For the past year, the United Kingdom has been on an absolute spending spree without having too much additional income to shore up the shortcomings of its other departments. The financial uncertainty of Brexit talks, their conclusion with a possible no-deal-exit accompanied by the recent pandemic have finally materialized as a £36 billion deficit in its public finances.
This is in no way a number to joke around with, by all means, nothing but red flags and warnings can be assumed from this metric. Accompanied by a nearly 0.5% inflation increase in September alone, the UK economy is starting to walk the thinnest line between barely-hanging-on and significant collapse.
More spending
The first major issues during Brexit and the COVID-19 pandemic started with the Consumer Price Index. This metric was quickly thrown out of balance as people had less to spend or chose to spend less. The government’s interference with the “eat out” campaign did help to shore up this metric by a little bit, but nothing too significant. However, the moment it was dropped as a priority, prices sky-rocketed in restaurants after months of receiving government subsidies. Suddenly, millions of people could not afford to eat out, and restaurant owners could not afford to bring prices back down due to shortages of ingredients which raised the prices.
The current spending deficit of the United Kingdom is around £209 billion, roughly 4 times more than it was last year. Considering the shrinkage of business activities, it will take quite a while to reach an equilibrium between supply and demand once again. At the moment, there is a major disruption. Supply is at one of its lowest, while prices continue to rise. It may look like a normal phenomenon at a glance, but let’s consider the millions of people that lost their jobs or went a few months without a paycheck. What this means is that demand is slowly correcting itself, but before it manages to do so, the economy will have to sail in rough waters.
Sun setting on the GBP?
Despite so many issues, the GBP is still considered one of the strongest currencies in the world. But that doesn’t mean that there were some hardships it had to push through or will have to push through after the Brexit deadline.
The Financial Conduct Authority took an important part in helping to regulate a disrupted market during a pandemic, but there is only so much they can do. The most recent significant move was raising the awareness of customer credit and its affordability in the financial markets. This was an important mention for people earning income through unorthodox means. This includes regulated forex brokers in UK alongside their customers and their attention to customer credit. In most cases, credit has nothing to do with FX trading in the country, but with recent mentions of it from the FCA, the brokers may have to start choosing who gets how much leverage based on their credit or previous activity on their or other platforms.
This brings in a huge issue of privacy as only the regulator has clearance to access customer data should it request it. But despite all the influence the FCA may have, it’s a very serious political issue that could seriously backfire during an already politically unstable landscape.
Effects of the inflation
There are already metrics showing increased prices on basic services and goods. Airfares were supposed to fall significantly due to lower demand for them during the pandemic, but in order to shore up their own losses from abroad travel orders, the airlines had to either maintain the prices almost untouched for in-land travel or hike them for the most important emergencies.
Prices on used cars also increased significantly as the majority of the population started searching for alternatives to public transportation. Gas prices were relatively untouched but may soon increase significantly as the nation’s largest petrol companies prepare for earnings disclosure. Should there be a significant increase in consumption with the current supply it’s economics 101 to see the prices increase. This should eventually correct the increased demand for cars, but that could take years.
Overall situation
The UK’s economic situation is not something anyone would even wish for their enemy. Everything is very precarious and uncertain, especially since the country is nearing its biggest political event since 1997’s agreement to give Hong Kong back to China.
The holes that the pandemic has left in the country’s economy are unlikely to be filled for a while as hundreds of businesses have already established Plan-B Headquarters in nearby countries of France, Netherlands, and Germany.
Regardless of the pandemic’s progression in the near future, the UK has a long way to go until it finally manages to take a fresh sniff of positive market metrics. For the moment though, everything seems quite pessimistic.
