The Current State of the UK Economy and How to Tackle the Challenges

According to leading financial authorities, the economy of the United Kingdom is in dire shape. If UBS is correct, then economic stagnation faces the United Kingdom in coming months. Volatility aside, the economic modelling process used by Swiss bank UBS indicates that UK growth has slowed down dramatically in 2017, and trends point to a continuation of this pattern. Post-Brexit, the PMI indicated a sharp decline in June 2016. Since then, the Purchasing Managers Indices gained sharply. There are two types of economic data that analysts can use to evaluate the performance of the economy: hard data with quantifiable facts, and soft data with sentiment.

The UK Economic Trend Is Bearish

UBS places less weight on soft data releases and focuses instead on the facts. The Office for National Statistics (ONS) is tasked with publishing Gross Domestic Product (GDP) readings, including export data, investment figures and consumer spending. In 2017, the ONS anticipates economic expansion in the region of 1.5%. This would be 0.3% lower than 2016 figures. When the performance of the UK economy is extrapolated over the past 3 years, the declines become more noticeable. The Brexit accelerated a trend that was already in place. It’s against this backdrop that the ONS forecasts further declines in UK GDP.

In recent weeks, a group of economists who favour Britain’s exit from the European Union published a paper stating that the UK economy stood to gain £135 billion by leaving the EU and opening up Britain’s economy to international trade. It was argued that increased competition would generate better prices for the UK, thereby resulting in a net gain post-Brexit. The data did not resonate well with economists in the UK. Many noted economists refuted these claims, labelling them biased political gobbledygook. According to a researcher from the NIESR (National Institute of Economic and Social Research), Monique Ebell, the UK could forgo some 30% of total trade as a result of the Brexit.

Should the UK Pursue a Northern Ireland-Style Agreement with the EU?

The noted professor from Cardiff University, Patrick Minford, believes that the UK can indeed generate strong returns post-Brexit by becoming more competitive. However, many factors need to be ironed out before then. Britain faces the prospect of a hard Brexit (a sudden divorce from the EU with no framework in place), and that could upend current agreements. Brexit secretary, David Davis uses the UK/ Northern Ireland paradigm as a case in point when referring to the UK’s future relationship with the European Union. There is a political separation between the UK and Northern Ireland, however their economies are closely interrelated.

A leading player in the UK market, Weiss Finance has seen strong trends with the GBP and the FTSE 100 index. ‘Currently, the cable is short-term bearish, having broken below the 1.30 handle and trending towards the 1.28 support level. If we continue on this path, the GBP/USD could move lower yet. Over the past 5 days, we have seen the GBP lose as much is 0.01 against the USD, as it marches away from its 52-week high of 1.3443 and continues below its major trend line. This is not a positive movement for GBP bulls, but it certainly bodes well for traders of the FTSE 100 index. The inverse relationship between the GBP and the FTSE 100 has held firm since the Brexit on June 23, 2016. Most companies on the FTSE 100 generate their revenues abroad, and this helps to boost GBP earnings when funds are repatriated.’

The GBP is in a bearish channel, and appears to be headed towards the 1.2589 Fibonacci retracement support level. If the cable holds at 1.2589, it is possible that it could ultimately continue rising above 1.30 towards 1.3700 after it consolidates. Short-term resistance remains at 1.2915 however. The technical support level is 1.2750, and the GBP is currently slightly above that, but caution remains the order of the day.


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