Record Drop for the U.K. GDP

The United Kingdom’s GDP outstripped the U.S. downturn. Moreover, it pushed Britain into its first economic recession since 2009. 

The British Pound suffered on the GDP release. While at a slower pace initially, the decline accelerated, visible on all currency pairs. GBPCHF and GBPUSD pushed lower, while EURGBP moved to the upside.

Not an Isolated Economy

Since the Brexit referendum vote in June 2016, the United Kingdom’s economy performed remarkably. That is, for an economy that is supposed to sever its ties with its main commercial partner.

It did perform mostly for a single reason – it is still part of the European Union. Sure thing, businesses adjusted their long-term plans. But activity moved along the usual lines, as the uncertainty behind the negotiations still persists.

However, we can see the impact of isolationism. The table below shows the GDP impact of coronavirus for the first six months of the year. It covers economies from Eurozone to Asia and the Americas – and the United Kingdom’s performance is second-worse.

Spain leads in terms of being the most affected economy. But the differences between the Spanish economy and the United Kingdom’s are huge.

First, Spaniards rely heavily on tourism and adjacent services. There is little industrial production or manufacturing, as the country transformed in the last couple of decades into a holiday paradise for the rest of Europe. Hence, when a pandemic affects international travel, countries like Spain suffer the most.

Second, the United Kingdom’s economy is service-based too. But the services it relies on (i.e., mostly financial services) should not record a similar drop. Without a doubt, the United Kingdom’s economic performance would have been better if it were not for the Brexit vote.

But that is water under the bridge. What comes next?

The pandemic affects the entire world at once. Some economies performed better so far in the year (e.g., China), some worse.

A rich country like the United Kingdom should quickly see a bounce back into the top economic performers in the period ahead. However, it depends on a few things.

One would be the final Brexit date. As the divorce is not yet official, both parties suffer – the European Union and the United Kingdom.

Another one would be how fast the United Kingdom manages to negotiate new trade deals with its future partners. The longer it takes, the slower the recovery will be.

All in all, a cold shower for Britain. And for Europe as well.

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