Spanish media reports shrinking of British economy to ‘levels of 2009’

brexit12Spanish national newspapers have reported on Britain’s post-Brexit vote economy having ‘shrunk to levels of 2009’, when the northern hemisphere was suffering from an international financial crisis.

Concerns about the falling exchange rate caused by a weakening sterling are already affecting British pensioners living in Spain, with most saying they have lost typically 10-20% of their income since the referendum results were made known on June 24.

Although not yet as drastic as the near-parity in early 2009, the pound currently sits at €1.19, having fallen to €1.23 the day after the referendum but having consistently sat at around €1.33 for over a year before – even rising to €1.41 briefly.

And forecasts show that the €1.19 could reduce even further once Article 50 has been triggered – and whilst the 2009 near-match was the result of a global recession, no outside influences have come into play to reduce the sterling’s power this time around; in fact, the UK economy was in a very strong position and enjoyed a triple-A credit rating, now downgraded.

According to Markit Flash UK Composite Output, used as a market reference and put together by the consultancy firm IHS Markit, activity in all sectors in the UK, with the exception of exports – having benefited from the weaker pound – have shown a contraction.

The index, which collates data from around 650 companies studied between July 12 and 21, placed economic results at 47.7, down from 50 and its lowest level since April 2009.

Cancellation of orders is at its highest since 2012 and the report cites a major loss of confidence in the services sector, the UK’s main economic mainstay.

In contrast to the moderate growth of the first half of 2016, the British economy is likely to contract by up to 0.4% in the third quarter, Markit Flash says.

The Bank of England is due to hold a meeting in August to decide whether to alter its monetary policy, hinting it may reduce interest rates.

Both Leave and Remain voters in Britain will be pleased with the resulting cheaper mortgages and the falling home prices in the UK, a country where property is priced out of the average earner’s pocket, but if Britain’s risk premium increases still further, the Bank of England may need to recapitulate and increase interest rates still higher to encourage international investors to buy national debt bonds.

In the meantime, Brits in Spain have been actively writing to MEPs and MPs to express their concerns over Brexit, with mixed responses.

They are hanging onto the fact that the new prime minister in the UK, Theresa May, is unlikely to invoke Article 50 until at least early 2017, offering a further stay of grace before the two-year process starts to run.

Published Think Spain 22 July 2016

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