Source: AFP
Source: AFP
The UK’s crises are raising the risk of a GBP collapse. The currency has fallen to 1.17 against the USD, near its lows of 1.15 after the UK voted to leave the European Union as the first chart shows. A sudden loss of investor confidence now could see a test of its all-time low of 1.05 in 1985.
Source: Bank of Singapore, Bloomberg.
This summer the UK is suffering several crises.
Firstly, inflation is at three-decade highs of 10.1% – as the next chart shows – owing to pandemic disruptions and trade frictions due to the UK’s exit from the EU. Inflation is set to hit 13% when household energy bills are re-set in October according to Bank of England forecasts. But soaring gas prices caused by Russia blocking supplies to Europe may lead to inflation hitting even higher levels.
Source: Bank of Singapore, Bloomberg.
Secondly, the economy is set to enter a recession as inflation and energy costs hit consumers. We forecast that the UK’s GDP will shrink by 0.6% in 2023. Thirdly, industrial disputes caused by employees striking for better pay to offset sharply higher living costs are worsening. Fourth, public services including the National Health Service are in a perilous state after the pandemic and years of under-funding. Fifth, disputes with the EU following Brexit are hurting trade and may result in a costlier confrontation over Northern Ireland’s exports. Lastly, the UK government seems paralysed while the ruling Conservative Party elects a new leader to replace outgoing Prime Minister Johnson.
Faced with surging inflation, the BoE is set to lift its Bank Rate by 50bps again in September before slowing to 25bps rate hikes in November and December.
But interest rate hikes may not be enough to prevent a GBP collapse. For example, the BoE may be forced to pause its tightening by year end if Russian gas supplies to Europe are fully cut off and the UK falls into recession. Moreover, this summer’s crises may cause a sudden loss of investor confidence. With the UK’s current account deficit at a staggering 8% of GDP, the GBP is highly vulnerable to capital inflows drying up. In 1985, the currency fell to as low as 1.05 against the USD. Any further economic or political shocks in the UK now may see a similar collapse in GBP this year.
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