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  1. Home
  2. / Investing
  3. / Financial Services

The British Pound Does Not Look Too Good for 2018

The pound looks set for further weakness in 2018 as consumers spend less.
By ANTONIA OPRITA Dec 27, 2017 | 09:00 AM EST

The mighty U.K. consumer seems to be taking a break. Retailers saw fewer shoppers entering their shops this year than last in the traditional second day of Christmas sales, according to preliminary data from retail intelligence firm Springboard. This does not bode well for the British pound in the year before Brexit.

Up to 12 p.m. on Boxing Day, footfall was down 4% compared with the same period last year, Springboard data showed. People still were lining up in front of some shops in the hope of finding bargains, but rising inflation, stagnating wages and continuing uncertainty about Brexit seem to be taking a toll on consumers' mood.

Online transactions, which have risen across the board, are expected to increase by around 6%. Still, this is not enough to make up for the weakness in bricks-and-mortar shops. Footfall fell by 4.7% in high streets and 4.3% in shopping centers, while retail parks saw a gentler decline of around 2.1% compared with last year.

This consumer weakness should come as no surprise. Final third-quarter gross domestic product data released last week saw household spending revised down to 0.5% growth from 0.6% in the second reading, with households' real disposable income rising by just 0.2% in the period. Consumers financed their spending by reducing their savings rate further, to 5.2% from 5.6%.

For an economy that relies heavily on the largesse of its consumers for growth, this is bad news.

"The deterioration in consumers' confidence in the second half of this year suggests that households won't continue to throw caution to the wind," said Samuel Tombs, Pantheon Economics' chief U.K. economist.

"So, with consumers set to struggle with a further fall in real wages, more austerity measures and rising borrowing costs, growth in households' spending must slow over the coming quarters," Tombs said.

The main reason for this deterioration in confidence is the increase in inflation, which was 3.1% in November, the highest in almost six years. The British pound's weakness after the Brexit vote is the culprit for the steep increase in prices.

In a survey of consumers carried out by polling institute Ipsos MORI for Lloyds Bank, 63% of people said they felt negative about current levels of inflation, an increase of 14 percentage points from November last year.

Regarding the country's financial situation, 66% have a negative attitude, up five percentage points from last year, while 65% said they were feeling "not good" or "not good at all" about the housing market, up six percentage points from last year.

The main positive thing about the Brexit vote in the short term was the hope that the pound's weakness would boost British exports and close the gaping current account deficit. Unfortunately, that does not seem to be the case.

The latest data show the current account deficit has been shrinking less than expected. In the third quarter, it was still £22.8 billion ($33.6 billion), compared with expectations that it would shrink to £21.4 billion. As a percentage of GDP, the current account gap fell from 5.1% in the second quarter to 4.5% in the third quarter.

According to Tombs, this is not enough to cushion the British pound from further weakness. "The current account deficit has remained large this year, indicating that sterling remains vulnerable to fall again if overseas investors lose their faith in Britain," he warned.

With the most difficult part of negotiations with the European Union -- that being trade -- slated to start in 2018, that faith easily could be lost. The British pound is not out of the danger zone.

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TAGS: Currencies | Markets | Financial Services | Investing | Economic Data | Economy | FOREX | How-to | Politics | Risk Management

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