business confidence and consumer confidence, there are indications that a resurgence in labour market conditions and retail sales have countered that.
Several positive indications exist about the state of the UK economy. For starters, gross domestic product (GDP) year on year is up 2.20%, and 0.6% quarter on quarter. The UK interest rate has been slashed to 0.25% in an effort to accelerate an economic recovery. The inflation rate in the UK is currently standing at 0.60%, with a jobless rate of 4.90%. The government budget has been slashed by 4.40% and the current debt/GDP ratio is 89.2%.
The GBP/USD currency pair is trading at 1.32303 as at Wednesday, 24 August 2016. For the year-to-date, the GBP/USD pair held steady in a range between 1.38493 and 1.47 from January through the last week of June. Since then, the GBP/USD pair has traded in a sharply lower range between 1.34 and 1.28. Since 15 August, the GBP has gained momentum and has enjoyed many robust sessions. Besides for the performance of the sterling, the broader UK economy requires further analysis.
Is the UK Economy Currently Undergoing a Shock?
The Bank of England certainly shocked the economy by slashing interest rates by 25-basis points. Now, the Bank Rate is 0.25% and a massive quantitative stimulus has been put into play. Additional government bond buying valued at £60 billion and £10 billion in corporate bond buying has been added to the £375 billion in asset repurchases. Combined, this is all being done to resuscitate the UK economy in a big way. The monetary stimulus measures adopted by the Bank of England are only the start of what could be a series of quantitative easing measures at its disposal.
One of the confounding elements of the UK economy is the increase in retail sales in the month of July. Retail sales shot up by 1.4%, greater than economists and analysts had anticipated. In an equally confusing set of data releases, jobless benefit numbers also decreased during July. Viewed in perspective, this indicates that UK consumers are still buying and fewer people are claiming unemployment benefits in the wake of the most politically destabilising event in recent history. Actual data conflicts with sentiment however. Various surveys of consumer confidence indicate a massive drop among shoppers during July, but this was not followed up by economic data releases.
Important Upcoming Events to Watch
There are other positives that can be put into play in the UK economy, notably fiscal policy stimulus. Now that the cost of borrowing is so much cheaper, government can finance infrastructure developments on a wide scale. This it can do via the issuance of government bonds, with low payback. Fiscal stimulus is certainly an option available to the government in its multi-pronged approach to reigniting a waning UK economy.
From a policymaker perspective, the combination of fiscal stimulus and monetary easing appears to hold ground. On main street, spread bettors are seeing more of an emphasis being placed on the impact of the US presidential elections on the global economy than the post-Brexit saga. Other factors that could play a part in strengthening the UK economy and helping to achieve the inflation objective are the upcoming talks in Algeria with OPEC members. If crude oil supply can be cut, prices will rise and this will bode well for inflation targeting by the BOE.
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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.