Join our community of smart investors

Watch the value of the pound and the UK economy

For me, the key issue for the rest of the year will be the performance of the UK economy and the value of the pound.
Watch the value of the pound and the UK economy

Brexit negotiations have cast a shadow this week, but putting to one side the continued troubles of the travel and leisure sectors, I think there are signs that the UK economy is recovering quite well.

I base this view largely on what I see locally and talking to people who run their own businesses. There seems to be a lot of pent up demand with plenty of home improvement activity going on and a noticeable uptick in housing market activity as evidenced by lots of houses for sale. Tradespeople seem to be very busy and have lots of work. Traffic levels look almost normal again.

In stark contrast, town centres remain very quiet.

We are beginning to get a clearer view about what’s going on from company results and trading updates which I continue to see as being a much better way to gain a view than listening to economists. We are seeing signs of pent up demand for some retailers such as Dunelm and Primark whilst Travis Perkins and Forterra are cautiously indicating that construction activity is on the up.

How long this lasts remains to be seen. The big fear is that with the winding down of the government’s furlough scheme unemployment could rise significantly. At the moment furlough is putting money in people’s pockets they may not have in a few weeks’ time. If a lot of these workers are made redundant then the economy is likely to dip down again.

The UK economy cannot cope with another lockdown but that still cannot be ruled out.

The other area of concern is the near breakdown status of the government’s trade talks with the EU. This is a toxic subject but I’ll say this. Regardless of how you voted in the referendum the current situation is a terrible mess and being handled appallingly. This could have significant negative repercussions for the value of the pound.

Sadly, I am a long-term bear on the value of the pound. This is simply because I see the UK economy as fundamentally weak as it does not produce enough and consumes too much with borrowed money. The reliance on the housing market as a source of wealth is a weakness that has persisted for a long time but surely cannot last given house price affordability and high debt levels.

The UK economy needs radical actions to get it sustainably back on track. Looking further out, I do not discount the pound trading at parity with both the US dollar and the euro.

Listen in for more insight on this week's main companies news from Phil in the newly launched IC Alpha podcast below. 

Download PDF