This is the longest contraction in UK credit impulse since the early 1990s

This is the longest contraction in UK credit impulse since the early 1990s

Macro
Christopher Dembik

Head of Macroeconomic Research

Summary:  Our central scenario remains the extension of Article 50, that should be requested by October 19th, and new Parliamentary elections that could take place five weeks after the initial Brexit deadline.


Our favorite macro gauge UK credit impulse, which explains economic activity nine to twelve months forward with an “R2” of .60, is going through its eighth quarter of contraction, the longest period since the early 1990s. It is currently running at minus 3.9% of GDP versus a low point this cycle at minus 7.2% reached in early 2018. The length of the contraction is similar to that of the period 1990-1992 when the United Kingdom entered into recession due to high interest rates, an overvalued exchange rate and falling house prices.

The current situation is profoundly different since it is Brexit uncertainty that is driving the economic downturn. The uncertainty goes hand in hand with low interest rates, a GBPUSD exchange rate undervalued by 23% and lower house prices in real terms.

The outcome of the ongoing negotiations between the United Kingdom and the European Union is unlikely to change the future of the British economy. The prolonged contraction in the flow of new credit in the economy and the five straight quarters of contraction in business investment are the two key factors usually leading to a recession.

However, there is no guarantee that the UK economy will fall in recession this year as a jump in stockpiling ahead of October 31st could artificially spur economy activity, as was the case in Q1 2019.

Strategic view :

  • Our central scenario remains the extension of Article 50, that should be requested by October 19th, and new Parliamentary elections that could take place five weeks after the initial Brexit deadline, ie end of November/beginning of December. At this stage, the polls favor the Conservative Party, but we cannot exclude a wide coalition gathering the Labour Party, the LibDem and the pro-European Scottish.
  • The risk of Brexit accident has increased in recent weeks due to Brexit fatigue on the European side but is still unlikely.
  • There is still extreme positioning on the GBP. The speculative community remains widely short GBP, though it has slightly compressed since mid-September on the hopes of a new extension. If this scenario is confirmed, it could be immediately followed by a technical rebound of the GBP. However, the long-term view is still gloomy for the British pound as Brexit uncertainty and unsupportive fundamentals (such as the wide current account deficit and negative net FDI flows) remain.
  • Based on these assumptions, we expect GBP/USD to re-test for the third time this year the 1.21 level, and EUR/GBP to move back to 0.93.
UK Credit Impulse is going through its eighth quarter of contraction, the longest period since the early 1990s.
Contrary to the early 1990s, the GBP exchange rate is not overvalued, it is even undervalued by 23% vs the USD.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992