Oliver Mangan: Weak sterling signals cold winds blow for prospects of the Brexit ‘sunlit uplands’

Overall, the UK’s departure from the EU and its customs union and single market is viewed by many as lowering the potential growth rate of the country's economy over the medium term, via negative impacts on investment and trade. 
Oliver Mangan: Weak sterling signals cold winds blow for prospects of the Brexit ‘sunlit uplands’

A quiet Piccadilly Circus in London last week after Prime Minister Boris Johnson ordered a new national lockdown for England. 

The EU-UK Brexit trade deal that was finally agreed on Christmas Eve has had little impact on sterling. Against the euro it has traded in a range between 88.5 pence and 93 pence since last May and has been confined to an even narrower 89 pence to 91 pence corridor since the deal was announced. One reason for this is that an agreement was widely expected by the markets.

Furthermore, it is a very limited or "skinny" trade deal and does not include services, in particular financial services, and is far inferior to the EU single market. 

Thus, it can hardly be classed as a positive development for the UK economy, although it avoided a much worse outcome in the form of a no-deal, or hard Brexit.

Overall, the UK’s departure from the EU and its customs union and single market is viewed by many as lowering the potential growth rate of the country's economy over the medium term, via negative impacts on investment and trade. 

Indeed, Bank of England governor Andrew Bailey has said that the deal will likely see a hit of 2% to the UK's GDP over the next three years. He endorsed forecasts from the UK's Office of Budget Responsibility that the hit will increase to between 3% and 4% over time.

Already, there are some signs of trade becoming far less frictionless, with business surprised at the complexity of new paperwork, retailer supply chains disrupted by rules of origin stipulations, and the City of London losing business to the EU. There are expectations of greater disruptions to trade and delays at ports as trade volumes pick up from their very low levels at the start of the year.

UK recession

Meanwhile, it is also the case that the recession caused by the Covid-19 pandemic has been much deeper in the UK than in other major economies, with the economy contracting by around 11% last year. Furthermore, the country has just entered a third lockdown which is likely to remain in force for much of the first quarter. As a result, UK growth forecasts for 2021 are being scaled back.

The deep recession has seen the UK budget deficit soar to close on 20% of GDP in the financial year 2020-2021, much higher than in other countries and another negative for the currency in an economy with a persistent balance of payments deficit. 

Meanwhile, given the headwinds facing the economy from both Covid-19 and Brexit, markets are pricing in further rate cuts by the Bank of England.

This could see the UK move to negative interest rates, which would hardly be positive news for the currency. Although we think that the Bank of England is likely to continue to eschew this option, especially with an economic rebound still in prospect over the second half of the year.

Taking all these factors into consideration, sterling seems likely to remain a relatively weak currency on a historic basis, trading in a 88 pence and 92 pence range against the euro in the months ahead. Meanwhile, it could trade close to $1.40 versus the dollar.

To put this into perspective, sterling hardly ever dipped below the $1.40 level throughout the whole period from the mid-1980s up until the Brexit referendum in 2016, despite a number of serious crises over this time frame. 

The sterling market, then, does not seem to be anticipating that the UK economy is on its way to the promised post-Brexit ‘sunlit uplands'.

Oliver Mangan is chief economist at AIB

More in this section

Home Delivery
logo-ie

HOME DELIVERY SERVICE

Have the Irish Examiner delivered to your door. No delivery charge. Just pay the cover price.

IE_logo_newsletters

Select your favourite newsletters and get the best of Irish Examiner delivered to your inbox

LOTTO RESULTS

Saturday, March 6, 2021

  • 3
  • 14
  • 17
  • 18
  • 38
  • 47
  • 46

Full Lotto draw results »