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 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.

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.