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Brexit's Cracks Beginning to Show as British Pound Collapses

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Part 2
Brexit's Cracks Beginning to Show as British Pound Collapses PART 2 OF 4

These Are the Risks Most Likely to Upend UK Economy

UK economy

The UK’s 2015 GDP (EWU) (DXPS) breakdown by sector shows that the agriculture sector contributed 0.6%, the industrial sector contributed 19.7%, and the service sector contributed 79.6%. Thus, the service sector is the major driver of the UK’s economy. The financial service providers, in particular, contributed heavily to the UK’s economy. Financial institutions such as HSBC (HSBC) and Barclays (BCS) will likely be more affected by doing business in the EU (EZU) (VGK) after the UK officially makes its separation.

These Are the Risks Most Likely to Upend UK Economy

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Is the pound’s fall a warning sign?

Britain’s exit from the EU (IEV) could hamper the business of various corporates. The fall in the pound could also create a major problem for the UK’s importers. There’s some uncertainty in the market about whether the UK’s exporters will benefit from the fall in the pound or not.

The fall in the pound (FXB) could push inflation higher. Some major developed economies (EFA) such as Europe (VGK) and Japan (EWJ) have already been facing deflationary situations. However, Britain’s inflation is gradually going up. If the inflation rises due to the fall in the currency, then it could create inflationary pressure on the economy. The low growth and the inflationary situation could be a serious concern.

The Bank of England (or BoE) already implemented stimulus measures to prevent a post-Brexit depression by reducing the key interest rates for the first time in nearly seven years by 25 basis points on August 4, 2016. In 2Q16, Britain’s current account deficit touched 5.9% of the GDP, which is the largest current account deficit among developed economies (EFA). This will affect the country’s currency and government debt.

The UK’s exit from the EU could lower the United Kingdom’s (EWU) GDP growth in comparison to expectations. According to the Organisation for Economic Co-operation and Development, the baseline effect could be -1.3%, -3.3%, and -2.5% on the United Kingdom’s real GDP in 2018, 2020, and 2023, respectively. Read How Brexit Could Impact GDP, Capital Flows, and Growth in the UK to learn more.

In the next part of this series, we’ll analyze the performance of UK’s ten-year bond yield.

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