LONDON: British consumer confidence suffered one of its biggest drops in 21 years and the country’s largest department store expressed concern over the pound’s fall, in the strongest evidence to date of the challenges Britain’s economy faces after the Brexit vote.
The vote to leave the European Union has thrust Britain into its worst political crisis in modern times. Investors have warned that what was ranked as the world’s fifth largest economy faces years of uncertainty over everything from trade to investment.
In a special post-referendum survey published on Friday, market research company GfK said consumer confidence fell 8 points to -9 in the aftermath of the June 23 vote from -1 in its previous regular monthly survey.
“During this period of uncertainty, we’ve seen a very significant drop in confidence, as is clear from the fact that every one of our key measures has fallen,” said Joe Staton, Head of Market Dynamics at GfK.
The last time the index, which dates back to 1974, fell so steeply was in January 2011, and the last time it fell more was in December 1994.
Moody’s credit rating agency said on Friday Britain faced a shock to confidence and almost halved its UK growth forecast for next year to 1.2% from 2.1%.
Moody’s also cautioned that the Brexit vote could potentially threaten the existence of the EU, which has a $16.5 trillion economy.
“The potential strengthening of nationalistic and protectionist movements could have a detrimental effect on the EU, even threatening its existence,” the credit rating agency said. It expected global spillovers to be limited, however.
The International Monetary Fund said growth in the euro zone would decelerate to 1.4% in 2017 from 1.6% this year due to uncertainty caused by the Brexit vote.
With households and investors left guessing about what the future relationship with the EU will look like, sterling has suffered its worst three-week performance against the US dollar since 1992 when Britain crashed out of the pre-euro Exchange Rate Mechanism.
Sterling dipped under $1.30 this week for the first time since 1985. It was trading as high as $1.50 just hours after voting ended in the referendum.
Amid the turmoil, Bank of England Governor Mark Carney said on June 30 that the central bank would probably need to pump more stimulus into Britain’s economy over the summer. The bank’s rate setting committee is due to make its monthly policy announcement on Thursday. Most economists polled by Reuters expect it to hold off on any action until it releases new economic forecasts in August.
The depreciation of sterling could potentially become a major issue for John Lewis, Managing Director Andy Street said late on Thursday. “Genuinely, it is a big issue for us to face into next year,” Street told reporters at a media dinner.
John Lewis imports about two-thirds of the goods it sells and one-third is purchased in dollars. Street said while the firm is fully hedged for its 2016-17 financial year and has “a good proportion” of hedging for the first half of its 2017-18 year, it has “a lot less” for the second half.
“It can never be quite that simple because you don’t know where cost inflation comes through from other things that are imported, perhaps one stage away from direct importing,” he said.
Published in The Express Tribune, July 9th, 2016.