Britain risks falling into recession and dragging the global economy with it. A raft of weak data puts the UK economy on thin ice.
Britain is in the global spotlight this week as royal disputes at Buckingham Palace play out like an episode of The Crown. But Britain has a bigger problems to deal with right now: its economy and the threat of recession.
A flood of poor data hit the headlines this morning, threatening to plunge the UK into recession. With the global economy on thin ice, Britain may be the black swan event that brings it all crashing down.
As the 6th largest economy on the planet, Britain has the ability to trigger a domino effect on the global stage. Its close ties to Germany (4th largest economy), France (7th), and Italy (8th) contribute to the systematic risk underlying the markets.
Uncertainty has gripped the British economy since the historic Brexit vote more than two years ago. But the economy has now dived into contraction as GDP unexpectedly fell 0.3% in November. Analysts were expecting the data to come in unchanged.
Half of UK firms now think the country will slide into a full-blown recession in 2020. The only caveat is that the data comes from before the general election. Boris Johnson’s storming victory should bring a degree of stability and certainty to the economy.
With the weak GDP data hitting headlines across Britain, there’s now talk of lowering interest rates. At least three policy makers at the Bank of England, including Governor Mark Carney, have hinted at interest rate adjustment in the last few days. Interest rate adjustments are used by central banks to hold off a potential recession.
No surprise, sterling has since plunged 0.8% against the dollar and now lies below $1.30.
The negative sentiment is creeping into consumers too. 2019 was the worst year on record for retail sales, hinting that Britons are reluctant to spend. Sales declined for the first time in 24 years as thousands of stores closed. 140,000 lost their jobs in 2019 alone.
British companies remain nervous as Brexit uncertainty drags on. Job postings fell by the most in 10 years in 2019 with a 59,000 decline in vacancies. This chimes with disappointing jobs data out of the USA last week which came in lower than expectations.
The UK’s inflation has consistently come in below the 2% target and Wednesday’s data looks set to be no different. Sebastien Clements of OFX said another weak report “would be a worrying sign for the UK” and would likely push the BoE to an interest rate cut.
In simple terms, uncertainty reigns in Britain. Despite a storming election victory in December, Boris Johnson has yet to deliver any further clarity on Brexit. The UK economy is now paralysed with indecision and uncertainty, threatening to drag it into recession. And if that happens, the rest of the developed world may follow.
Last modified: September 23, 2020 1:29 PM