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UK pound's slide threatens global growth

UK pound's slide threatens global growth

Britain's currency is taking a pounding.

As the global financial markets Monday tried to find a footing after U.K. voters Thursday — in late results that affected the market Friday — decided to sever decades of ties to the European Union, currency traders continued to dump the pound. Sterling fell to a 31-year low against the dollar, extending losses to nearly 12 percent from levels before the Brexit results were announced.

Assurances from British government officials that the economy is sound as well as central bank pledges to defend the currency did little to stem the slide. British bank stocks were also hammered.

"The U.K. has entered a period of acute and extraordinary uncertainty not seen since the Second World War," said analysts at IHS Global Insight in a note to clients. "The [country] currently does not have a political leadership or a cohesive government, let alone a plan with which to navigate a way forwards."

The British economy had already slowed to a crawl as investors braced for the vote's outcome and businesses and consumers postponed spending plans.

Gross domestic product advanced by just four-tenths of a percent in the first quarter of this year, down from six-tenths of a percent in the fourth quarter of 2015. That's the slowest rate since the fourth quarter of 2012, according to the Office for National Statistics.

Now, economists say the Brexit vote will likely put the brakes on what little forward momentum was left for British economic growth.

The cloud hanging over the crash in sterling, if the recent losses are sustained, could have one silver lining. A cheaper pound would make British exports more competitive in European markets and around the world, helping to narrow a widening trade deficit with Europe.

One of the main arguments advanced by leave supporters was that independence would give Britons a chance to boost trade by negotiating better trade deals. They also argued that once freed from an oppressive thicket of EU regulations spewed by Brussels bureaucrats, Britain's feeble economy could once again regain its lost glory.

But those hopes now seem optimistic. EU officials seem to be in no mood to reward post-Brexit Britain with better trade terms, especially as countries from Greece to France are seeing a rise in popular sentiment for more independence from the EU.

Whatever trade gains Britain sees from the export boost with a weaker currency, it will pay for in the form of higher-priced imports, which will now cost more when paid for with newly devalued pounds. Inflation is currently running at just 0.3 percent on an annual basis, which has given British central bankers plenty of leeway in holding interest rates at historically low levels, currently just half a percent.

But despite those low rates, credit remains very tight. If inflation rises, central bankers will have much less latitude in suppressing rates to stimulate the economy.

Despite the warnings of potential economic havoc, British voters seemed more focused on a wave of immigration that has brought an influx of arrivals from European economies in even worse shape than Britain's.

Last year, some 630,000 people moved into the U.K., while 297,000 left the country, for a net migration of 333,000. Of those, 184,000 came from the EU, which poses no restrictions on moving from one member country to another.

It's far from clear how widely Britain's economic slowdown will be felt. Much depends on whether the uncertainty over the two-year Brexit process begins to dampen an already weak European economy. Such a slowdown, in turn, would dampen already weak global growth.

"We have been wary of the risks of a global economic recession for some time," Carl Weinberg, chief economist at High Frequency Economics, wrote in a recent note to clients.

Weinberg is especially concerned about a slowdown in world trade, which he said tends to precede wider global economic distress.

"The drop in world trade we are currently experiencing — 10 percent on average in the first two months of this year — is the largest percentage drop we have ever seen in the postwar period other than during the global financial crisis of 2008-09," he said.

"This is a bigger issue by far than the separation of Britain from the EU alone," Weinberg said.

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