UK: Economy: UK On The Global Stage (Part Two)

Last Updated: 20 September 2019
Article by Simon Burgess

As the UK's role as a leading actor on the global stage hangs in the balance, head of Alternative Investments, Simon Burgess continues to explore the state of the UK economy and that of the global backdrop.

Read part one here.

The UK is not the only country to record falling GDP and other economic headwinds; global growth is generally weaker...

In the US, the flattening of the yield curve of US Treasuries has traditionally been regarded as a signal that recession looms. This yield curve represents the spread between two and ten-year US Treasury bonds, which currently remains teetering on a dime by falling in reverse and inverting. Usually, you'd expect yields on longer dated bonds to be higher than shorter ones. The last time this inversion happened was in 2007 and as I write this, they are pretty much "even stevens". 

Given this yield curve, along with credit spreads and equity prices, Aberdeen Standard Life rates the chances of a US recession at 50%. However, there are also positives to note and given strong labour market fundamentals and resilient private sector confidence, a soft landing is predicted by some. 

Is the old Napoleonic adage that when the US sneezes, the rest of the world catches a cold playing on the minds of investors?

After the US Federal Reserve (the Fed) cut interest rates, Thailand, India, Australia and New Zealand followed suit (the latter having cut its rates to a record low 1%). The European Central Bank is also anticipated to cut rates in September 2019, a move which will be regarded as necessary given their sluggish growth, especially in terms of production and exports.

The usually robust German economy is also showing signs of faltering, with a marked downturn in industrial output reported in August 2019. This is likely to be exacerbated by the 70% expected drop in bilateral trade with the UK off the back of a no-deal Brexit, according to the German Mittelstand Association (the UK is currently one of five of Germany's largest export markets). With this in mind, the World Trade Organisation (WTO) terms associated with a no-deal Brexit will certainly worry the German Chancellor as well as German businesses.

Possibly more worrying for all however is the progression of the China/US trade war which risks building in significant market inefficiencies and risks. This, in-turn is knocking investor confidence. Of great concern is the effect of the devaluation of the yuan, which has historically been tightly managed by the People's Bank of China. If the exchange rate tips over seven yuan to the US dollar, as it did briefly on 5 August 2019, there are a range of potentially disruptive consequences. It could even threaten a global devaluation and could help push the UK and other European countries into recession. 

At the time of writing, sterling has fallen to EUR1.12 and USD1.23, and we are likely to see further volatility as the market responds to the political turmoil playing out in the British Parliament (prorogued or otherwise). Many will say further falls in the pound are a direct response to higher expectations that Prime Minister Johnson will exit Britain from the European Union without a deal and therefore defaulting to WTO rules. That said, recent drops in the pound don't compare with the double digit drop that occurred in in the immediate aftermath of the 2016 referendum and arguably, Brexit has already been largely priced into exchange rates. 

Currency falls are generally considered a bad thing, but this isn't necessarily the case; following the significant devaluation of sterling in 2016, the UK experienced a boost for its exports and the trade deficit moved from £13.7 billion in Q3 to £4.2 billion in Q4 that year.

Typically, cutting rates has a devaluing effect on currencies and will make imports more expensive and exports cheaper. As such, when sterling drops, there will be both winners and losers. Those importing goods and services will suffer as their costs go up and businesses exporting goods and services will benefit as their prices will be lower to foreign buyers. However, given the UK imports more than it exports, the effects in aggregate are regarded to be marginally negative. 

The drop in the pound will have other domestic ramifications; the increasing cost of imports should result in buyers seeking out more British-based goods and services and sellers should see their exports increase. Together, these two factors will be good for the UK economy and should have a positive impact on domestic employment. However, these effects take time to feed through so more are likely to suffer in the immediate term before gains are felt. The inflationary effect is one immediate result, so we should watch out for the possibility of the Bank of England (BoE) reversing its expected interest rate cut with rate increases in order to protect jobs.

Many of our clients are interested in the effect that sterling has on the value of their real assets or private equity investments. For those holding both GBP-denominated assets and GBP liabilities, a change in exchange rates does not in itself have an adverse effect. Only those holding GBP assets with non-GBP liabilities (or vice versa) will be directly impacted.  

This position also applies to the UK's state owned assets and liabilities. This is due to a higher proportion of UK foreign liabilities held compared to UK-held foreign assets. The former tend to be fixed and held in GBP (valued in January 2019 at £125 billion), typically made up of foreign currency hedged positions - these remain unchanged when the pound drops. By comparison, the latter (valued in January 2019 at £180 billion) consist mainly of foreign currency, which increase in value when the pound falls. Britain wins.

Dr Gerard Lyons, the economist tipped to succeed Mark Carney as the next Governor of the BoE advised in August: "one needs to retain perspective about the UK economy, where the solid labour market and stronger wage growth with easing inflation should underpin consumer spending in coming months. There is also scope for policy easing. Of course, how Brexit is resolved will be key".

Trying to second guess exactly what will happen during the final quarter of 2019 and then into 2020 is nigh on impossible. The best that investors can do is scenario-test their portfolios and de-risk where possible. Many have already done so, evidenced by the hike in the value of gold, the perennial safe-haven asset. Other precious metals, like silver, are following suit.

There is everything to play for and all without a script, but whatever happens, the show must go on...

To view our range of services pertaining to Alternative Investments,  click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions