The division within the ranks of the Conservative party does not augur well for the British economy at a time when the world is topsy-turvy and the signs of a global recession seem to be knocking at the door. The pound is heading for a further decline that could see it slump to the lowest level against the US dollar in three decades, according to analysts at Deutsche Bank.
The pound is bound to weaken more if Britain were to take the calamitous step of leaving the EU. In the meantime, clamouring for Brexit by the likes of Michael Gove and Boris Johnson is another negative factor, causing a reducing demand for the pound which, in the long term, could see it decline further, to reach parity with the euro.
Investors have also become increasingly anxious about the deterioration in the UK current account deficit – the gap between the amounts of money flowing in and out of the economy. The economic impact of this has been delayed by UK companies paying higher dividends to their investors back home. Some economists believe that British corporates are standing on the cusp of an earnings recession. As the dividends of banks, mining and telecom companies come under increasing pressure so too will the pound. Foreign earnings repatriated to the UK will decline, reducing demand for the pound and weighing on the currency, according to Deutsche Bank.
Britain’s position is now precarious given that the outcome of Brexit is becoming an unknown quantity and is destined to cause mayhem to the British economy. I think matters will get worse as June approaches. The EU referendum is like the Ides of March, warning of an impending storm the strength of which is hard to estimate.