UK Economy In Steep Decline: Is It Becoming An Emerging Market?

The economy of the United Kingdom has become so fragile – devastated by the coronavirus pandemic and uncertainties surrounding Brexit – that some analysts think it may be time to treat Britain as an “emerging market” rather than a developed nation.

Like many emerging markets, such as Turkey and Mexico, Britain has a volatile currency and an increasing dependence on foreign investors, CNN reported. And Brexit -- separation from the European Union -- also could Britain’s global profile and overall prestige.

Bank of America recently noted that the British pound sterling has been behaving more like an emerging market currency. The pound has declined more than 15% in value since the 2016 Brexit referendum.

"We believe [the pound sterling] is in the process of evolving into a currency that resembles the underlying reality of the British economy: small and shrinking," wrote Bank of America strategists Kamal Sharma and Myria Kyriacou.

Sharma and Kyriacou called the pound’s fluctuations "neurotic at best, unfathomable at worst." Only the Brazilian real is currently more unstable than the pound, they added.

Indeed, the U.K. is not at emerging markets status yet – the pound remains heavily traded and U.K government debt still has high demand.

"There doesn't seem to be any ... unwillingness to buy and hold U.K. [government] debt," added UBS economist Dean Turner.

Moreover, the U.K. remains the world’s sixth largest economy and the pound represents 4.4% of the world's currency reserves, according the International Monetary Fund, suggesting many traders want to dabble in it.

Still, Britain’s role in Europe and the globe is clearly falling.

"We don't think there's any risk that the U.K. is suddenly going to be viewed as an emerging market," said Thomas Pugh, U.K. economist at the research firm Capital Economics.

But he cautioned that Brexit and the government’s response to the covid-19 pandemic "will weigh on confidence." Sharma and Kyriacou similarly warned that Britain’s final exit from the EU "is likely to permanently alter the way in which investors view the pound.”

Adding to pressures, Prime Minister Boris Johnson now must come up with a new trade agreement with the EU – the country’s top trading partner – in less than six months.

Meanwhile, the U.K. is locked in a deep recession and deaths of covid-19 – now at more than 44,000 – keeps rising. Major companies like British Airways, Rolls Royce, EasyJet and others have enacted tens of thousands of job cuts.

Stimulus programs by the government, including wage subsidies, have been criticized as insufficient to stem the tide of huge job losses.

The Bank of England predicted the British economy may contract by 14% this year, the worst performance in more than three centuries.

Britain’s debt picture is also darkening – the country carries a huge current account deficit -- $25.9 billion as of the first quarter – as well as a worsening fiscal deficit.

After the Chancellor Of The Exchequer Rishi Sunak recently introduced another $37.8 billion stimulus package, the Institute for Fiscal Studies, an economic think tank, forecast that this latest spending program will push the fiscal deficit beyond $378 billion, "easily" to the highest percentage of national income since the Second World War.

Sharma and Kyriacou indicated that Britain's current account deficit and its fiscal deficit together will be greater next year than those of Mexico or Turkey.

Forbes recently characterized the British economy as “broken.”

“The numbers that are in are… incredible,” wrote Clem Chambers. “Overall tax income is down 28% although some reports state way higher. Sales tax down 46% and employment taxes down 29%. Government debt levels have exploded to above 101% and headed up vertically towards perhaps 120% by next year.”

Chambers further warned that “every day that passes is digging a bigger pit for the U.K. economy and to hear the British prime minister say that spending will continue on government services as if nothing has happened and in the same breath talk about managing finances prudently it is hard not to be struck with cognitive dissonance.”

Chambers predicted that things will get much worse in Britain, with rising company insolvencies and climbing unemployment, as well as hyperinflation.

On Friday, the credit ratings agency Moody’s said the U.K. will suffer the worst economic downturn this year among the G20 nations.

“We forecast a contraction of 10.1% in the U.K.'s GDP for this year, but expect a gradual subsequent recovery on the back of the easing in lockdown measures, with growth rebounding to 7.1% next year,” Moody’s wrote.

Plus, Britain’s deficit and public debt ratio are expected to deteriorate further this year on the back of borrowing-funded stimulus measures amid lower tax revenues.