Volatility was the word on everyone’s lips in the immediate aftermath of the Brexit vote. Jackie Bowie looks at the longer-term prognosis for the UK and the world economy
The British vote to leave the EU led to volatility on the foreign exchange markets the likes of which had not been seen since the financial crisis. Sterling was marked down sharply. The pound hit a 31-year low against the dollar. Against the euro it fell to 2014 levels.
However, with no other inflationary pressures in the UK and Europe still flirting with deflation, the slight inflationary impact of a weaker pound could prove more blessing than curse. Of course, that is provided the weakness does not become excessive. The advantage of a flexible exchange rate has already been demonstrated by the fact that the FTSE 100 managed to fall only 3% on the day the result was announced. Around two thirds of the index’s earnings are denominated in foreign currency, and sterling’s 8% and 6% falls against the dollar and euro respectively on 24 June increased the sterling equivalent value of these revenues.
A weaker pound should alsoeventually help the UK’s appalling balance of trade deficit. However, in the short term, as consumers continue to buy more expensive imports, before exporters have been able to gear up, the deficit will probably get worse.
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