Brexit and the coronavirus pandemic are reshaping Uk economy. Could it end up looking more like Turkey, Mexico and Argentina than France, Germany and the united states?
Some analysts on Wall Street are beginning to wonder whether a volatile currency, declining global clout and a reliance on foreign investors could relegate the United Kingdom to “emerging market” status.
Bank of America suggested in a recent note to clients that it may be time to treat the British pound as an emerging market currency, citing Brexit and worsening debt dynamics as a result of Covid-19.
“We believe [the pound] is in the process of evolving into a currency that resembles the underlying reality of the British economy: small and shrinking,” wrote BofA strategists Kamal Sharma and Myria Kyriacou.
There are reasons the demotion to emerging market status seems like a stretch. The pound is heavily traded, investors have maintained their faith in British institutions and there’s high demand for debt issued by the country’s government.
But what the comparisons make clear is that investors are bracing for a world in which the United Kingdom’s standing is diminished.
“We don’t think there’s any risk that the UK is suddenly going to be viewed as an emerging market,” said Thomas Pugh, UK economist at the research firm Capital Economics. But Brexit and the country’s response to the pandemic, he said, “will weigh on confidence.”
A sagging United Kingdom
The United Kingdom, which has one of the highest per capita Covid-19 death rates in the world, is battling a deep recession as a result of lockdowns aimed at containing the virus.
The Bank of England estimates the UK economy could shrink by 14% this year, its worst downtown in more than 300 years. The country also has fewer than six months to hammer out a new trade deal with the European Union, its biggest export market.
The pound has become extremely volatile amid uncertainty about the United Kingdom’s path forward. It’s now trading at $1.26, down more than 15% since the 2016 Brexit referendum.
Bank of America’s Sharma and Kyriacou described its fluctuations as “neurotic at best, unfathomable at worst.” The only currency that investors see as more unstable is the Brazilian real, they noted.
Brexit, they added, isn’t helping. The country’s departure from the European Union “is likely to permanently alter the way in which investors view the pound,” Sharma and Kyriacou said.
Investors also have to stomach concerns about Britain living beyond its means.
For years, Britain has carried a sizable current account deficit, which means it spends more on goods, services and investments abroad than it brings in at home. That’s now coupled with a worsening fiscal deficit as the country borrows huge amounts to finance its pandemic recovery plans. As of May, Britain’s debt was bigger than the size of the entire economy for the first time since 1963.