Brexit is causing the UK to face a number of short-term economic challenges. Most notably, the value of sterling has fallen to a historic low versus the dollar. However, there could be more problems ahead such as inflation and falling GDP.
The key reason for this is confidence. Or, more specifically, a lack of it. Investors feel that the UK economy will perform worse than it would have done had the public chosen to remain in the EU on 23 June. This has caused the value of sterling to fall and while this is good news in the short run for exporters, it could mean that inflation rises.
In fact, the Bank of England has stated that it will accept higher inflation in order to help boost the economy through a loose monetary policy. This means that the days of inflation being close to zero could now be over and UK consumers may feel the pinch when spending on everyday items such as food and transport. This could cause consumer spending to come under pressure – especially if, as the Bank of England expects, unemployment rises to over 5.5%.
Economic boost
Balancing this pessimistic outlook out, however, is planned policy action by the Bank of England. It has restarted the quantitative easing programme and lowered interest rates. This should provide the economy with a boost. Meanwhile, the government has stated that the age of austerity is now apparently over and that borrowing at such cheap rates to fund major infrastructure projects could be a good move.
Therefore, the idea that the UK economy is doomed to fail is rather short-sighted. Certainly, the short term is likely to be a highly uncertain period that will become even more so as discussions regarding Brexit begin next year. However, the idea that the UK economy will fail outside the EU is rather overly pessimistic. After all, the UK remains a major economic player in the global economy and has a financial services sector that is the envy of Europe.
This means that investing the in the UK remains a good idea. In fact, at the present time UK-focused stocks trade at wide margins of safety. Therefore, they may already have downbeat news flow priced in and this could lead to larger gains over the medium-to-long term. Similarly, it could mean that their scope for further falls is somewhat limited.
As ever, the best time to buy shares is when the future is least certain. Although in this respect things could get worse before they get better, now is nevertheless a good time to buy high quality, high-yielding shares that have sound balance sheets. Their share prices may be volatile and paper losses cannot be ruled out in the short term. But for investors who can look beyond the challenges faced by the UK economy in the short run, long-term gains could be the end result.
