A recent report by the OECD (Organisation for Economic Cooperation and Development) indicates that the UK economy will be the worst performing of the G-7 economies in 2018. Even Italy – a traditional laggard in this arena – will outstrip the UK in terms of economic growth. Current economic models indicate that the UK will grow at 1.00% in 2018. This is a damning report, and it’s important to evaluate the impact of the current performance of the UK economy in light of these new developments.
On June 23, 2016, Britons voted by a margin of 52 per cent to 48 per cent to break from the European Union. This resulted in massive economic and political upheaval which remains to this day. Now that Brexit negotiations are in full swing, it is proving difficult to gain consensus on an economic blueprint. The UK, a global powerhouse in financial technology (FinTech) is starting to see a reversal in investment activity, but not in technical or entrepreneurial flair. One of the leading credit institutions in France has expanded credit lines valued at €40 million to multiple European countries, but has postponed investments to the United Kingdom, pending the Brexit negotiation outcomes.
This wait and see approach can have devastating consequences on the UK economy, and its entrepreneurial nature vis-à-vis FinTech. The current performance of the GBP is at odds with the level of interest in UK investments. Many multinational companies, venture capitalists and investors are putting all of their big-ticket decisions in the UK on hold. The issue of passporting rights remains front and centre. UK banks and financial institutions have heretofore been able to offer their services to greater Europe, but that remains in doubt now.
To upgrade or downgrade?
If the Brexit results in a downgrading of the UK’s GDP, this would make it a bad investment proposition for startups. For now, the GBP appears to be in the ascendancy against its rivals, reaching the mid-1.30s against the USD, and reversing course away from parity against the EUR. The current performance of the GBP is best described as short-term bullish. Thanks to strong retail sales growth in the UK, the GBP is rising. However closer inspection indicates that the reasons for the short-term appreciation of the GBP are a little concerning.
SNP investments guru Charles Martin believes it’s too early to call it, ‘For starters, the relative weakness of the pound against other currencies means that Britons don’t have the necessary finances to travel abroad and enjoy overseas vacations. Instead, many Britons have decided to vacation at home and this has helped to prop up retail sales figures. Much the same is true with foreign visitors to the UK who are now spending their euros, yen and dollars in Britain. The pyrrhic victory for the GBP may also be a bad omen moving forward.’
Where to next for the UK economy?
By March 2019 (the end of the two-year interim Brexit period), it remains uncertain what will happen with any loans extended to UK fintech operations. If they lose their passporting rights, this could make them bad investments and subject to collapse. If the departure from the European Union is disorderly and fragmented, it could augment a new reality that is unfavourable to investments in fintech. The number of bad loan defaults will increase, and the number of businesses closing up shop will increase too.
Various trade ideas have been floated to try and assuage investor concerns about the UK, but there is little clarity at this juncture. On the plus side, the UK remains the most substantial loan market for France, and the number of loans extended to the island nation is double that of the market for loans in Germany. Many other European countries have been beset by high volumes of loan defaults, notably Italy, Spain, Portugal and the like. Recently, the UK unemployment rate dropped to 4.3 per cent – a historic low, but everyone is playing a wait-and-see game to determine whether the UK will be able to recover from the Brexit conundrum.