UK: No Longer a Leading Economy

UK: No Longer a Leading Economy

2022-08-17 • Updated

The current situation is terrible, and the future is worse for the United Kingdom. Will the British pound withstand the challenges that await the UK economy, or will it collapse?

The problems of the UK are plentiful: inflation crisis, political instability after the departure of Prime Minister Boris Johnson, trade turmoil due to Brexit and the COVID-19 pandemic, and the unpredictable rise in energy prices due to the Russian invasion of Ukraine. According to Saxo Bank analysts, the negative factors listed above make the British economy look like one in a developing world rather than the sixth largest economy in the world.

Negative factors for the UK economy

1. Britain is on the cusp of a deep recession

The Bank of England has warned that the British economy will enter its most prolonged recession since the 2008 global financial crisis in the fourth quarter of 2022, with GDP dropping 2.1%. Inflation will also peak and exceed 13% in October.

To make it worse, the central bank doesn't anticipate a sharp recovery from the recession and sees GDP growth under 1.75% until mid-2025.

2. Inflation did to the UK what Brexit didn't

The BoE sees UK inflation peak at 13.3% in October, well above the previously expected 11%. Inflation will remain elevated through most of 2023 before falling back towards its 2% target in 2025.

So far, the BoE has raised rates six times in a row in a desperate attempt to control inflation. The latest increase of 50 points was the most significant hike since the bank became independent from the British government in 1997.

3. Political instability haunts Britain

A new British Prime Minister will be announced on September 5, after the resignation of Boris Johnson due to a series of scandals and mass resignations within his government. Conservative candidates Liz Truss and Rishi Sunak are now competing for the position.

4. Surging energy prices due to the war in Ukraine

UK energy prices cap is set to rise another 70% in October, increasing energy bills to more than £3,400 ($4,118) a year.

The rise in oil and gas prices is the primary driver of the inflation crisis in Britain. Gas prices have reached record levels due to supply disruptions caused by Russia's invasion of Ukraine and Russia's cutting off gas supplies to Europe.

5. Trade turmoil  

There’s a risk of a trade war between Britain and the EU over the Northern Ireland Protocol. If the Northern Ireland Protocol bill becomes law in the UK, Europe will fight back. As a result, this will aggravate the negative effects of Brexit.

Sterling saves Britain despite its weakness

The only thing preventing the British economy from fully transforming into an emerging economy is the absence of a currency crisis.

A currency crisis is a type of financial crisis followed by a sharp devaluation of a country's currency. However, the sterling has remained stable through recent major economic events, notably Brexit and the coronavirus pandemic.

GBPUSDWeekly.png

Still, the pound may return to its lowest level against the US dollar since March 2020, dropping below $1.20 soon. Sterling will struggle against the dollar as the economic outlook for the UK grows bleak, while the US has a strong labor market and easing inflation. For now, GBPUSD is consolidating between 1.23 and 119.

LOG IN

 

Similar

USD: FOMC Meeting Takes Centre Stage
USD: FOMC Meeting Takes Centre Stage

Today's FOMC meeting is the highlight of the week, and Antje Praefcke, FX Analyst at Commerzbank, discusses the USD outlook ahead of the announcement. Praefcke believes there's low risk of the Dollar declining post-meeting due to unlikely dovish surprises, especially after strong inflation readings. Instead, the Fed may emphasize...

GBP: Analysts Predict Lower CPI Figures
GBP: Analysts Predict Lower CPI Figures

In its February meeting, the Bank of England kept interest rates unchanged at 5.25%, the highest in 16 years. While one policymaker advocated for a rate cut, the central bank refrained from signaling any imminent changes, citing the need for further evidence on inflation. With inflation stable at 4.0% y/y in January and the economy emerging from recession, policymakers...

Latest news

WTT: Currency Pairs To Trade In April
WTT: Currency Pairs To Trade In April

Hello again my friends, it’s time for another episode of “What to Trade,” this time, for the month of April. As usual, I present to you some of my most anticipated trade ideas for the month of April, according to my technical analysis style. I therefore encourage you to do your due diligence, as always, and manage your risks appropriately.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera