Brexit has turned out to be an economic disaster for the unprepared United Kingdom, which has been reflected in the pound sterling's exchange rates over the past few years. Before the passing of the 2018 Brexit bill, the GBP/USD exchange rate was significantly above 1.50, but subsequent years saw a strong sell-off of the pound. The uncertainty and instability caused by Brexit negotiations, coupled with the economic disruptions it entailed, led to significant volatility in the currency markets.
Investors and businesses were wary of the potential economic fallout, which was compounded by the UK government’s lack of a clear and cohesive strategy for managing the transition. As a result, confidence in the pound weakened, leading to its decline. This depreciation was not just a short-term fluctuation; it reflected deeper concerns about the UK’s long-term economic prospects outside the EU.
However, analysts at Bank of America (BoA) have forecasted that the pound sterling will end 2024 as one of the strongest G10 currencies. They attribute this optimistic outlook to a projected economic recovery in the UK. This forecast is based on several factors, including the anticipated stabilization of the UK economy as it adjusts to its post-Brexit reality, as well as broader global economic conditions that might favor stronger currencies.
According to BoA, the pound’s recovery will be driven by improvements in domestic economic indicators such as GDP growth, employment rates, and investment levels. Additionally, the pound’s potential rebound could be bolstered by changes in monetary policy from the Bank of England, which might adopt measures to support the currency.
The UK's exit from the European Union was supposed to improve the islands' economic situation, reduce unemployment, and increase domestic policy effectiveness. Proponents of Brexit argued that leaving the EU would allow the UK to regain control over its laws, borders, and trade policies, thereby fostering a more dynamic and competitive economy. They envisioned a scenario where the UK could strike its own trade deals, tailor regulations to better suit its economy, and reduce the financial contributions made to the EU budget.
This, in turn, was expected to create a more favorable environment for businesses and spur job creation. Furthermore, Brexit was seen as an opportunity to address concerns over immigration and reclaim national sovereignty.
Despite these promises, the British struggled to realize these visionary plans, hindered by the pandemic and political reshuffling in Europe. The COVID-19 pandemic, which began in early 2020, severely disrupted the global economy, and the UK was no exception. The simultaneous impact of Brexit and the pandemic created a perfect storm of economic challenges. Lockdowns, supply chain disruptions, and shifts in consumer behavior exacerbated the economic uncertainty caused by Brexit.
In addition, political changes in Europe, including shifts in leadership and policy directions, further complicated the UK’s efforts to establish new trade and diplomatic relationships. These factors collectively hampered the UK’s ability to implement its post-Brexit strategies effectively.
As a result, within just a few years, the amount of foreign investment in the UK (mainly from Germany) plummeted. This decline in investment was a significant blow to the UK economy, as foreign direct investment (FDI) is crucial for economic growth, job creation, and technological advancement. The outflow of labor migrants, who played a vital role in various sectors of the economy, disrupted supply chains and created labor shortages. Industries such as agriculture, healthcare, and hospitality, which relied heavily on migrant workers, were particularly hard hit.
Moreover, the restriction of markets due to the loss of seamless access to the EU’s single market negatively impacted the UK’s GDP. Businesses faced increased costs and bureaucratic hurdles in trading with EU countries, leading to reduced competitiveness and profitability.
It’s no surprise that the deterioration in trade relations between the UK and the eurozone significantly affected the pound sterling’s exchange rate. The pound weakened not only against the euro but also against the US dollar, causing it to lose its global significance. This depreciation reflected broader concerns about the UK’s economic health and its ability to navigate the post-Brexit landscape. The weakening of the pound made imports more expensive, contributing to inflationary pressures within the UK.
At the same time, it provided some relief to exporters, as their goods became cheaper for foreign buyers. However, the overall impact on the economy was negative, as the costs associated with import dependency outweighed the benefits of a weaker currency for exports.
However, this is now in the past, and Bank of America analysts predict further recovery of the pound, driven by the economic rebound of the islands and the lessons learned from Brexit. They argue that the UK has made significant strides in adapting to its new reality outside the EU, and this adaptation is beginning to bear fruit. The government has implemented policies aimed at boosting investment, innovation, and productivity.
Efforts to establish new trade agreements with non-EU countries have also started to pay off, opening up new markets for UK businesses. Furthermore, the pound’s recovery is expected to be supported by structural reforms in the UK economy, which aim to enhance its resilience and competitiveness in the global market.
Weekend public opinion polls indicate a significant lead for the British Labour Party, which could win the parliamentary elections on July 4. This would mean that, for the first time since 2010, the so-called Labour Party could govern the UK, with plans to take a much more ambitious approach to climate and energy issues than the ruling Conservative Party. The Labour Party, under the leadership of Keir Starmer, has outlined a comprehensive agenda aimed at addressing the country’s pressing challenges, including economic inequality, climate change, and public services.
Their proposed policies focus on green energy, infrastructure investment, and social welfare programs, which they argue will create jobs and stimulate economic growth. The potential change in government has generated optimism among investors and the public, as it is seen as an opportunity for a fresh approach to governance and policy-making.
Currently, the left, led by Keir Starmer, has about 42% support. The Conservatives can count on 22% of the votes, closely followed by Reform UK (founded by Nigel Farage) with a 14% share. This shift in public opinion reflects widespread dissatisfaction with the Conservative government’s handling of Brexit, the pandemic, and other key issues. The Labour Party’s surge in popularity is also attributed to their focus on issues that resonate with a broad spectrum of voters, including healthcare, education, and economic justice.
Meanwhile, Reform UK’s rise indicates a segment of the population remains committed to a more radical approach to Brexit and conservative policies. The political landscape is thus highly dynamic, with significant implications for the country’s future direction.
Political changes could be positively received, similar to the case in Poland on October 15, 2023, when investors reacted with incredible optimism towards the zloty, despite no change in the ruling team. In Poland, the mere anticipation of potential reforms and a new strategic direction generated positive sentiment in the financial markets. Investors were encouraged by the prospects of stability and growth, leading to a surge in the value of the zloty. A similar scenario could unfold in the UK, where the expectation of a new government and policy direction might boost investor confidence and positively impact the pound sterling.
Thus, rumors of a return to integration with other European countries could attract new investors to the UK, and consequently, strengthen the pound in the long term. Renewed efforts to improve relations with the EU and other European nations could lead to increased trade, investment, and cooperation, benefiting the UK economy.
Such integration would not necessarily mean rejoining the EU but could involve closer economic and regulatory alignment, making it easier for UK businesses to operate in European markets. The potential for enhanced economic ties and a more stable political environment could make the UK a more attractive destination for foreign investment, contributing to a stronger and more resilient pound sterling.
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22.06.2024
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