British currency is still being harmed by Brexit

21.07.2017 11:06|Conotoxia.com

The pound has not managed to recover from last year's referendum, when the British decided to leave the European Union. On one hand, this may mean that the islanders' currency has been undervalued, but on the other hand, it shows what kind of burden that the conditions of Britain's exit from the Union could have. A commentary from Marcin Lipka, senior analyst at Cinkciarz.pl.

The British currency has maintained a level of about 8 percent below average (in a period of seven years) in relation to the euro and the zloty and 17% compared to the dollar. Meanwhile, looking at Great Britain's macro economic data, there is no sign of a downturn. In this year’s first quarter, the GDP increased by 2% YOY and in April-June’s term (according to a consensus among economists) by 1.7% YOY. Indeed, after the referendum, there were fears that the UK economy will be close to a recession in 2018.

Unemployment, employment, vacancies

The labour market's parameters are practically like looking at a model. Month to month they have continued to improve. According to a report published in July by the Office for National Statistics (ONS), May's unemployment data dropped to 4.5 percent, the lowest level since 1975. The 21.5 percent rate of the economically inactive has been reached and is the highest decrease since 1971. Employment for the working-age population (16-64) reached 74.9 percent, the highest level in 46 years.

Equally, hiring has been rising in all sectors of the economy. There are 774k vacancies - the most since 2001, which is when this parameter study began.

Low wages growth has been the main weakness within the local labour market. They have grown at a rate of 2.3 percent yearly. Taking into account inflation, households are experiencing a real decline in purchasing power - by 0.4% YOY. This may mean worse results for retail sales or industrial output in the future, as well as a risk of lower GDP readings.

Sector strongly dependent on Brexit conditions

For years, the British economy has been struggling with a trade deficit that is primarily concerning goods trading. In 2016, imports were higher than exports by 128 billion pounds (over 6% of GDP). Additionally, this year the deficit exceeded the 10 billion pound barrier in monthly from January to May, following the worsening of last year's poor result.

Other concerns may be related to the fact that a weaker currency does not help in the balancing of trade. Theoretically, it should limit imports and stimulate exports. For now, nothing is happening in the UK economy. This may further suggest sterling depreciation in order to reduce the deficit.

At first sight, the situation improved due to a relatively high positive balance of services, which has been evaluated to over 42 billion pounds for five months and in 2016 at 97 billion. If not for Brexit, the high share of trade services should be enjoyed, as it demonstrates Britain's high competitiveness in this sector of the economy.

However, in current circumstances, too much dependence on services may pose a threat to the future condition of the economy. An unstated exit from the EU threatens to lose access to the euro area’s currency market for the financial sector, which generates about half of the services' surplus. As a result, the greater the dependence Britons have on service exports, the more important that Brexit conditions are.

Political sparks do not help

It has been common knowledge that for more than a year, negotiating the conditions of exiting the EU has not been easy. Great Britain is at a disadvantage due to its high dependence on the euro market, and Brussels is likely to show that leaving the Union simply does not pay off.

These concerns should also be added to other internal policies in the UK. In the early election, conservatives lost most of their seats in the House of Commons and had to form a coalition that increased the risk of instability in Theresa May's office.

It is also worth noting that the Conservative party is still at a serious disadvantage between "hard" Brexit supporters and more pragmatic members of the government. As a result, London, in a difficult negotiation with Brussels, may even have some trouble with stating a coherent stance on the "divorce."

The lack of improvement in a commodity turnover, the declining purchasing power of the UK, and the problems that are piling up connected to internal politics may continue to hold the pound below its multi-year average.

 


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